3. Short questions Indicate whether the following statements are true, false, or

Question

3. Short questions Indicate whether the following statements are true, false, or uncertain, and why. a) Crowding out occurs when a smaller money supply squeezes investment. An automatic stabilizer is a feature of an economic system, such as unemployment insurance or the graduated income tax, that moderates swings in the business cycle. Now that there are more British pounds per dollar than six months ago, the GBP has appreciated. In setting monetary policy, the Fed mainly targets the discount rate b) c) d)

Explanation / Answer

(a) False

Crowding out occur when government budget deficit increases, so government finances the deficit by higher borrowing that increases market interest rate. Higher interest rate lowers investment demand.

(b) True

Automatic stabilizers decrease the fluctuation of economic shocks during business cycle.

(c) False

Higher number of Pounds per Dollar signify that 1 dollar can now buy more pounds, so pound has depreciated and dollar has appreciated.

(d) False

Fed primarily targets the inflation rate or engages in open market operations to change money supply.

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