As much as possible, use graphs and equations to drive home your points! That’s the best way to learn economics!
7. Some economists suspect that one of the reasons that economies in developing countries grow so slowly is that they do not have well-developed financial markets? Does this argument make sense? Explain.
8. (10 points) Suppose the Bank of Canada announces that it will raise the money supply in the future but does not change the money supply today. Using the Fisher equation, explain what happens to the nominal interest rate.
9. (10 points) Can the Bank of Canada directly increase or decrease the money supply at will? Explain critically.
10. (15 points) The more risk averse people are, the more likely they are to diversify. Is this statement true, false or uncertain? Critically explain your answer using the expected utility framework. (Hint: Graphs will be very helpful in your analysis).
11. (10 points) Describe what is meant by the liquidity trap. Discuss the problems posed by the liquidity trap and the optimal ways to escape from it.
12. (15 points) Critically explain why interest rates are pro-cyclical, using the supply and demand for bonds framework.
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