Question

1) During a recession

a. both consumption and investment fall, but consumption falls more

b. both consumption and investment fall, but investment falls more

c. consumption rises and investment falls

d. investment falls and consumption rises

2) The Fed does monetary policy by raising the money supply with the hope of raising real GDP. In the long run, the result will be

a. only an increase in prices

b. successful as long as the Fed sells bonds in the open market

c. an increase in prices and output

d. an increase in output and a decrease in unemployment

Answer 1

1. Option B.

• A recession slows down the economic activity of an economy and also disrupts the business cycle.
• This will cause both the investment spending and consumption spending to fall by a greater amount.
• But the fall in investment spending during a recessionary period always exceeds the consumption spending.

2. Option A.

• When Fed raises the money supply in order to raise the increase the real GDP, in the long run the result will be only an increase in the price's.
• This is because, in the long run only the price's increases or changes when money supply Increases. The aggregate output will return to its potential level and hence there will be no change in the real aggregate output.