1. In last 10 years, if the Federal Reserve lowered the Discount rate by eleven times, from 5% to .50%, what would be a reason for this action? What is the reason for this action? What is the Fed trying to do with these actions.
2. How is money created in the economy today? What is the money multiplier and what is the role of the money multiplier in the creation of money? Is cash and coins really being created in this process? Yes or No and why?
3. If the central bank (the Federal Reserve) keeps printing money and lowering the interest rates to get consumers buy and businesses to borrow money, then the economy will improve. Do you agree with the statement? Hint: Think about Both of the short term and in the long term effects on the economy.
4. Give an example of consistent Fiscal Policy and Monetary Policy that you would choose to correct an unemployment gap (a Recession) that you suspect in the economy? Explain your answer.
5. In a system of money which is based on Fiat Money. Who or what backs up the money? In other words, who do we trust with our money? Why does the value of the Dollar decline?
6. True or False and why: If the Fed Increases the money supply, then ceteris paribus, there will be an increase in interest rates in the economy?
7. Which is the following is true? Explain why briefly.
The paper money (cash and coins) that is used in the US is called the following? A. US Note B. Federal Reserve Note C. US treasury Note d. All of the above. E. None of the above.
8. Why are there time lags a problem in making monetary and fiscal policies? Can these lags be avoided? Why?
9. If the government spends a $2,000 more and cuts taxes by $2,000, then what will be the effect on the economy, budget deficit and when would this be a good policy to use? Use a MPC of .80. You Need to Show Work, for full credit on the question. Show the formulas used.
10. If the MPC increases, then what happens to the Consumption Multiplier? Explain your answer by giving an example of how that would work. What is the range of the MPC? What would be a realistic value of the MPC? explain why.