Why does the Fed have to be concerned with money growth even though their main focus seems to be on interest rates?
What will be an ideal response?
The Fed needs to focus on money growth because economic research and the resulting evidence point to the fact that there is strong correlation between the rate of inflation and the rate of money growth. As a result, in order to avoid sustained episodes of high inflation, the Fed must be concerned with money growth.
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There is an old saying that "The proof of the pudding is in the eating," which means that by definition good decisions work out well and poor decisions work out badly. This question asks you to consider this the wisdom of this saying
a. Your friends live in a city where it often rains in May. Nonetheless, they plan a May outdoor wedding and have no backup plan if it does rain. The weather turns out to be lovely on their wedding day. Do you think your friends were being rational when they made their wedding plans? Explain. b. You usually have to see a doctor several times each year. You decided to buy health insurance at the start of last year. It turns out you were never sick last year and never had to go the doctor. Do you think you were being rational when you decided to buy health insurance? Explain. c. Given your answers to the first two parts of this question, do you agree or disagree that "The proof of the pudding is in the eating?" Explain.
The Ogallala aquifer is a large underground pool of fresh water under several western states in the United States. Any farmer with land above the aquifer can at present pump water out of it. We might expect that
a. over time, the aquifer is likely to be overused. b. each farmer has a sufficient incentive to conserve the water. c. state governments have an incentive to insure that their farmers do not overuse the water. d. resources would be used more efficiently if the government paid for the pumps farmers use to get the water.