Question

2. (18 points) State whether each of the following statement is TRUE OR FALSE, and then briefly explain your answers (the explanation is what counts).

2.1. If the Fed lowers discount rate, it will shift LM curve to the right because it increases money demand.

2.2. When an economy is in the liquidity trap, neither monetary policy nor fiscal policy is effective in getting the economy out of recession.

2.3. Money demand is related to the functions performed by money. So, money demand curve is downward sloping because of its medium of exchange function.

2.4. Other things being held constant, a trade deficit will reduce money supply in the U.S.

2.5.According to the IS-LM model, a simultaneous increase in consumer confidence and discount rate by the Fed will raise both the equilibrium interest rate (i*) and real GDP (Y*).

2.6. There will be no crowding-out effect if demand for money is not sensitive (responsive) to interest rate change.

Answer 1

1 True because in this case it becomes borrowing for people becomes cheaper . As a result demand for money increases.

2 False in case of recession both monetary and fiscal policy effectively helps in getting economy out of recession.In case of recession expansionary fiscal policy is followed. It involves lowering of taxes and increasing government spending. In case of monetary policy easy money monetary policy is followed in case of recession.In a recession, the Fed will lower interest rates and increase the money supply.

3. False. The downward slope of money demand curve is because people want to hold less of their wealth in the form of money the higher that interest rates on bonds and other alternative investments are.and vice versa.

4 True Trade deficits are detrimental to a nation's economic outlook by negatively impacting employment, growth and devaluing its currency.Money supply decreases, if there is a trade deficit, given govt want to keep the changes in exchange rate under control.In case of trade deficits imports are more than exports.