Question: 1. Suppose the economy is significantly weakened, real GDP is far below potential GDP, and the unemployment rate is high. The Federal Reserve is concerned that monetary policy might have limited effectiveness due to deflation. How can deflation limit the Fed's ability to increase aggregate demand?

2. Explain the two main causes of banking crises.

3. In 2010 the British government increased taxes and cut public spending in order to reduce its budget deficit and debt. Was this a policy of fiscal stimulus or austerity? What was the impact of the policy?

4. The economy is in a recession. The head economist at the central bank is concerned about the growing possibility of a liquidity tap. The head economist for the president is an ardent Keynesian. What will this Keynesian economist recommend or not recommend? Explain.

5. Suppose that on January 1 the exchange rate was E120 per US. dollar. On December 31 of that year, a person needed 125 to buy $1. over the course of that year, did the dollar appreciate or depreciate against the yen? Did the change in the exchange rate make American goods and services more or less attractive to Japanese consumers? Explain.