Question 1: Suppose there was a small, negative shock to demand. You-a policymaker-have a stack of papers in front of you detailing the magnitude of the shock and its devastating effects on the people of your country. You are tempted to use an active policy to offset these effects. Your advisers have estimated its impact on the economy, in both the long and short runs. What questions should you ask yourself before committing to this course of action? Why?
Question 2: You, as chairman of the Fed (congratulations), are considering whether the monetary base or the interest rate should be used as a target. What information do you need to have to make an informed decision? When would each be a good (or bad!) choice?