Ql: The conventional definition of inflation is a change in prevailing price lev
ID: 1104513 • Letter: Q
Question
Ql: The conventional definition of inflation is a change in prevailing price levels. As discussed in class, Austrian economists prefer to think of inflation as an expansion money supply in excess of the expansion in production, whether or not any price change has immediately occurred. In class we discussed a little-noted index of international pricing that can give us an early warning of weakness in the dollar long before a change in the CPI is observed. of the a) What is this forward-looking Index? b) Which movement in this index would give us warning of possible future inflation, an increase in the index decline in it? Q2: In class we noted that for a financial institution to be considered a bank, it must do TWO essential things. First, it must make commercial and/or personal loans to profit from interest paid on them. What is the other thing that financial institutions must do to be considered banks? Q3: We had a little fun in class discussing the work of Copernicus, a mathematician and astronomer in the late middle ages who advanced the then-innovative idea that the earth rotated around the sun. We were surprised to note that Copernicus was also an economist, who created Gresham's Law, and who developed the Quantity Theory of Money, a theory still popular today among so-called "monetarist" economists, who, in opposition to Keynesian economists, stress the importance of the relationship between the Money Supply and aggregate price levels. a) Write the equation that is the expression of the Quantity Theory of Money. (You will need four variables) b) Define in a word or two what each of the four variables represents. Q4: There are two types of currencies that can be used and have been used in mature economies: specie, and fiat. What is the difference between specie currency, and fiat currency? Which of the two is the currency we use in the USA? Q5: In the 1920s, the Federal Reserve Bank (the Fed) began to use a very powerful tool to expand or contract the money supply This tool is its Open Market Operations, operations in which the Fed buys and sells Treasury bonds (T-Bonds). Let's say that the Fed wants to use this tool to EXPAND the money supply. Would the Fed then sell T-bonds, or buy them? Q6: During the 1920s the Fed used its Open Market Operations to expand credit an They did so with the intention of reducing the cost of capital and facilitating operation would increase business investment and expand the d increase liquidity in financial markets. funds flow to businesses, believing t that thisExplanation / Answer
Q1