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1. Suppose people perceive a greater risk of their local bank closing. How does this alter...

1. Suppose people perceive a greater risk of their local bank closing. How does this alter the money supply? If you were on the FOMC, how would you respond? What risk does this pose?

2. For each of the following, what is the expected impact on the AD curve?

a. A fall in business confidence

b. An increase in government debt financing

c. A fall in growth rates abroad

d. An increase in the domestic monetary base

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Answer #1

2) a) A fall in business confidence will reduce the aggregate demand and shift the demand curve to the leftward

b) An increase in govt. debt financing will increase the aggregate demand and shift the demand curve to the right

c) A fall in growth rate abroad will decrease the export and will shift the demand curve to the left

d) An increase in the domestic monetary base will shift the money supply to the right and decreases the interest rate leading to an increase in investment and Aggregate demand. Thus demand curve shifts to the right

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