Suppose an economy is experiencing a deep recession due to a drop in aggregate d

Question

Suppose an economy is experiencing a deep recession due to a drop in aggregate demand. The unemployment rate has claimbed but to nearly 10% and has plummeted into the range of deflation. What could be Federal Reserve do to try and suitable the economy? Select one: increase interest rates by decreasing the supply of money show down the economy to stop the deflation mandate that all banks increase lending or face financial penalties Create incentives for banks to make more loans by increasing bank reserves. In the short run, a monetary contraction leads to increased unemployement because Select one wages are sticky, while prices are flexible wages are flexible, while prices are sticky wages and prices are flexible wages and prices are sticky Which of the following is true regarding the reserve ratio and the money multiplier Select one: the money multiplier only exists when the reserve ratio is zero the bigger the reserve ratio the bigger the money multiplier the smaller the reserve ratio the bigger the money multiplier the money multiplier equals reserve ratio is 100

Explanation / Answer

Answert 1:

Since aggregate demand is at a low level, so the lending by banks has to be increased. So, Option D.

Answer 2:

Option d. In short run ,both wages and prices are sticky.

Answer 3:

Option C. Money Multiplier = 1 / Cash Reserve ratio, So there is inverse relationship between two,

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