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.