1) In which situation would contractionary monetary policy be most effective?

a) Consumer confidence is very strong, leading to a record holiday shopping season despite fewer discounts being offered.

b) Businesses worry that shoppers are being very cautious about their spending because they are concerned about job safety.

c) A crisis overseas has led to a spike in oil prices, causing the price of gasoline and other goods to increase.

d) The economy has been in a long recession but signs of improvement are starting to appear.

2) Suppose that the economy is currently below its long-run equilibrium output. Which of the following is an example of monetary policy that can help put the economy back toward equilibrium?

a) Decreasing income taxes to encourage more spending and investment.

b) Reducing the money supply to push interest rates higher to encourage more savings.

c) Raising income taxes to help pay off government debt.

d) Increasing the money supply to reduce interest rates to encourage more spending and investment.

3) Which of the following scenarios would make monetary policy the most difficult to address?

a) A reduction in business confidence that leads to a reduction in investments.

b) A booming housing market that causes inflation to rise.

c) A worldwide spike in oil prices resulting in higher production costs.

d) A rise in unemployment that causes consumers to spend less.