Would the Federal Reserve respond more aggressively with interest rate cuts in a recession caused by a decrease in spending, as in the 2001 recession, than in a recession caused by an increase in oil prices, as in the 1974-75 recession?
What will be an ideal response?
The inflation rate responds differently in the two recessions. A large increase in oil prices decreases real GDP (or slows down the growth rate), but increases inflation. The large decrease in spending decreases real GDP and decreases inflation. The Fed wants to increase real GDP, but they also want to prevent an increase in inflation. Cutting interest rates increases aggregate demand which increases real GDP and increases inflation. With a recession caused by a drop in spending, the rate of inflation declines, which allows the Fed to more aggressively cut interest rates.
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The components of M2 that are not also in M1:
A. sum to an amount that is smaller than the sum of the components of M1. B. are usable for making payments, but at a greater cost or inconvenience than currency or checks. C. are not usable for making payments. D. pay lower rates of interest than do the components of M1.
If people are made unemployed because of a fall in aggregate demand this is known as:
a) Frictional unemployment b) Seasonal unemployment c) Cyclical unemployment d) Structural unemployment