CH 17/18

The MPC =7/8. The government purchases multiplier is _____________ and its tax multiplier is_________. A) B) 4; 2 C) 6; -10 D) 7; 8. E) 8; -7.

E) 8; -7.

The tax multiplier equals the change in ________ divided by the change in ________. A) taxes; equilibrium real GDP B) consumption spending; taxes C) taxes; consumption spending D) equilibrium real GDP; taxes

D) equilibrium real GDP; taxes

The government purchases multiplier is defined as A) Change in equilibrium real GDP / Change in government purchases B) Change in equilibrium real GDP / Change in autonomous consumption C) Change in government purchases /Change in equilibrium real GDP D) Change in government purchases / Change in induced consumption

A) Change in equilibrium real GDP / Change in government purchases

The economy suffered a mild recession in 2001. Despite the recession, home sales and durable goods sales remained high. Which of the following is a plausible explanation? A) The Fed caused a reduction in the federal funds rate to its lowest level in 40 years. B) Rising inflation encouraged many to invest in the real estate market. C) The Fed's pursuit of contractionary policy stimulated these markets. D) Home building and consumer durable purchases are always high during a recession.

A) The Fed caused a reduction in the federal funds rate to its lowest level in 40 years.

If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.) A) a $300 billion decrease in GDP B) a $133.33 billion decrease in GDP C) a $300 billion increase in GDP D) a $133.33 billion increase in GDP E) a $30 billion increase in GDP

A) a $300 billion decrease in GDP

If the Fed pursues expansionary monetary policy, A) aggregate demand will rise, and the price level will rise. B) aggregate demand will fall, and the price level will fall. C) aggregate demand will fall, and the price level will rise. D) aggregate demand will rise, and the price level will fall.

A) aggregate demand will rise, and the price level will rise.

If real GDP exceeds potential GDP, to move the economy to potential GDP the Fed A) raises the federal funds rate to decrease real GDP but not potential GDP. B) lowers the federal funds rate to decrease real GDP but not potential GDP. C) raises the federal funds rate to decrease both real GDP and potential GDP. D) raises the federal funds rate to increase potential GDP but not real GDP. E) lowers the federal funds rate to increase potential GDP but not real GDP.

A) raises the federal funds rate to decrease real GDP but not potential GDP.

Control of monetary policy rests with A) the Federal Reserve. B) the U.S. Treasury. C) the President. D) Congress. E) the Comptroller of the Currency.

A) the Federal Reserve.

The MPC =2/3, and the government cuts taxes by $200. How much does real GDP increase by in the short run? A) $166.67 B) $400 C) 300 D) $40 E) $1,200

B) $400

The MPC = 0.75, and the government increase its pruchases by $200. How much does real GDP increase by in the short run? A) $150 B) $800 C) $200 D) $266.67 E) $0

B) $800

When there is a threat of inflation in the economy, the Fed can ________ the federal funds rate so as to ________ aggregate demand and ________ the price level. A) raise; decrease; increase B) raise; decrease; decrease C) raise; increase; decrease D) lower; increase; decrease E) lower; increase; increase

B) raise; decrease; decrease

Automatic changes in tax revenues and expenditures that occur as a result of fluctuations in real GDP are referred to as automatic A) taxes and expenditure. B) stabilizers. C) discretionary policy. D) discretionary taxes and expenditure. E) government.

B) stabilizers.

When the Fed raises the federal funds rate, A) investment and consumption expenditure increase, thereby raising the real interest rate. B) the real interest rate increases, thereby decreasing investment and consumption expenditure. C) the real interest rate increases, thereby decreasing investment and increasing consumption expenditure. D) the real interest rate falls, thereby increasing investment and consumption expenditure. E) the real interest rate is unchanged so investment and consumption expenditure are not changed.

B) the real interest rate increases, thereby decreasing investment and consumption expenditure.

An increase in the money supply will A) increase the interest rate. B) have no effect on the interest rate. C) decrease the interest rate. D) decrease the equilibrium quantity of money in the economy.

C) decrease the interest rate.

Fiscal policy refers to changes in A) federal taxes and purchases that are intended to fund the war on terrorism. B) state and local taxes and purchases that are intended to achieve macroeconomic policy objectives. C) federal taxes and purchases that are intended to achieve macroeconomic policy objectives. D) the money supply and interest rates that are intended to achieve macroeconomic policy objectives.

C) federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

The money demand curve has a A) negative slope because an increase in the price level decreases the quantity of money demanded. B) positive slope because an increase in the price level increases the quantity of money demanded. C) negative slope because an increase in the interest rate decreases the quantity of money demanded. D) positive slope because an increase in the interest rate increases the quantity of money demanded

C) negative slope because an increase in the interest rate decreases the quantity of money demanded

Suppose that household income increases by $400, leading to a $300 increase in consumption spending, the marginal propoensity to consumer is ________ A) 1.333 B) C) $100 D) 0.75 E) 1/3

D) 0.75

An advantage monetary policy has over fiscal policy is that monetary policy A) has no multiplier effects. B) affects consumption expenditure and investment without impacting international trade. C) is approved by the president of the United States. D) can be quickly changed and implemented. E) is coordinated with fiscal policy.

D) can be quickly changed and implemented.

In order to help the economy recover from a recession using fiscal policy, the government can ________ so that aggregate demand increases. A) cut government expenditure on goods and services B) raise taxes C) raise interest rates D) cut taxes E) decrease the quantity of money

D) cut taxes

To fight a recession, the Fed can A) raise the federal funds rate by selling securities. B) raise the federal funds rate by buying securities. C) lower the federal funds rate by selling securities. D) lower the federal funds rate by buying securities. E) lower income taxes on interest income.

D) lower the federal funds rate by buying securities.

Expansionary fiscal policy will A) shift the short-run aggregate supply curve to the left. B) not shift the aggregate demand curve. C) shift the aggregate demand curve to the left. D) shift the aggregate demand curve to the right.

D) shift the aggregate demand curve to the right.

If the economy is in equilibrium with real GDP less than potential GDP, there is ________ gap and a fiscal policy that ________ is appropriate. A) an inflationary; increases aggregate demand B) a recessionary; decreases aggregate demand C) an inflationary; decreases aggregate demand D) a recessionary; increases potential GDP E) a recessionary; increases aggregate demand

E) a recessionary; increases aggregate demand

In a recession, the Fed's monetary policy aims to ________ the real interest rate, ________ aggregate demand, and ________ aggregate supply. A) decrease; increase; increase B) increase; not change; increase C) increase; decrease; not change. D) increase; increase; increase E) decrease; increase; not change

E) decrease; increase; not change