Respond to the following questions:
Question 1: If the Federal Reserve were to engage in an activist stabilization policy, in which direction should they move the money supply in response to the following:
- A wave of optimism boosts business investment and household consumption.
- To balance the budget, the federal government raises taxes and reduces expenditures.
- OPEC raises the price of crude oil.
- Foreigners experience a reduction in their taste for US produced
- Ford automobiles
- The stock market falls.
Question 2: If the Federal Reserve were to engage in an activist stabilization policy, in which direction should they move interest rates in response to the same events listed in Question 1? Explain.
Explain the relationship between FED policy in terms of monetary supply and policy in terms of the interest rate.