Assignment:
1. What is fractional reserve banking? Why is it feasible and how does it increase welfare?
2. What is multiple deposit creation? How is it connected to multiple credit creation? What is the deposit multiplier?
3. Describe the panic of 1907 and how it led to the Federal Reserve Act.
4. Describe the nature of bank panics and how they led to the creation of the Federal Reserve System.
5. What were the goals of the Federal Reserve Act? What provisions of the Act were designed to accomplish these various goals?
6. Was the Federal Reserve Act successful in achieving all of its goals? Describe the banking legislation of the 1930s.
7. What are the monetary policy tools of the Fed? How are they different? How are they similar?
8. Compare the degree of control the Fed has over the discount rate and the federal funds rate?
9. What is M1? What is M2? Compare the properties of M1 and M2 and the monetary base?
10. Describe the market for the monetary base? Show graphically the effect of a purchase of a government security by the Fed on the federal funds rate.
11. Under what circumstances can the discount rate and the interest rate on reserves create a "corridor" for the federal funds rate? Explain how this corridor is maintained
12. How can "lags" make the implementation of monetary policy difficult?
13. How is money demand related to the velocity of circulation? If transactions cost are falling over time, then, other things the same, what will velocity growth be over that same time?
14. What is the quantity theory of money? Use the quantity theory of money in rates of change form to argue that in the long-run inflation is a monetary phenomenon. Also use the quantity theory to explain and justify "x" percent rules.
15. Why is inflation costly?
16. Why is the 1982 recession sometimes called the Volcker Recession?
17. Why is financial intermediation costly? What is the difference between accounting and economic profits? Use these ideas to explain the spread between lending and borrowing rates, and to argue that financial innovation improves welfare.