Problem 1. What are the three tools the Federal Reserve uses to change the money supply and interest rates in the economy? Which of these tools is most important and why?
Problem 2. In each of the following cases, explain whether the statements are true or false, and why:
a. If the real money demand is greater than the real money supply, interest rates must rise to reach the equilibrium in the money market as people sell bonds to obtain more money (cash).
b. The federal government's control of money supply, which influences the interest rates, is the primary tool that policy makers use to impact the macro economy.
c. A decrease in the reserve requirement decreases the money supply because banks
have fewer reserves.
d. The real money demand curve shows how households and businesses change their spending in response to changes in interest rate.