Problem 1. Suppose you read in the newspaper that last week the Fed conducted open market purchases, and that on Tuesday of last week it lowered the discount rate. What would you say the Fed was up to? Describe the most likely economic condition of the economy.
Problem 2. What three tools can the Fed can use to change the money supply? Which tool is used most frequently? What are two limitations on the money expansion process?
Problem 3. Explain why incorporating money into our macroeconomic framework moderates the effects of fiscal policy. That is, how does the existence of the supply and demand for money moderate the effects of increased government spending?