Explain how exchange rates and interest rates are linked (including the mechanisms for that linkage.)
Why and when was the velocity of money stable and why and when was it unstable?
Fully develop the AD/AS model with inflation and output as its axis labels in both the short run and long run. Be sure to include all of the elements that go into its development.
Describe the Great Moderation, when and how it came about and why it ended as badly as it did.
Summarize all of the channels by which the monetary policy transmission mechanism can work.
example of a really good answer:
Distinguish between idiosyncratic and systemic risk.
Idiosyncratic risk is the risk that results from owning a specific security in the form of a stock, bond, CD, etc. It is the risk you think of when you think about losing money investing in a specific thing. For example, if you bought a share of AMZN, and then earnings came out and they were disappointing and the stock price falls resulting in you losing money, you just suffered the consequences of idiosyncratic risk. You can diversify against idiosyncratic risk by purchasing many different securities so that when one does poorly, it doesn’t affect you as much because the others are likely to not be suffering the same problems.
Systemic risk, on the other hand, is risk that affects many securities at once. These are often geopolitical events that result in the market as a whole being affected. For example, a highly infectious virus might originate somewhere in the world and start to spread aggressively causing economic slowdowns/lockdowns that in turn affect the performance of many securities at once. These sorts of things are generally out of the hands of individual investors, and cannot be so easily diversified against.
You might look at it this way. You’re on a ship in the middle of the ocean. There are things you can do to make sure you don’t fall off of the ship. You can avoid the top deck, wear a restraint of some sort, make sure people are keeping track of you, etc.. Here, you are doing what you can as an individual to manage the idiosyncratic risk of falling of the ship. However, if the ship is sinking, that might be out of your hands. Now you have the systemic risk (the sinking ship) that you cant do much about. This will affect all of the passengers (securities) at once, and diversification (risk management) will not have helped that much.
Idiosyncratic and systematic risk
Interest rates, inflation, and exchange rates are highly correlated. By manipulating interest rates, central banks exert influence over both inflation over both inflation and exchange rates, and exchanging interest rates impact inflation and currency values. Exchange rates play a vital role in a country`s level of trade, which is critical to most every free market economy in the world. For this reason, exchange rates are among the most watched, analyzed and governmentally manipulated economic measures. A higher exchange rate can be expected to worsen a country`s balance of trade, while a lower exchange rate can be expected to improve it. On the other hand, higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise. The impact of higher interest rates is mitigated, however, if inflation in the country is much higher than in others.