Department of Economics
ECON 304 Winter 2016
Assignment 3: Chapters 6, 17 – 18
This assignment is due, in my mailbox, on Wednesday, April 13 at 1:00 pm. Late assignments
will be penalised at a rate of 2:5% per hour.
Complete the following questions. Please type or write your answers clearly in black or blue
INK using ruled paper; graphs may be done in pencil. Make your answers as concise as
1. Suppose in the monetary intertemporal model that the government can pay interest on money, …nancing
this interest with lump-sum taxes on consumers. If the nominal interest rate on money is the same as
the nominal interest rate on bonds, determine the e¤ects in the model, illustrating this in a diagram.
Explain your results.
2. In the late 1940’ the communists under Mao Zedong were defeating the government of China in a
civil war. The paper currency issued by the Chinese government was losing much of its value and most
businesses refused to accept it. At the same time, there was a paper shortage in Japan. During these
years, Japan was still under military occupation by the United States, following its defeat in World
War II. Some of the US troops in Japan realised that they could use dollars to buy up vast amounts
of paper currency in China, ship it to Japan to be recycled into paper and make a substantial pro…t.
Under these citcumstances, was the Chinese paper currency a commodity money or a …at money?
3. English economist William Stanley Jevons described a world tour during the 1880s by a French singer,
Mademoiselle Zélie. One stop on the tour was a theatre in the Society Islands, part of French Polynesia
in the South Paci…c. She performed for her usual fee, which was one-third of the receipts. This
turned out to be three pigs, 23 turkeys, 33 chickens, 5000 coconuts and “considerable quantities of
bananas, lemons and oranges.” She estimated that this would have had a value in France of 4000
francs. According to Jevons, “as Mademoiselle could not consume any considerable portion of the
receipts herself, it became necessary in the meantime to feed the pigs and poultry with the fruit.” Do
the goods Mademoiselle Zélie received as payment ful…ll the three functions of money that we have
studied? Brie‡ explain.
4. Use the Diamond-Mortensen-Pissarides model to answer the following questions.
(a) Explain and illustrate the e¤ects of a decrease in employment insurance on the labour market.
(b) Suppose the government institutes a programme to help unemployed workers learn new skills, …nd
new jobs and relocate as necessary to take the new jobs.
i. Explain which variable in the matching function is a¤ected by this programme.
ii. Explain, graphically and in words, how this programme a¤ects the unemployment rate, the
vacancy rate, the labour force, the number of …rms, aggregate output and labour market
(c) How would each of the following changes likely a¤ect the unemployment rate?
i. A new law prohibits people from seeking employment before 18 years of age.
ii. A new Internet service, job…nder.ca, makes it easy for people to check on the availability of
jobs around the country.
iii. The length of time that unemployed workers can receive Employment Insurance doubles.
iv. A shift in the public’ buying habits greatly expands the demand for sophisticated consumer
electronics while reducing the demand for traditional consumer goods and services such as
clothing and restaurant meals.
5. Use the central bank learning story and the central bank commitment story to explain the behaviour
of the Canadian in‡
ation rate from 1960 to 2010. Use diagrams to aid in your explanation.
Originally posted 2017-02-17 06:52:02. Republished by Blog Post Promoter