crowd deflation n market operations investment subsidy policy mix transmission mechanism zero lower bound (ZLB) PROBLEMS Conceptual 1. In the text we describe the effect of an open market purchase by the Fed. a. Define an open market sale by the Fed. h. Show the impact of an open market sale on the interest rate and output. Show both the immediate- and the longer-term impacts. Discuss the circumstances under which the monetary and fiscal policy multipliers are each, in turn, equal to zero. Explain in words why this can happen and how likely you think this is. . What is a liquidity trap? If the economy was stuck in one, would you advise the use of mon- etary or fiscal policy? 4. What is crowding out, and when would you expect it to occur? In the face of substantial crowding out, which will be more successful-fiscal or monetary policy? 5. What would the LM curve look like in a classical world? If this really were the LM curve that we thought best characterized the economy, would we lean toward the use of fiscal policy or monetary policy? (You may assume your goal is to affect output.) What happens when the Fed monetizes a budget deficit? Is this something it should always try to do? (Hint: Outline the benefits and costs of such a policy over time.) 7. "We can have the GDP path we want equally well with a tight fiscal policy and an easier monetary policy, or the reverse, within fairly broad limits. The real basis for choice lies in many subsidiary targets, besides real GDP and inflation, that are differentially affected by fiscal and monetary policies." What are some of the subsidiary targets referred to in the quote? How would they be affected by alternative policy combinations