Suppose the Fed cares only about keeping the economy close to full-employment output. The Fed can target the real money supply (thus keeping the LM curve fixed) or it can target the real interest rate, changing the money supply and shifting the LM curve however is necessary to prevent a change in the real interest rate.(a)Which is the best policy if the main shocks to the economy are shocks to the IS curve? Explain why. Illustrate with a diagram.(b)Which is the best policy if the main shocks to the economy are shocks to real money demand? Explain why. Illustrate with a diagram.
What will be an ideal response?
| (a) | Target the real money supply, since targeting r would lead to larger fluctuations in output. |
| (b) | Target the real interest rate to offset shocks to money demand and stabilize output. |
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If the realized real interest rate in an economy is 6%, the realized inflation rate is 8%, and the expected inflation rate is 8%, then the nominal interest rate in the economy is:
A) 2%. B) 8%. C) 20%. D) 14%.
The U.S. government imposes import quotas on many agricultural products, especially products that receive price supports. Offer an economic explanation for this
What will be an ideal response?
Federal budget deficits
A. help stabilize the economy during recessions and depressions. B. depress interest rates. C. rarely occurred prior to the Reagan Administration. D. stimulate investment spending by businesses. E. are always undesirable.
When the interest rate increases, the cost of financing investments ______ and _____ investment projects will be undertaken.
a) increases; more b) increases; fewer c) decreases; more d) decreases; fewer