Monetary Theory and Policy Economics 518/418 Review Sheet; Fall 2021

Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit

Monetary Theory and Policy

Economics 518/418

Review Sheet; Fall 2021

1. It is frequently asserted that the search costs associated with monetary exchange are less than that associated with barter.  Construct a formal proof of this assertion.

2. Evaluate the accuracy of the following comment. “Compared to commodity money, fiat money is a superior medium of exchange”. (Your answers to questions like this should come as close as possible to a formal proof.)

3. Evaluate the accuracy of the following comment. “A monetary economy is an economy in which fiat money is the medium of exchange”.

4. Ruminate on the historical evolution of exchange from barter to various forms of monetary exchange and given monetary exchange, from commodity money, to fiat money, and possibly cryptocurrencies.  Write an essay that analyses the extent to which this evolutionary history is a reflection of various communities’ attempts to maximize social welfare.

5. Write an essay on the functions of money.  In addition to carefully describing the various functions of money, your essay should explain how a diminution in the efficiency with which each of these functions are performed will affect social welfare.  Your essay should leave the reader with a clear sense of the principal threat or threats to money’s ability to perform these functions and should explain how the efficacy with which each of these functions are performed will affect the performance of the remaining functions.  (For

example if something interferes with money’s performance as a store of value will that affect its efficacy as a medium of exchange.)

6. Empirical evidence on the effects of monetary policy shocks typically lead to the conclusion that changes in the money supply have transitory (or short-lived) effects on real variables. Evaluate the consistency of this result with Lucas’ misperceptions model by using it (i.e. Lucas Misperceptions Model) to evaluate the macroeconomic effects of a surprise increase and/or decrease in the supply of money.  To be complete your answer should thoroughly explain the exact sense in which the theory and evidence are, or are not, compatible.

7. The expectations augmented Philip’s curve is typically viewed as a marked improvement over the simple Philips curve.  Use both written and graphical exposition to describe the exact sense in which the expectations augmented Philip’s curve is superior to the simple Philip’s curve and carefully explain any relationship you see between Lucas’ Misperceptions model and the expectations augmented Philip’s curve.

8. You should be able use the basic model we developed in class to evaluate whether money is neutral in the model.  If you conclude that money is neutral explain the intuition underlying that result.  If you conclude that money is non-neutral also explain the underlying intuition.

9. You should be able to identify and discuss the implications of key empirical facts about the relationship between money and output.  In addition, you should be able to discuss alternative explanations for these empirical facts.

10. What is the Seigniorage Laffer Curve?  Derive/explain it?

11. Currency substitution in the face of hyperinflation might be characterized as tax avoidance behavior.  Use a combination of the theory of money demand and your understanding of government reliance on seigniorage revenue to demonstrate that this characterization is accurate.

12. Evaluate the accuracy of the following statement.

“Since the monetary authority in the United States is legally independent of the fiscal authority, the conduct of monetary policy is independent of the taxing and spending behavior of the fiscal authority.”