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    Contractionary monetary policy

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    1. Which of the following is true about Keynesian policies views?
    c. Keynesian economists believe that a small amount of inflation may be good for the economy, and they do not advocate pushing inflation to zero if it means that a significant amount of unemployment will result.

    Keynesians believe that changes in aggregate spending have an immediate, short term effect on output rather than on prices. Because prices are rigid, monetary policy is not an effective means of stimulating the economy.

    2. Contractionary monetary policy may not be advantageous for which of the following reasons?
    a. The trade deficit may increase.

    A contractionary monetary policy shock leads to an appreciation in the US which would cause an increase in the trade deficit. Many of these answers are things that will happen under contractionary policy, but they are not undesirable.

    3. You have been hired as an economic adviser to a large bank. What buy or sell recommendations for the US dollar in response to the following news: (2 points)
    a. Expectations of higher interest rates in the US
    Higher expected rates of return in the US will cause currency appreciation. Buy.
    b. US interest rates rise, but less than expected
    Less than expected increases will cause currency depreciation. Sell
    c. Expected loosening of US monetary policy
    A larger money supply leads to lower interest rates. This will cause currency depreciation. Sell.
    d. Higher ...

    Solution Summary

    Assistance with pros and cons of the deficit and other short answer questions.