Would the Federal Reserve respond more aggressively with interest rate cuts in a recession caused by a decrease in spending, as in the 2001 recession, than in a recession caused by an increase in oil prices, as in the 1974-75 recession?
What will be an ideal response?
The inflation rate responds differently in the two recessions. A large increase in oil prices decreases real GDP (or slows down the growth rate), but increases inflation. The large decrease in spending decreases real GDP and decreases inflation. The Fed wants to increase real GDP, but they also want to prevent an increase in inflation. Cutting interest rates increases aggregate demand which increases real GDP and increases inflation. With a recession caused by a drop in spending, the rate of inflation declines, which allows the Fed to more aggressively cut interest rates.
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A point outside of the production possibility frontier is:
A. inefficient. B. impossible. C. efficient. D. on the contract curve.
In the short-run macro model, a decrease in the money supply will
a. lower the interest rate, increase spending, and increase GDP b. lower the interest rate, reduce spending, and lower GDP c. raise the interest rate, increase spending, and increase GDP d. raise the interest rate, reduce spending, and lower GDP e. raise the interest rate, reduce spending, and increase GDP
In defining the money supply (M1), economists exclude savings deposits because
a. the purchasing power of savings deposits is much less stable than that of checkable deposits and currency. b. savings deposits are a form of investment and, thus, a better store of value than money. c. savings deposits are liabilities of commercial banks, whereas checkable deposits are assets of the banks. d. savings deposits are not generally used as a means of payment.
With an MPS of 0.3, the MPC will be
A. 0.3 ? 1. B. 1 ? 0.3. C. 0.3. D. 1/0.3.