Read the Note: Implementing Monetary Policy by Rukstad, pp. 101—112. For each question, give a short explanation.

1. Of the tools on p. 110, which did Volcker use or emphasize? (For each tool you list, give a one sentence explanation of how that tool was used.)

 

2. Look on page 102. Is it fair to say that the use of cash should have little or no effect on the value of money? In other words, if money demand and supply determine the value of money (which is the reciprocal of the price level), how much of that money demand comes from the use of cash?

 

3. Study the diagram on page 107. Show on an IS-LM diagram how an increase in the supply of money would affect output. Do investment and consumption both move in the same direction?

 

4. In the diagram on page 107, how do short-term rates determine long-term rates? Give this question some thought. Does the role of expectations enter the analysis?