ANALYTICAL PROBLEMS

1. How would the following monetary decisions of the European Central Bank influence individuals?

a. A decrease in interest rates

b. An asset purchase program to support struggling member-states

c.

d. A fixed exchange rate to the U.S. dollar

e. An abolition of cash

2. Since 1989, many central banks have adopted infla­tion targeting as a strategy for conducting monetary policy. What is inflation targeting? What influence do the following decisions have on inflation?

a. An increase in interest rates

b. Reduction of income taxes

c. Government support programs for small and medium-sized enterprises

d. Government demand for better infrastructure

e. Tightened lending criteria for private loans

3. Describe the following measures of monetary policy the Fed used to fight the Great Recession starting in 2007. What effect did they have on the U.S. economy?

a. Zero lower bound and forward guidance

b. Credit easing

c. Quantitative easing

d. Increased limit for coverage on deposits from $100,000 to $250,000

4. Why do many governments have policies against negotiating with hostage-taking terrorists? Under what conditions, if any, are such policies likely to reduce hostage taking? Discuss the analogy to mone­tary rules.

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