chapter 8 questions

Question 1

what were some observed outcomes of the Great Depression?

Answer 1

• people don’t have jobs/incomes.
• without income people don’t buy output from firms.
• firms can’t make profits, so they shutdown and layoff workers.
• stable state with low resource use and low output

Question 2

what are the three policy tools that the Fed uses to alter the money supply?

Answer 2

1. open market operations
2. setting of reserve requirments
3. setting of discount rate

Question 3

why not always increase the money supply in order to stimulate economic activity?

Answer 3

in the long run, changes in the money supply have no impact on the overall level of real economic activity, but rather only have an impact on price.