• Describe how the Federal Reserve can affect the money supply and interest rates.
• Identify and describe the effects of a change in money supply on the interest rate.
• Describe the money multiplier and the money creation process.
• Describe the likely change in equilibrium output and price levels resulting from a change in interest rates.

• Describe the likely changes to equilibrium output and price levels resulting from the change in the tax rates. Begin by describing the effects on aggregate supply and/or demand to fully demonstrate the connection between the tax rate change and equilibrium.

• Identify and describe the effect of changing the tax rate ondisposable income and consumption, as well as the post-taxmultiplier. You should use the formulas discussed in the Readingpages and the text to describe the effects of the changing tax rateon disposable income, consumption, and the multiplier.
• Describe the likely changes to equilibrium output and pricelevels resulting from the change in the tax rates. Begin bydescribing the effects on aggregate supply and/or demand to fullydemonstrate the connection between the tax rate change andequilibrium.
• Describe the change in tax revenues for the government in the newequilibrium, in both the short and longer terms.

1. To counteract an economic contraction, the Federal Reserve (the Fed) often attempts to stimulate the economy by reducing interest rates. Describe the five-step process that starts with an increase in the money supply and ends with an increase in GDP.

2. To counteract inflation, the Fed often attempts to dampen economic growth by increasing interest rates. Describe the five-step process that starts with a decrease in the money supply and ends with a reduction in inflation and GDP.

3. What factors determine the effectiveness of this five-step process?