Money and Banking – Cheap Research Essays

Money and Banking Assignment 2 Question 6-9

Question 1-5. Answer True, False or Uncertain. Brie‡y explain your answer. (each
question 4 marks)
1. In an international economy of perfectly substitutable currencies, an increase in the
stock of one country’s money reduces real value of all monies.
2. The negative correlation between in‡ation and the real interest rate can be explained
by the Fisher e¤ect.
3. The rate of return equality in the model of illiquidity.
4. The central bank can lower the reserve requirement to increase capital investment
and GDP.
5. The interest rate channel implemented by the RBA requires that the RBA lends to
banks in the interbank market by charging an interest rate that is 25 basis points below the
target cash rate.
6. (8 marks) Consider an economy of three-period-lived people in overlapping generations. Each individual is endowed with y goods when young and old and nothing when
middle-aged. The population of each generation born in period t is Nt , where Nt = nNt 1 .
There are no assets other than loans. Explain how private debt can be used to provide for
consumption when middle-aged. Point out who lends to whom and write the condition for
the equality of supply and demand for loans in period t. Write the budget constraints for
the young, the middle-aged, and the old. Be sure to de…ne any notation you introduce.
7. (12 marks) Consider the model of illiquidity where individuals live for three periods.
Each individual is endowed with y units of the consumption good when young and with
nothing in the other two periods of life. Let Nt be the number of individuals in the generation
born at t with Nt = nNt 1 . There are two types of assets in the economy. (No inside money
or private IOUs are available.) One asset is …at money, with a …xed supply M . The other
asset is capital. A unit of capital can be created from a unit of the consumption good in any
period t and capital can be created in any amount. Two periods after it is created, a unit
of capital produces X units of the consumption good and then disintegrates. Let X > n2 .
Assume that the stock of money is distributed equally to the initial middle-aged and each
initial old can produce Xk0 units of the consumption good in the …rst period. Now suppose
that an individual’s preference is given by
u (c1 ; c2 ; c3 ) = c1 c2 c3 :
(a) Find the rate of return on …at money. (1 mark)
(b) Describe and explain how an individual …nances his consumption in the secondperiod and third-period of life. (3 marks)
(c) Write down the budget constraints faced by an individual when young, middle-aged
and old. (3 marks)
(d) Solve for the optimal stationary allocation of (c1 ; c2 ; c3 ) for all future generations.
(5 marks)
8. (10 marks) Find the exchange rate data on Swiss Francs against U.S. dollar from 2007
to 2013. Can you identify how the U.S. monetary policy QE1 (QE refers to quantitative
easing) and QE2 implemented by the Federal Reserve a¤ect the relative value of the Francs
and the U.S. dollar? Suppose that the demand for the Swiss Francs and the demand for
the U.S. dollar stay stable throughout the sample period. Can you explain your …ndings
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