Question #5:

Part I:

When does the Fed use a stimulative monetary policy and when does it use a restrictive-monetary policy?

What is a criticism of a stimulative monetary policy? What is the risk of using a monetary policy that is too restrictive?

Part II:

Assume that the Fed's primary goal is to reduce inflation. How can it achieve its goal? What is a possible adverse effect of such action by the Fed (even if it achieves this goal)?

Explain how the Fed's monetary policy could depend on the fiscal policy that is implemented.

Explain the effects of a stimulative monetary policy on a firm's cost of capital.