1. Discuss differences between fiscal and monetary policy. Specifically, what organization controls fiscal policy? What instruments do these organizations use to control the economy (i.e. government spending, taxes, and money supply)?
2. What are the three tools, which the Fed uses to control the money supply? How would the Fed use these tools to increase the money supply? How would they decrease the money supply? Explain in detail how each of these tools could influence the money supply.
3. Give a detail intuitive explanation of the money expansion process. How can money be literally created by banks?
4. Using bond and money market diagrams illustrate how the Fed could use open market operations to increase the money supply. Determine the impact on the price of bonds and interest rate. Relying on your knowledge from earlier in the course, how would this change in interest affect Total Expenditure and Nominal GDP? Would you therefore, consider increasing money supply to be an expansionary or a contractionary policy? Under what Macro economic problem would you expect the fed to increase the money supply?
5. Using bond, money, Consumption Function, and complete Keynesian model, illustrate how the fed could use monetary policy (open market operations) to combat inflation. Explain briefly
6. Using bond, money, Consumption Function, and complete Keynesian model, illustrate how the fed could use monetary policy to combat unemployment. Explain briefly.
7. What is the Quantity Theory of Money (QTM)? Use QTM to explain how inflation occurs.
8. Carefully explain how equilibrium nominal GDP (Ye) can exceed full-employment non-inflationary nominal GDP (Y*).
9. Assume that the economy is initially in equilibrium at full-employment. Use a real AS and AD diagram and brief verbal description s to show and explain how an adverse supply shock (like OPEC quadrupling the price of crude oil) can lead to stagflation. Also, discuss how policymakers could change AS and AD to combat stagflation.
10. Consider the following: “Some Clinton Administration officials have urged the Fed to lower interest rates in an attempt to increase the growth rate of real output. These officials claim that real growth will accelerate while inflation remains at its current level (3% per year). Fed Chairperson has rejected the Administration’s proposal arguing that such expansionary monetary policies would simply result in higher inflation while real output growth remains the same.”
a) Use QTM to analyze the Administration and Fed Chairperson’s contentions.
b) If the Fed decide to lower interest rates, what open market operations
would they use? Illustrate these “expansionary” open market operations
using supply/demand diagram of the money and bond markets.
11. Use bond, money, investment, and nominal GDP (Y) diagrams and brief verbal descriptions to explain the short run effects of an increase in government spending (G) that is financed by the Treasury selling bonds. Assume no chane in the money supply (Ms).