1. As the price level increases, the demand for money ________and interest rates __________.

2. If output is above full employment, we expect wages and prices to rise, money demand to increase, and interest rates to fall. ____________(True/False)

3. An increase in the money supply will have no effect on the real rate of interest in the long run. _____________(True/False)

4. An increase in government spending will ________ interest rates in the long run.

5. Understanding Japanese Fiscal Policy. Japan s finance ministry agreed to income tax cuts to combat a decade-long recession in the 1990s but only if national sales taxes were increased several years later.

a. What would you expect to be the short-run effect of the income tax cuts? Draw a graph to show this effect.

b. What would you expect to be the long-run effect of the income tax cuts? Draw a graph to show this effect.

c. Why did the Finance Ministry require an increase in sales taxes several years later?

d. What was the Finance Ministry trying to prevent?

6. Can Monetary Policy Prevent Crowding Out? Explain what is wrong with this quote: In the long run, we do not have to worry about increased government spending causing crowding out, because the Fed can always increase the money supply to lower interest rates to prevent this.

7. Increasing Health Spending and Economic Growth. Analyze how the following factors associated with increased spending on health care might affect economic growth.

a. With increased longevity, workers will need to postpone their retirement in order to save more for old age.

b. Households may cut down on purchases of consumer durables to spend more on health.

c. Households may reduce their savings in order to spend more on health care.

d. New and expensive technologies allow people to live longer.

8. Money and Output Growth in the Long Run. Countries that have high money growth for long periods do not grow more rapidly than countries with low money growth. Why?

9. Economic Policy and the Housing Industry. Explain why advocates for the housing industry (an industry very sensitive to interest rates) might want to advocate lower government spending for the long term.

10. Tax Increases and Crowding In. Using an aggregate demand and aggregate supply graph, show how tax increases for consumers today will eventually lead to lower interest rates and crowd in investment spending in the long run.