ECONOMICS 0281
SUPPLEMENTARY READINGS QUESTIONS-Part 1

1. In Glasner's article "The Evolution of Money and Banking":

a. What does Glasner mean when he says that some commodities are more marketable than others?

b. How did money evolve in a pre-monetary economy?

c. Why did more advanced ancient societies use metals as a medium of exchange instead of cattle?

d. Why did coins evolve? Is government (the state) necessarily involved in this evolution?

2. In Meir Kohn's article "Inflation: Causes and Cures":

a. What is the inflation tax and in what sense does it change peoples' behavior?

b. What is inflation risk and why is it important?

c. How does inflation affect the relative attractiveness of real versus financial assets? Explain.

d. How does inflation affect the duration of loans offered or desired by lenders and borrowers? Explain.

3. In Charles Calomiris and David Beim's article "Causes and Cures":

a. How do deficits cause inflation? Why is this a particular problem in developing countries (EFMs)?

b. Explain how an unanticipated inflation can be a partial default on government debt. Likewise, explain how an unanticipaterd inflation results in an unanticipated inflation tax.

c. Is government debt free of default risk because governments have an unlimited power to tax and print money? Explain carefully.

d. Why do governments rarely default on debt denominated in sovereign currency but default more frequently on debt denominated in foreign currency? Explain.

e. How have countries tamed hyperinflation? Explain.

f. Why does indexing make the cure for hyperinflation more difficult? Explain.

4.  In Thies' article "The Interest in Indexation":

a. Why should bonds be indexed? Explain briefly.

b. What is the Fisher relation and how is it used to adjust nominal interest rate? Why are long term interest rates more likely to be in error than short term interest rates when inflation occurs?

c. What are variable rate bonds? Why are they a substitute for indexed bonds?

d. Why do fixed rate bonds have a very active secondary market while indexed bonds have a very small secondary market?

e. What does the use of indexed bonds by the US Treasury imply about the government's commitment to prevent inflation? (Hint: Compare the situation for the government when bonds are indexed to the situation where bonds are not indexed.)

5. In Wrase's article "Inflation-Indexed Bonds: How Do They Work?":

a. What is the difference between conventional bonds and inflation-indexed bonds?

b. Why is the Treasury finally issuing inflation-indexed bonds?

c. Why would policymakers be interested in inflation-indexed bonds?

d. What are some of the problems in measuring inflationary expectations with inflation-indexed bonds? Explain briefly.