1. Suppose we observe that over the past two years USA has seen higher inflation and higher output than what one would reasonably believe to be their long-run equilibrium levels. What can we conclude with confidence about the shocks that must have happened in USA over the past two years?

A.

It is possible that there was a mix of aggregate supply and aggregate demand shocks and the central bank has exactly neutralized all aggregate demand shocks

B.

USA cannot have experienced any aggregate supply shocks

C.

USA cannot have experienced any aggregate demand shocks

D.

It is possible that there were positive aggregate demand shocks that the central bank of USA has not fully offset

E.

None of these statements is correct

2.

Consider the market for reserves. Suppose that the Fed reduces the discount rate, that is, the interest rate it charges banks on the discount window for emergency loans. What happens to the federal funds rate?

A.

The federal funds rate increases

B.

The federal funds rate falls

C.

The federal funds rate does not change

D.

The effect cannot be determined without additional information