### What is the logic of arguing that it hurt debtors

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1. The internet article is from a speech by Fed Chair Ben Bernanke, made in 2002, when he had just joined the Board and four years become he became Chair.

Briefly list in your own words up to three arguments of Bernanke's for not using monetary policy to fight bubbles.

P.S. A bubble occurs when an asset rises in price quickly and beyond reason. As the term imply, bubbles pop quickly and often without warning. The housing crisis that started in 2008 was a classic example of a bubble-a large run-up in housing prices during the years preceding it and then a quick and painful fall in prices when the bubble popped.

2. Bernanke uses the term "fundamentals" several times. Which of these sounds the most like what he is talking about? (There is more than one answer.)

a. The stock price of XYZ goes up because they have discovered a way to increase productivity in producing widgets.

b. Housing prices go up in Midtown because people are tired of long commutes into the city each day and are willing to pay a premium for living in-town.

c. People pay on average 50 percent more for houses than a year ago because they are convinced that housing prices only go up.

d. The stock market increases because people are convinced that the fight against inflation will make the U.S. more competitive in the world market.

For the next two questions consider the paragraph before the conclusion, where Bernanke commenting on the Great Depression says, "Most seriously it permitted a serious deflation..."

3. In this section Bernanke comments that real interest rates went "sky-high." In class your instructor commented that nominal interest rates were very low during the Depression. Which of the following is an example of numbers that are consistent with what both Bernanke and your instructor said?

a. nominal interest rates = 1 percent and CPI falling 30 percent annually

b. nominal interest rates = 1 percent and CPI stable.

c. nominal interest rates = 10 percent and CPI rising 2 percent annually

d. nominal interest rates = 1 percent and CPI rising 2 percent annually

4. What is the logic of arguing that it hurt debtors?

a. Debtors paid back debts with dollars that had less purchasing power than before

b. Debtors paid back debt with dollars that had more purchasing power than before

c. Creditors were paid back with dollars that had less purchasing power than before.

d. both b) and c) are correct.

5. Bernanke in his speech on monetary policy and asset bubbles said he hesitates to use monetary policy to pop asset bubbles. Which of the following is (are) consistent with his argument? [Look at footnote #16 as well as main text.]

a. Homeowners have a right to maximize the return from their investment.

b. Speculating on homes and stocks is basically harmless to the real economy. It is only the perception that makes it look harmful.

c. It is difficult to use monetary policy to stop bubbles. In addition, The Great Depression is a case in point where using monetary policy was a contributing cause to the seriousness of the depression.

d. Although it is easy to use monetary policy to stop bubbles, it can cause bad recessions. The Great Depression is a case in point where using monetary policy was a contributing cause to the seriousness of the depression.

6. a. Find a testable hypothesis in the article and put it in if,then form in 15 words or less.

b. What is the normative implication of the article. (A statement with a normative implication should either contain "should" or "should not.")

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