Question

2.When a negative aggregate demand shock occurs and creates a short-run recessionary equilibrium,

	a.	eventually wages and prices will fall and move the economy back to potential output
	b.	the government could increase spending and/or lower taxes to move the economy back toward potential output
	c.	the Federal Reserve could lower interest rates to move the economy back toward potential output
	d.	all of the above

3. If the unemployment rate were 6% and the Federal Reserve believed that structural unemployment was 2% and frictional unemployment rate was 1%, then the appropriate monetary policy action would be to

	a.	lower the federal funds interest rate
	b.	increase the federal funds interest rate
	c.	increase taxes
	d.	decrease taxes

4. Given the Federal Reserve's current target range for inflation, if the inflation rate were at 4% we would expect the Federal Reserve would

	a.	lower the federal funds interest rate
	b.	raise the federal funds interest rate
	c.	lower taxes
	d.	raise taxes

Answer 1

Q2)

d) all of the above

as recission happens , wages and prices fall which cause aggregate demand to rise again and moving economy forward

govt can also spend or lower taxes to stimulate the economy and can the federal reserve with its monetary policy

Q3)

a) lower federal funds rate

unemployment rate = 6%

natural unemplyment rate = structural unemployment + frictional unemployment = 2 + 1 = 3%

so in reality unemployment is 3% above natural rate so to bring it down fed will lower rate

Q4) b) raise federal funds rate

As inflation is above target range ( near 2%) so fed will raise interest rate to bring down inflation as people will start consuming less with higher rate