5.1 Fiscal and Monetary Policy Actions in the Short Run

A combination of expansionary or contractionary fiscal and monetary policies may be used to restore ______ when the economy is in a negative or positive output gap.

• full employment

• low unemploymnet

• stable prices

• lower prices

Which of the following can the combination of fiscal and monetary policies influence?

• aggregate demand, real output, the price level, and interest rates

• aggregate supply, GDP, the price level, and interest rates

• long-run supply, real output, the price level, and interest rates

• aggregate demand, real output, prices, and real interest rates

The government can be both a borrower and saver in a loanable funds market. If they are borrowing money, do they affect the demand or supply of loans? If they decide they need to borrow more money, how does that affect interest rates?

• demand

• supply

• raise real interest rates

• lower real interest rates

The government can be both a borrower and saver in a loanable funds market. If they are loaning money, do they affect the demand or supply of loans? If they decide they need to save more money, how does that affect interest rates?

• demand

• supply

• increase real interest rates

• decrease real interest rates

Suppose the US is in a recession and we need to boost aggregate demand. The fed and the gov't both take action in the loanable fund market and the money market. What happens to real and nominal interest rates?

Answer explanation

The government will increase demand for loans which raises real interest rates. The fed will increase the money supply which will lower nominal interest rates.

Suppose the US is overheating and we need to lower aggregate demand. The fed and the gov't both take action in the loanable fund market and the money market. What happens to real and nominal interest rates?

Answer explanation

The government will decrease demand for loans which raises real interest rates, or they will have a surplus of funds which will also lower real interest rates. The fed will decrease the money supply which will raise nominal interest rates. In an ample funds regime, the targeted administered rates will increase.

If we are in a recession and we boost aggregate demand, what is our concern to watch out for?

• too much spending and too low interest rates could cause inflation and overheating

• We might not be able to get back to the long-run

If we are overheating and we lower aggregate demand, what is our concern to watch out for?

• Cutting spending too quickly and raising interest rates too fast could cause a recession

• Higher inflation with higher interest rates just makes it harder.

Here is a yield curve. It tells you the difference between 10 year yields and 2 year yields. Why would it be negative?

• It tells you investors would rather hold on to 2 year bonds than 10 year bonds, so they don't like the future

• it tells you investors would rather hold on to 10 year bonds than 2 year bonds, so they don't like what's about to come.