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| |ECO-222 Principles of Macroeconomics |

Research Paper #2.

Instructions: Do any four problems, all problems have equal weight.

Limit your answer to four typed pages (maximum five if you decide to include additional data or graphs). The text should be either single-spaced or space-and-a-half.

All the supplementary data or graphs should be put into the appendices. All sources of your information should be referenced.

Your answers must be submitted by Friday, April 30 either via email or as a hard copy.

Question 1. The Fed is the most independent of all US agencies. What is the main difference between it and other government enterprises that allows the Fed to have greater independence?

Question 2. Why interest rate targeting by the Fed during the periods of rising prices may cause even faster acceleration of inflationary processes in the economy?

Question 3. Since the introduction of Euro in 1999, 15 countries have adopted Euro as the sole currency. Therefore, one may assume that since all these countries share the same currency, the exchange rates between them are permanently fixed. Can you provide any explanation why this statement may be wrong? You may think about the difference between real and nominal exchange rates to explain your reasoning.

Question 4. An expansionary monetary policy by the Central Bank during the periods of recessions may result in so called “liquidity trap” - a situation in which the short-term nominal interest rates approach zero. In your opinion, is the Fed currently facing the threat of liquidity trap? Why this situation may potentially be very dangerous for the US economy?

Question 5. Refer to the article “America for Sale” by Ben Steverman: (http://www.businessweek.com/investor/content/jul2008/pi20080724_358837.htm?chan=investing_investing+index+page_top+stories ).

Briefly answer the following...