Scott Sumner on Interest Rates

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Listen to the EconTalk podcast Scott Sumner on Interest Rates and consider these questions.

1. What does Sumner mean by "reasoning from a price change?" Use supply and demand graphs to illustrate this confusion.

2. If interest rates tend to be pro-cyclical, why haven't they risen in recent years, according to Sumner? (Or, why didn't interest rates bounce back with the post-2008 recovery?)

3. What does Sumner mean by "defensive" monetary policy, and how does this differ from "tight" or "loose" monetary policy?

4. What is the difference between savings and investment? How does this distinction help explain the low interest rates we see today?

5. How are nominal interest rates affected by expected inflation? What does Sumner mean by the difference between the return you want and the return you're willing to accept?

6. Listen to Sumner's two-part explanation of the effect of current savings rates on interest rates from 24:27 to 30:14. Use supply and demand graphs to illustrate his explanation. Don't forget to label!

7. What is the "secular stagnation" thesis? How plausible do Roberts and Sumner find this thesis? Explain.

8. Sumner argues that the "old" manufacturing economy was closer to the model of perfect competition than today's digital economy. For what reasons does he make this claim? How convincing do you find them?

9. How much of the recent financial crisis does Sumner attribute to housing? Do you agree that we may not be building enough today? Explain.