Must know questions exam 2 version 1 Definition and significance questions go to D2L content browser under econ terms 2 Suppose that the Fed s policy objective is to keep the nominal interest rate i constant How would a Fed with this policy objective respond t a decrease in money demand Why Illustrate your answer with diagrams of the money and bond markets 3 Why are there so many interest rates 4 Assume a the economy is initially in equilibrium at noninflationary full employment GDP y b government spending is cut by 10 billion c taxes are cut by 10 billion and d the MPC 8 Using your knowledge of the government spending and tax multipliers calculate the change in Y caused by the decrease in government spending then calculate the change in Y caused by the decrease in taxes Using a PTE ASk and J W illustrate and briefly explain the combined effects of the spending and tax cuts What if any problem would be the economy be experiencing after these fiscal policy changes 5 Give the three reasons to explain why there are so many different interest rates 6 Consider the following In the late 1920s the FED decided to slow down the booming stock market by raising interest rates Use the quantity theory of money to explain the likely effects of this fed policy on the overall or general price level P Using diagrams of the money and bond markets illustrate and explain the likely effects of this FED policy 7 Use the quantity theory of money to explain deflation inflation 8 If you were a member of the FED what three polies could you suggest to combat inflation deflation Explain each policy Using money and bond market diagrams illustrate and briefly explain the effects of your suggested open market policy 9 Three functions of money 10 Suppose Congress decides to cut taxes by 12 billion Then it also decides to cut government spending by 12 billion Assuming MPC 8 calculate the combined effects f these actions on nominal GDP Y Show your calculation Suppose Congress undertakes these actions in an attempt to reduce inflationary pressures in the economy Does it succeed Why or why not