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Answer five of the eight essay questions immediately below. Students must do Essay Questions 03 and 04 and the two graphing exercises.

Essay Question 01. The Quantity Theory of Money. (5 points for each case/20points total).

What happens to the Purchasing Power of Money, Prices and the Nominal Rate of Interest in

CASE 1: the case of an increasing supply of money and credit?

CASE 2: the case of a decreasing supply of money and credit?

CASE 3: the case of an increasing demand for money and credit?

CASE 4: the case of a decreasing demand for money and credit?

Essay Question 02. A Catch-All Question. (4 points each/20 points total).

02A. Another term for the purchasing power of money is:

a.) the exchange value of money.

b.) the price of money.

c.) the commodity price of money.

d.) the asset price of money.

02B. The Quantity Theory of Money applies:

a.) regression analysis to the study of money.

b.) input–output analysis to the study of money.

c.) demand and supply analysis to the study of the economic good money.

d.) probability theory to the study of money.

02C. The two ways to define money are the:

a.) a priori and inductive approaches.

b.) a priori and empirical approaches.

c.) a priori and deductive approaches.

d.) descriptive and empirical approaches.

02D. The natural rate of interest is the sum of:

a.) the pure rate, the debtors’ risk, inflationary price and liquidity premiums plus

consideration of monetary policy actions undertaken by the central bank.

b.) the pure rate, the inflationary price premium, the liquidity premium and consideration of the monetary policy actions by the central bank.

c.) the nominal rate of interest and the inflationary price premium.

d.) the pure rate, plus the debtors’ risk, inflationary price and liquidity premiums.

02E. The real rate of interest is equal to:

a.) the sum of three conceptual components: the pure rate; the debtors’

risk premium; and a positive or negative price premium.

b.) the nominal rate of interest less the inflationary price premium.

c.) the pure rate of interest plus the inflationary price premium.

d.) the nominal rate of interest less the debtors’ risk premium.

Essay Question 03. The Caveman’s Dilemma – 3 Solutions. (5 pts. each/10 pts. total).

The Caveman’s Dilemma: What are the other two solutions to the ‘Caveman’s Dilemma’ that were not covered in the Origin of Money lecture? Each solution is worth 5 points or 10 points altogether. The requisite transactions arriving at each of the two solutions must be specified.

Solution One: Individual A exchanges commodity p with Individual B. B drops out of the process because he gets the commodity he wants for consumption or production. Individual A receives commodity q from B in exchange. Individual A is willing to take possession of commodity q for use not in consumption or production but for use as a medium of exchange.

Individuals A and C subsequently get together and transact with one another. Individual A exchanges commodity q for commodity r. Individual A desires commodity r for his own consumption or production. Individual C wants commodity q for his own consumption or production. Commodity q is the medium of exchange in this solution. Accordingly, primitive indirect exchange presents itself as an alternative to direct exchange. The caveman’s dilemma is solved.

Solution 2?

Solution 3?

Essay Question 04. The Market System’s Adjustment to Change. (20 points).

How is the market form of economic organization known as capitalism able to adjust to a changing landscape? In other words, what mechanisms are at work in the market system which enable it to adjust to change?

Describe how each mechanism works.

How does the Socialist Commonwealth adjust to change?

Essay Question 05. The Business Cycle is a Monetary Phenomenon. (20 points).

Graphically prove Gottfried Haberler’s proposition that ‘an increasing supply of money and credit is a necessary condition for the occurrence of a long-run boom in the business cycle.’ The proposition is a limiting notion and requires two graphs.

What key assumption is made in each graph?

Derive the accompanying sufficiency condition the way your professor did in the lecture.

Essay Question 06. The Inflationary Price Premium. (10 points each/20 points total).

Graphically and verbally describe how the inflationary price premium is attached to the nominal rate of interest. Your answer must comprise a complete and thoroughgoing explanation of this phenomenon.

Specify and explain the three most important independent variables affecting the demand for money.

Essay Question 07. The Financial Term ‘Liquidity.’ (20 points).

What does the financial term ‘liquidity’ mean in the accounting sense of the term? What other financial term is typically used alongside of it? How is it defined? Caution: do not use an accounting textbook’s definition of these terms.

Discuss the two factors causing many if not most American corporations to be illiquid and possibly insolvent today?

Essay Question 08. Necessary Conditions for Indirect Exchange to Occur.

(20 points).

Specify the four necessary conditions for Indirect Exchange to occur. Which of the four relates to self-interest or selfishness? Expound on what self-interest and selfishness means in a utilitarian philosophical sense.

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PART Il — GRAPHING EXERCISES (First of two exercise questions – each 15 pts.

IF YOUR LAST NAME BEGINS WITH LETTERS M THROUGH Z DO CASE 1.

IF YOUR LAST NAME BEGINS WITH LETTERS A THROUGH L DO CASE 2.

On this examination copy, on the page below, draw the three graphs required to answer the graphing exercise question specified immediately below.

Case 1: Draw the Purchasing Power of Money, the Price/Quantity and the Quantity-of-

Loanable Funds graphs for the case of an increasing supply of money and credit.

Case 2: Draw the Purchasing Power of Money, the Price/Quantity and the Quantity-of-

Loanable Funds graphs for the case of a decreasing supply of money and credit.

PART Il — GRAPHING EXERCISES (Second of two exercise questions – each 15 pts.

IF YOUR LAST NAME BEGINS WITH LETTERS M THROUGH Z DO CASE 3.

IF YOUR LAST NAME BEGINS WITH LETTERS A THROUGH L DO CASE 4.

On this examination copy, on the page below, draw the three graphs required to answer the graphing exercise question specified immediately below.

Case 3: Draw the Purchasing Power of Money, the Price/Quantity and the Quantity-of-

Loanable Funds graphs for the case of an increasing demand of money and credit.

Case 4: Draw the Purchasing Power of Money, the Price/Quantity and the Quantity-of-

Loanable Funds graphs for the case of a decreasing demand of money and credit.