Suppose that the Fed has decided that it should have an activist monetary policy in order to stabilize the level of GDP by managing the money supply. When the following events occur, show whether the Fed’s policy will actually stabilize GDP or not:

a) An increase in aggregate demand in the economy leads to an increase in the demand for money.

b) People increasingly distrust the banking system and decide to hold a higher proportion of their money in their pockets.

c) During a serious recession, the demand for money falls.

d) Bank managers become more aggressive, and decide that they can operate with fewer excess reserves.