Question

If the economy began at potential output when a negative aggregate demand shock hit, what would be the traditional monetary policy action to stabilize output?

		lower interest rates to increase spending and shift the AD curve to the right
		lower interest rates to increase spending and shift the AD curve to the left
		increase interest rates to increase spending and shift the AD curve to the right
		lower interest rates to decrease spending and shift the AD curve to the left

At the beginning of the Great Recession, the Fed's balance sheet held about $1 trillion of assets. Because the Fed purchased a wide range of assets to support financial markets, provide liquidity and keep longer term interest rates as low as possible, by the beginning of 2011, the size of the balance sheet had swelled to approximately

		$2.2 trillion
		$4.2 trillion
		$2.4 trillion
		$1.4 trillion

The recession at the beginning of the 1980s was caused by monetary policy to lower inflation and inflation expectations. One of the primary lessons arising from this time is the need for monetary policy to

		anchor inflation expectations
		be flexible with inflation
		promote lower unemployment
		allow politicians to influence monetary policy

As as result of the monetary policy action of 1980-81 and the increased vigilance of the Federal Reserve, inflation expectations declined the during the remainder of the 1980s, inflation average approximately

		6%
		4%
		8%
		2%

Answer 1

1) first option is correct. Interest rate should be reduced when the money supply is increased in order to boost investment expenditure and the aggregate demand. This will shift the AD curve to the right

2) the answer is 2.4 trillion.

3) anchor inflation expectations. These play an important role in determining the future outlook of the economy because different economic agents expect a certain rate of inflation and they determined their economic activity accordingly

4) it is 4%