QUESTION 8

In an economic model

for simplicity, let X=M

G = 1

I = 2

if you like decimals C = 3 + 0.8Y or if you prefer fractions C = 3 + 4/5Y

If the Full Employment level of Y is 35, then there is a recessionary gap,or Y, andto close the gap,or Y, using monetary policy,Investment Expenditures equation will need to be rewritten as

and the new level of InvestmentExpenditures,I*,shouldbe

Match policy tool with impact on economy

Cut taxes

Fed buys bonds

Cut government expenditures

Raise the discount rates

Fed sells bonds

Fed cuts target for Federal Funds Rate

Increase government spending and raise taxes by equivalent amounts

Increase the Required Reserve Ratio

A.expansionary

B.neutral

C.expansionary

D.contractionary

E.contractionary

F.expansionary

G.contractionary

H.contractionary

I.expansionary