FISCAL AND MONETARY POLICY
Case Assignment
Short Answer Questions. Please address the following questions. Your total page requirement is 3- to 5-pages.
1. Suppose a consumer has $1000:
a. If the marginal propensity to save (MPS) is .2, how much will the consumer spend?
b. If the consumer deposits the entire $1000 into a bank and, assuming the reserve requirement rate is 10%, what will be the eventual increase in
checking account balances?
2. What are supply shocks? Explain what effect adverse and favorable supply shocks have on the supply curve. Give an example of a supply shock
that has affected the U.S. economy on more than one occasion.
3. True/False Statements. Indicate if the statement below is True or False. You must support your answer with a few sentences for each statement.
a. When considering the aggregate demand curve, the wealth effect, interest rate effect, and effects from international trade reinforce each
other.
b. When federal government spending amounts to less than tax revenues, the federal government runs a budget deficit.
c. Credits cards are NOT a part of the M1 or M2 money supply.
d. Money is a perfect store of value.
4. Suppose the current real GDP is less than the potential GDP. Explain the ways fiscal and monetary policy can increase real GDP. Be sure to
focus on the specific tools, and use the concepts of aggregate demand (fiscal policy) and money supply (monetary policy).
Assignment Expectations
Use concepts from the modular background readings, as well as any good-quality resources you find. Please be sure to cite all sources within the text
and provide a reference list at the end of the paper.
Length: 3–5 pages, double-spaced and typed.
The following items will be assessed:
• Your ability to apply the basic economic concepts to the questions.
• Some in-text references to the modular background readings (APA formatting not required).
• The assignment should address each question for full credit. Remember to support your answers with solid references, including the case
readings.
Module 4 – Background
FISCAL AND MONETARY POLICY
This module explores the business cycle and economic fluctuations. You will also learn how to use aggregate demand and aggregate supply to understand
what is happening in the economy. The special role of taxation, government spending, and import/export activities is also discussed.
We will also examine the role of money in the economy. It is important to understand how money is defined. We will also analyze banks and other
financial intermediaries that impact the creation of money. The Federal Reserve (the central bank) and how it controls the money supply is also
explored. Changes in the money supply have major impacts on inflation, output, and employment. Please review the following background materials:
Required Reading
Aggregate Demand, Supply, and Fiscal Policy, Interactive Tutorial.http://www.pearsoncustom.com/mct-comprehensive/asset.php?isbn=1269879944&id=11387
Money and the Banking System, Interactive Tutorial. http://www.pearsoncustom.com/mct-comprehensive/asset.php?isbn=1269879944&id=12277
Discussion Video
Khan Academy Video: https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregate-supply-demand-topic/keynesian-thinking/v/keynesian-
economics
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