The global business cycle reached a peak towards the end of 2019 and economic bad times began in 2020 (winter came). Many economies around the world entered a recession. At the beginning of 2020 in the USA the federal funds rate (the rate targeted by the Federal Reserve) was 1.75%, while in the Eurozone (Euro Area) the rate on the main refinancing operations (the rate targeted by the European central bank) was 0%. Take this to mean that the Federal Reserve was be able to decrease the federal funds rate, while the European central bank could not go any lower. Assume that the two central banks want to take active measures to counter the recession. Please apply your knowledge from our course about the money creation in a modern economy, about monetary policy, and about monetary theory (in this case the Aggregate Demand / Aggregate Supply, AD/AS for short, model) to answer the following questions below. Important: please when answering the questions ignore the possibility that central banks may resort to some non-traditional policy actions such as QE or LTRO and assume strictly that only the three traditional monetary policy instruments studied in class are available.

Which one of the three traditional instruments of monetary policy do central banks use to try to affect their target interest rates (this is true in general, not only for 2020)?

a. the required reserve ratio

b. loans to commercial banks

c. open market operations

d. auctions for banknotes and coins

Which one of the three traditional instruments of monetary policy do central banks use to try to affect their target interest rates (this is true in general, not only for 2020)?

a. the required reserve ratio

b. loans to commercial banks

c. open market operations

d. auctions for banknotes and coins

In the AD/AS model, a recession may come if

a. Aggregate Demand decreases

b. Aggregate Supply decreases

c. both Aggregate Demand and Aggregate Supply decrease

d. all of the above

In the AD/AS model monetary policy counters a recession by expanding the money supply and thus _____________________ the ____________________ curve.

a. shifting to the right; Aggregate Demand

b. shifting to the right; Short-Run Aggregate Supply

c. shifting to the right; Long-Run Aggregate Supply

d. none of the above

From the description of the case it follows, that the Federal reserve will be able to counter the recession by lowering the policy interest rate, while the European central bank will not be able to do it, at least not through the policy rate which is limited by the zero lower bound. Let us assume that this means that the Federal reserve will be able to counter the recession effectively, while the European central bank will not. Let us also assume that all else is unchanged. This means that after the economy eventually recovers back to its long-run equilibrium level of output, in the USA the price level will be

a. lower than before the start of the recession

b. the same as at the start of the recession

c. higher than at the start of the recession

d. none of the above

From the description of the case it follows, that the Federal reserve will be able to counter the recession by lowering the policy interest rate, while the European central bank will not be able to do it, at least not through the policy rate which is limited by the zero lower bound. Let us assume that this means that the Federal reserve will be able to counter the recession effectively, while the European central bank will not. Let us also assume that all else is unchanged. This means that after the economy eventually recovers back to its long-run equilibrium level of output, in the Eurozone the price level will be

a. lower than before the start of the recession

b. the same as at the start of the recession

c. higher than at the start of the recession

d. none of the above