1. Suppose the Fed wants to increase the money supply to increase equilibrium levels of output in the economy
a. Describe a method the Fed can use to do this
b. Referring to the equation of exchange, what would a classical economist’s view on this policy be?
c. Still referring to the equation of exchange, how would a monetarist disagree with the classical economist?
2. What is the effect of an expansionary monetary policy on equilibrium price and output from the perspective of:
a. A classical economist
b. A monetary economist
c. A Keynesian economist
3. A Keynesian economist and a monetary economist are arguing over what is the best policy to stimulate the economy (there may be multiple answers)
a. How would the Keynesian economist criticize monetary policy?
b. How would the monetary economist criticize fiscal policy?
4. Suppose that the Fed observes that the federal funds rate is increasing
a. What does this say about the quantity of loanable funds in the economy? Explain your answer
b. What effect does this have on aggregate demand?
c. In this situation, would fiscal policy be effective or ineffective? Explain your answer
d. What should the Fed do to avoid a recession?
5. Identify the effect of each of these events on the production possibilities frontier:
a. Discovery of new oil fields
b. Less people are going to university
c. A decrease in taxes encourages consumer spending
d. A drop in the birth rate reduces the size of the labour force
6. More firms are buying the newest models of computers for their employees
a. How do the effects on the production possibility frontier for each of the scenarios in (4) correspond to an effect on the AS/AD model? (identify how the curves shift)
7. Suppose that our economy is in a recession
a. What would this look like on the AS/AD model
b. What would this look like on the production possibilities frontier
c. If the government decides to buy bonds on the secondary market, how would this affect the AS/AD model and the production possibilities frontier?
d. If firms use the money they receive from the government to purchase newer and more efficient technology, how would this affect the AS/AD model and the production possibilities frontier?
Answers: 3
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