ECO 200: Principals of Macroeconomics, Homework Chapter 21

While a television news reporter might state that "Today the Fed raised the federal funds rate from 1 percent to

"Today the Fed told its bond traders to conduct open- market operations in such a way that the equilibrium federal funds rate would increase to 1.25 percent."

Which of the following correctly explains the crowding-out effect?

An increase in government expenditures increases the interest rate and so reduces investment spending.

Monetary policy

can be described either in terms of the money supply or in terms of the interest rate.

When the Fed sells government bonds, the reserves of the banking system

decrease, so the money supply decreases.

In recent years, the Federal Reserve has conducted policy by setting a target for the

federal funds rate.

The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it

increases income and thereby increases consumer spending.

The goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy.

According to classical macroeconomic theory,

output is determined by the supplies of capital and labor and the available production technology; for any given level of output, the interest rate adjusts to balance the supply of, and demand for, loanable funds; given output and the interest rate, the price level adjusts to balance the supply of, and demand for, money.

Monetary policy is determined by

the Federal Reserve and involves changing the money supply.

Fiscal policy is determined by

the president and Congress and involves changing government spending and taxation.