1.) A decrease in the money supply causes interest rates to __________, investment spending to __________ and Gross Domestic Product to __________.

a.fall; rise; fall

b.fall; fall; rise

c.rise; rise; rise

d.rise; fall; fall

e.rise; fall; rise

2.) If the Federal Reserve is targeting the interest rate when the demand for money increases, their proper response is to

a.decrease the money supply

b.keep the money supply constant

c.increase the money supply

d.stimulate inflation to increase the demand for money

e.stimulate a decrease in the price level to increase the demand for money

3.Suppose that the economy shows signs of going into a recession and GDP has declined from $21 trillion to $16 trillion. Since one of the Fed's goals is to promote full employment, it has decided to useOpen Market Operationsto help meet this goal.

a.)Please explain in three or four sentences how the Fed's use of Open Market Operations would help to achieve this goal? (hint: Explain how the Fed's buying or selling of securities would affect the money supply.)

b.)Please draw the four graphs we used in class and label them appropriately. Then show in detail how the Fed's actions shifted each of the curves in your 4 graphs.

c.)Please explain in at least one sentence or two for each of the four graphs why the Fed's action affected the

Money market

Market for investments

Aggregated Expenditure Function

Aggregate Demand Curve

4.) In spite of the Fed's actions, there will be afeedback loop, which will diminish the effectiveness of the Fed's Open Market Operations.

a.)Please draw another set of 4 graphs illustrating where the economy ended up as a result of the Fed's use of Open Market Operations in question (3) above.

b.)Please explain how changes in the economy's Aggregate Demand, which resulted from the Fed's monetary policy, will affect the demand for money in the money market and illustrate this change on your new set of graphs.

c.)Please explain why the change in Aggregate Demand affected

the economy's interest rates

the quantity of Investments demanded

the Aggregate Expenditure Function

Aggregate Demand

a.)Explain in two or three sentences what policy tool the Fed normally usesto counteract this feedback loop.

b.)Please explain why this action will help achieve the Fed's goal of promoting Full Employment in the economy.