GSB 410 Homework 3 (due Saturday 10/05)

1. Refer to the formula,

, which means "Nominal interest rate = real interest rate + inflation".

1. What is the interpretation of the statement that ?
2. What will be the implication to the real interest rate if ?
3. What is the implication of the real interest rate r to the investment in this case? (There are two parties involved in this: businesses that want to invest in profitable K projects, and individual & institutional investors who want to invest in those companies that return high. i here refers to the rate at which they borrow from the bank.)

1. Refer to the Pleasure reading #3, "Slowing European Economies".

1. Interpret the 4^th paragraph. Why is it harder to get the negative real interest rate the closer the inflation is to zero?
2. Why is negative real interest rate often necessary in a recession?

GSB 410 Homework 4 (due Saturday 10/19)

1. Refer to the Pleasure reading #6, "Deflation, not Double Dip".

1. Explain the contention in paragraphs 6~8, how an expanding economy can experience deflation. You will need to refer to our lecture notes for relevant explanations & graphs. (Hint: Look up the explanations about inflationary / recessionary gaps in relation to the SR eqm between SRAD & SRAS with full employment output Y_F level - i.e. potential GDP.)
2. Refer to paragraph 11. Even though the deflationary spiral theorists contend that "falling prices encourage consumers to postpone spending in the expectation of cheaper goods tomorrow", only exacerbating deflation further:

1. What kind of counter-argument can you make theoretically when falling prices are a result of expanding AS to fill the gap between the potential GDP & the actual GDP?
2. If the AD remains strong, what is the implication of this to the deflation? Will deflation still be a cause of concern, exacerbate, or remain unaffected? Explain with full rationale.

Your homework must be typed in double space, using Times New Roman 12 point font. If you quote or excerpt a passage, you must put citations between quotation marks and either i)footnote or endnote them for their sources, or ii)declare the source in the parenthesis immediately following the citation or excerpt, and list the references (bibliography) that you cited at the end of your paper.

For styles of the reference and others, strictly observe the following guidelines:

1. References must be numbered in the alphabetical order of Author(s) name(s), Title of the book underscored or italicized (Title of the article in case of journal, followed by the name of the journal, review, or magazine, underlined or in italic), Publisher, Year of publication, Volume No. in case of journal, pages cited or excerpted from. The reference page is not included in the number of pages.
2. Use a front cover page, which clearly indicates in descending order the class code, section; course title; name of the instructor; (student number if applicable) your name; Fall/Spring Year. These must be typed in large bold Times New Roman font (above 14 point). The front cover must be center-aligned, and is not included in the number of pages.
3. The paper must be written in grammatically correct & coherent English, brief & to the point. Incoherent writing will only work to your disadvantage.