1:Suppose there is a sudden decrease in business optimism. If the Fed wants to keep the real growth rate near the long run average supply growth rate, how should the Fed respond to the shock?

A. Sell government bonds

B. Enact contractionary monetary policy

C. Try and reduce inflation

D. Buy back government bonds

2: Suppose a new technology is discovered that reduces the cost of electricity, which causes a big productivity increase in the economy. Additionally, due to the new technology, investors become more confident, and growth in investment increases.

According to the AS-AD model, these two shocks will result in a _____ in inflation and a _____ in real growth.

A. increase, increase

B. decrease, either increase or decrease

C. either increase or decrease, increase

D. decrease, increase

3:Suppose the Federal Reserve (Fed) tries to use monetary policy to fix a negative AD shock. However, the Fed did not account for an extremely large increase in consumer confidence that came in response to the Fed's monetary policy. Why might this be a problem?

A. The monetary policy may not do enough to increase real growth

B. Inflation may become too high, requiring costly disinflation

C. Real growth may decrease even further

D. This may cause a negative real shock