Question

topic: milton friedman

In 1971 and 1972 the United States experienced large balance of payments deficits. If the Federal Reserve wanted to cure this problem while maintaining the fixed exchange rates, they probably would need to _____.

a. raise interest rates

b. lower interest rates

c. purchases government bonds, but not corporate bonds

d. purchase corporate bonds, but not government bond

Suppose that we are on a system of flexible exchange rates and the central bank of China makes a determined effort to depreciate its currency. Milton Friedman would probably say, according to the class lecture, _____.

a. The Federal Reserve should act to offset the Chinese central bank’s actions

b. The U.S. Treasury should put a tariff on Chinese goods

c. It would be impossible for the Chinese central bank to do this because any attempt would be overwhelmed by market forces

d. Let them, this will benefit the American consumer

Answer 1

1) Lower the interest rates

• The balance of payment deficit means that there isl ess amount of money supply.
• Then it will have to do open market operations to overcome this problem
• That means that either it will have to purchase bonds from govt or sell bonds.
• Since it is in payment deficit, Then they will have to purchase the bonds.
• Then the money supply will increase.
• This leads to bank having more reserved money.
• Then they will lend out too much money to people.
• this leads to people having more money.
• Then inflation increases.
• Hence bank will lower the interest rates.

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