Q1. Assume the economy starts out at point A. After that, the public anticipates that the Fed will use expansionary monetary strategy to shift the AD curve from AD1 to AD2. Explain what happens; instead, is that the Fed does not raise aggregate demand as much as the public expects (bias upward). Instead the Fed pushes the AD curve from AD1 to AD3. As a result, according to new classical theory in the short run the economy moves to point

Q2. Bank A and Bank B both have assets of $1 billion. The return on assets for both banks is the same. Bank A has liabilities of $800 million while Bank B's liabilities are $900 million. In which bank would you prefer to hold on an equity stake?