Give an example of a government policy that acts as an automatic stabilizer. Explain why the policy has this effect. 1. Explain how each of the following developments would affect the supply of money, the demand for money, and the interest rate. Use diagrams to illustrate your answers.
a. The Fed’s bond traders buy bonds in open-market operations.
b. An increase in credit-card availability reduces the amount of cash people want to hold.
c. The Fed reduces reserve requirements.
d. Households decide to hold more money to use for holiday shopping.
e. A wave of optimism boosts business investment and expands aggregate demand.
