1. If unemployment is higher than the natural rate, an appropriate action by the Fed would be to:

A. increase the discount rate.

B. increase government spending.

C. buy government bonds.

D. raise the federal funds rate.

E. raise taxes.

2. If the quantity of investment is very sensitive to changes in interest rates:

A. the investment demand curve will be relatively flat, and monetary policy will be very ineffective.

B. the investment demand curve will be relatively flat, and monetary policy will be very effective.

C. the investment demand curve will be relatively steep, and monetary policy will be very ineffective.

D. the investment demand curve will be relatively steep, and monetary policy will be very effective.

E. the money demand curve will be flat, and monetary policy will be ineffective.

3. If the demand for money is very insensitive to changes in the interest rate:

A. the money demand curve will be relatively flat, and monetary policy will be very ineffective.

B. the money demand curve will be relatively flat, and monetary policy will be very effective.

C. the money demand curve will be relatively steep, and monetary policy will be very ineffective.

D. the money demand curve will be relatively steep, and monetary policy will be very effective.

E. changes in the money supply will have only small effects on the interest rate.

4. If the Fed sells bonds:

A. the Phillips curve will shift down.

B. bond prices will fall, and interest rates will fall.

C. banks’ reserves will be reduced.

D. aggregate demand will increase.

E. bond prices will rise, and interest rates will fall.