1. Which do you think is the greater risk for the U.S. economy in 2022: inflation or deflation? Base your answer on what weve discussed in class and your readings, but you may also want to consider this:
2. Many developing nations are not seeing the resurgence in demand that the developed world has in the 2nd half of this year. How feasible would it be for developing nations to maintain current interest rate levels when the rest of the world is raising interest rates to prevent continued increases in the inflation rate?
3. Looking at the chart below, speculate on why Japans inflation rate breaks the mold. (I say speculate because no one knows for sure .)
4. Central bank independence is taken for granted in developed nations like those in Western Europe and the U.S., but independent central banks are something of a rarity in developing and emerging market economies. What roles does an independent central bank play in a countrys economic and financial development, and how does the absence of an independent central bank jeopardize economic growth?
5. The Economist writes: Cash is a safe asset, but a wasting one. The real returns on risky assets have been much greater. True, cash affords optionsto buy cheaply when others are selling. But episodes of distressed selling have been fleeting, largely thanks to central banks, which have been liberal in supplying cash in emergencies. Why are investors willing to incur the opportunity cost of holding cash in the face of current outsized returns in the equity and bond markets?
6. What does the risk structure of interest rates measure? Is the current structure of U.S. rates consistent with your impressions of the health of the US economy and the corporate and housing sectors? Give specific examples.
7. The global investment bank ING has released its forecast of when the major central banks will change their interest rates in 2022. Answer the following questions based on their forecast:
a. Would you expect the dollar to be strengthening against the British pound in the first quarter of 2022?
b. Would you expect the euro to strengthen or weaken against the Swedish krone in 2022? When?
c. Which two currencies are most likely to move in lockstep in 2022?
d. Which country is likely to have the strongest currency at the end of 2023?
8. The U.S. financial system boasts very liquid and efficient markets where financial assets are bought and sold. The U.S. also has a very large number of banks. Other developed nations, like France, Japan or Germany, have few banks even fewer financial markets. What are the pros and cons of the two different approaches?
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