Suppose the demand for money rises.

1. All else equal, will this lead to recession or boom, and why? Trace the causal process as explicitly as possible. (10 points)
2. In order to counteract (a), should the central bank expand or contract the money supply? (10 points)
3. In order to do (b), should the central bank do open marketpurchasesorsales, and what will this typically be a purchase or sale of? (10 points)
4. When the central bank does (c), does this imply a rise or a fall in the Federal Funds Rate, and why? (10 points)
5. ***Explain how this affects interest rates in the broader economy,step by step, based on the portfolio balance effect. (20 points)
6. Suppose Congress also wants to counteract (a) with fiscal policy. If you can't convince them not to do it, how would you recommend they fund the spending, and why? (20 points)

***Only need Q 5 answered