Assignment Monetary Economics Winter 2019

1. Why is money seen as a 'veil over the real workings of the economy'? You should explain the QTM
and Walrasian system of equations in Monetary Economy while explaining the concept
2. If there is a decrease in money supply, explain what would happen in the flow model of Loanable
Funds Thoery
3. Assume the value of a = 2 and b = 4 in the loss function stated by Barro and Gordon. State the
function and derive the optimal inflation rate (we also call this inflation bias).
a. If the rule is that π = 0%, is this a feasible policy option?
b. What about the announcement of π = 1.75%? Is this reputational equilibrium or non
feasible?
4. How did Svensson explain the inflation targeting through interest rates?
5. Explain nominal income targeting rule stated by Bean and McCallum