Reference no: EM132308885 , Length: 3

Question 1

Suppose you are central bank governor of a country which is experiencing inflation of 100% per month. You have two economic advisors. One advisor tells you that in order to increase seignorage you ought to raise the money growth rate. The other advisor tells you that in order to increase seignorage you ought to reduce the money growth rate.

(a) Explain the concept of seignorage, both in words and formally (e.g. alge- braically).

(b) Which of the two recommendations is correct? Why?

(Hint: look up the concept of the "Laffer curve" and use it to answer this question.)

Question 2

Using the AEM, describe the likely effects on aggregate output in the short run in each of the following circumstances. Provide brief explanations.

a)  There is deep recession in Europe.

b)  Housing values rise above their trend.

c)  Mortgage lenders raise interest rates.

d)  The government decides to close 20 percent of its military bases around the country.

e)  The long-run interest rate rises.

Question 3

Consider the following graphs for the US which relate the unemployment rate to CPI inflation,

and the following graph, also for the US, which provides estimates of the Phillips curve coefficient:

Figures 1 and 2 are taken from “Can the Phillips Curve Helf Forecast Infla- tion?” by Kevin Lansing (FRBSF Economic Letter, 2002) and figure 3 is taken from “Prospects for Inflation in a High Pressure Economy: Is the Phillips Curve Dead or Is It Just Hibernating?” by Peter Hooper, Frederic Mishkin, and Amir Sufi (NBER Working Paper, 25792, 2019).

Briefly interpret these graphs. Offer some possible explanations why the slope of the regression line in figure 1 is steeper than the slope of the regression line in figure 2 and why the Phillips curve coefficient in figure 3 has fallen (in absolute terms) since its low in 1995. What does the Australian experience look like and how does it compare to the US experience?

Page Count: 1 Page for 1 question. Total 3 Pages.