ASSIGNMENT-2: ECON-2010 DUE DATE: NOVEMBER 7, 2012 QUESTION-1: A classical economist wears a t-shirt printed with the slogan

Fast Money Raises My Interest! Use the quantity theory of money and the Fisher equation to explain the slogan. Assume that the demand for real money balance (M/P) is M/P = 0.6Y 100i, where Y is national income and i is the nominal interest rate. The real interest rate r is fixed at 3 percent by the investment and saving functions. The expected inflation rate equals the rate of nominal money growth. a . If Y is 1,000, M is 100, and the growth rate of nominal money is 1 percent, what must i and P be? b . If Y is 1,000, M is 100, and the growth rate of nominal money is 2 percent, what must i and P be?

QUESTION-2: Although inflation is always and everywhere a monetary phenomenon, explain why: a. the start of a hyperinflation is typically related to the fiscal policy situation, and b. the end of a hyperinflation is usually related to changes in fiscal policy.

QUESTION-3: Suppose that the International Monetary Fund (IMF) is concerned about currency depreciation in a small open economy. Use the basic version of our exchange-rate model for your answers. a. What type of fiscal policy should the IMF propose to the government of the small open economy to generate a currency appreciation? b. Illustrate graphically the impact of the IMF proposal on the exchange rate of the small open economy. c. What will happen to the trade balance of the small open economy, assuming that it started from a position of balanced trade? d. The trade balance of the small open economy will move into deficit.

QUESTION-4: Suppose that the large industrial countries of the world are concerned about the depreciating currencies of a number of small open economies. a. What type of fiscal policies must the large industrial countries undertake in order to promote currency appreciation in the small open economies?

b. Illustrate graphically the impact of the industrial countries' policies on the exchange rate of the small open economies. c. What will happen to the trade balance of the typical small open economy, assuming that it starts from a position of balanced trade?

QUESTION-5: Assume that a society consists of two types of workers. For type A, 3 million workers lose their jobs each year, and each one takes a year to find a new one. For type B, 36 million workers lose their jobs each year (3 million per month), and each takes one month to find a new job. Thus, at any given time, 6 million are unemployed in this economy. a . How many spells of unemployment occur each year in this economy? b . What percentage of the spells are only one month long? c . If you take all the workers unemployed each year and multiply each by the length of his or her unemployment spell, how many months of unemployment would there be in this economy each year? d . Of all the months of unemployment, how many are accounted for by the workers unemployed a year at a time?

QUESTION-6: Explain what type of wage rigidity is most likely to affect the unemployment rates of the following types of workers: a. workers with low marginal labour productivity; real rigidity b. workers seeking jobs that are typically unionized, such as longshoremen and electricians; and nominal rigidity c. workers engaged in creative work that is not easily monitored.