(Asterisked questions are more difficult or introduce new terminology/concepts.)
1. Alan Blinder, the Fed's newish vice-chairman, insisted that central banks could use interest rates to reduce unemployment, at least for a few years. "Sell dollars" said a former European finance minister, summing up many economists' feelings.
a. Explain how the Fed could use interest rates to reduce unemployment.
b. Under what circumstances would this practice be appropriate, and under what circumstances would it not be appropriate?
c. Why might the reaction of many economists be to "sell dollars"?
d. If this policy were undertaken appropriately, following your answer to part b, would the policy's effectiveness be enhanced or curtailed by the "sell dollars" reaction of part c?
2. Consumer prices rose just 0.1 percent in July from June. While the increase from a year earlier is 2.8 percent, inflation in the last three months is a mere 0.8 percent annualized. As a result, the long bond plunged to a new low of 5.63 percent from 6.33 percent a week earlier.
Explain why the long bond plunged.
3. The reason for Clinton's caution is obvious: the bond market sent him a signal a month ago that big spending is just not acceptable. In anticipation of Clinton's victory, coupled with talk from the Clinton camp about fresh spending, the sell-off of treasury bonds boosted long-term interest rates to about 7.7 percent from 7.3 percent.
Explain why interest rates rose.
4. Analysts are wondering if Canadian yields can fall while U.S. yields are rising.