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% ob ject ive% resp ond% t% a% decrease% in%money%demand?%Why?%Ill ustrate% your%answ er% 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%fullOemployment% 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% fol lowing:% “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%l ikely%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?%
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