1.Explain in words how hyper-inflation takes off. What role does fiscal policy play in causing hyper-inflation?
2. Why is it important that a central bank be independent from the fiscal authorities (the government)?
3. Explain how an increase in inflation expectations is self-fulfilling and self-perpetuating and can lead to explosive inflation or hyper-inflation.
4. Consider a standard IS curve which is downward sloping in (Y, r) space. Explain why any point underneath this IS curve is a point in which S < I.
5. From yesterday’s newspaper, “The Fed’s current monthly purchases of about $80 billion in US Treasuries have kept a lid on government borrowing costs as the government budget deficit has exploded.” What does it mean that the Fed’s purchases of Treasury bonds have kept the lid on government borrowing costs? Describe in words what is happening to the IS curve and the LM curve, output, consumption, investment and the money supply.
Americans are a giving, compassionate people. They willingly support any number of domestic and international causes that bring relief and hope to those in need. Is there a limit to this generosity? Some analysts point to what they call “Donor Fatigue.” This describes a situation where people no longer give to causes that they supported in the past. Among the causes attributed to this phenomenon are overstretched budgets, negative reaction to pressure tactics, and mismanaged donation campaigns. Another factor cited is that some programs provide assistance that is not warranted.
Critics point to the National Flood Insurance Program as an example. Everyone feels compassion for those who have lost their homes and possessions due to flooding, right? Maybe not. Many insurance companies refuse to underwrite flood insurance in certain locations because the potential liability exceeds the premiums they can charge. The US National Flood Insurance Program resulted from recognition that private insurance companies can’t provide coverage at affordable rates that would allow them to be profitable. In order to receive coverage, however, communities that benefit must adopt and enforce floodplain management policies to mitigate threats to life and property damage in flood-prone areas. Critics assert that taxpayers should not be required to subsidize those who choose to build in known floodplains – they know the risk, they should accept the risk. Is this “donor fatigue?” What do you think? Explain your position.