Answer to Question 1
Answer: An ideal response will:
1. Note that the response had two parts, which included the federal bailout of banks and the financial industry (the Emergency Economic Stabilization Act, which included the Troubled Assets Relief Program) and the stimulus package (the American Recovery and Reinvestment Act).
2. Illustrate that the response contained aspects of monetary policy (keeping interest at near zero) as well as fiscal policy (using government spending increases and tax cuts to address unemployment).
Answer to Question 2
Answer: An ideal response will:
1. Explain the role of the Federal Reserve in controlling the money supply by controlling the rate at which banks can borrow money. This then affects the rate at which banks loan money to consumers and businesses.
2. Describe how adjusting the discount rate up or down will affect the money supply.
3. Illustrate how lowering the discount rate reduces the cost of money, which makes borrowing easier, which increases spending and affects economic growth.
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