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APPLIED INTERNATIONAL MACROECONOMICS

Spring 2012: Practice Problems 7

Due Thursday February 13 at the beginning of class

1. Please attach some item from the media discussing the ECB’s current monetary policy. The ECB is constrained by its bylaws and cannot simply raise high-powered money by buying government bonds. What is it doing instead?

Keep in mind that to get full credit for these questions,

i. The attached article should be relevant to the topic listed

ii. The answer should include a brief summary (1 paragraph) of what is going on in the article that makes clear the connection between the article, the topic listed in the question, and the class discussion of that topic.

2. This question examines central bank policies in Denmark during a period of high crisis risk. In 1999, there was intense world-wide concern that computers would crash on January 1, 2000, as they tried to read years that began with “20.” The problem came to be known as “Y2K” for “year 2-thousand.” (This was also just prior to the transition to the euro. Though Denmark never joined the eurozone, its currency is fiercely pegged to the euro.) The crisis never materialized, possibly because everyone prepared so carefully.

a. Using the table below, calculate Denmark’s currency preference, the bank reserve ratio, and the money multiplier for the periods shown. (Note: there is enough information provided to do these calculations, but you will need to remember and exploit the definitions of M and H):

Period |M1 |CU |H |D |BR |c =(CU/D) |Ө=(BR/D) |mm=(M1/H) | |1991:Q1 | 205.1 | 33.3 | 43.5 | | | | | | |1996:Q1 | 295.6 | 29.8 | 78.7 | | | | | | |1998:Q1 | 344.6 | 32.2 |124.7 | | | | | | |1999:Q4 | 378.0 | 36.9 |192.9 | | | | | | |2000:Q1 | 378.9 | 36.4 | 50.8 | | | | | | |b. Please describe the ups and downs of the three ratios you calculated in Part (a).

c. Explain why these ratios went up and down in terms of the uncertainties surrounding Y2K.

d. Use your...