Question 1: A student says the following: "I understand why the Federal Reserve uses expansionary policy, but I don't understand why it would ever use contractionary policy. Why would the government ever want the economy to contract?" Answer the student's question, explaining the mistakes made in his or her understanding of the issue.
Question 2: Explain the four stated goals of monetary policy. Are there potential tensions (or trade-offs) between some of these goals? Explain.
Question 3: If the Fed orders an expansionary monetary policy, describe what will happen to the following variables relative to what would have happened without the policy:
- The money supply
- Interest rates
- Investment
- Consumption
- Net Exports
- The aggregate demand curve
- Real GDP
- The price level
Question 4: Suppose you buy a house for $250,000. One year later, the market price for the house has fallen to $200,000. What is the return on your investment in the house if you:
- Paid for the house all in cash
- Made a cash down payment of 20% and took out a mortgage loan for the other 80%
- Made a cash down payment of 5% and took out a mortgage loan for the other 95%
Show your calculations and explain all of your answers.