Chapter Macro 16 Questions: Fiscal vs Monetary Policy

Expansionary fiscal policy will cause which of the following? A) A decrease in interest rates. B) A decrease in investment. C) A rise in interest rates. D) A decrease in the money supply.

A rise in interest rates.

If an economy appears to be growing rapidly and inflation appears to be becoming a serious problem, which of the following fiscal policies would be appropriate? A) decrease in capital gains taxes B) A decrease in government spending C) A reduction in personal income taxes D) An increase in government transfer payments

A decrease in government spending

Which of the following groups would prefer monetary policy to ameliorate a recession, as opposed to fiscal policy? Borrowers or lenders

Borrowers

Assume that we are currently producing less than the potential level of GDP. Which of the following is a valid argument for active use of monetary policy instead of fiscal policy? A) Fiscal policy is not effective in stimulating aggregate demand B) Monetary policy stimulates aggregate supply C) Fiscal policy may cause crowding out of investment D) Fiscal policy will lead to lower interest rates

Fiscal policy may cause crowding out of investment

According to the advocates of crowding out, an increase in government spending will cause the demand for money to ______________, then interest rates to ______________, which in turn causes investment spending to ______________. A) Decrease, decrease, increase B) Increase, decrease, increase C) Increase, increase, decrease D) Decrease, increase, increase

Increase, increase, decrease

Which of the following accurately refers to "crowding in"? A) Increased consumption in response to increased government spending B) Increased investment in response to expansionary monetary policy C) Increased consumption in response to contractionary fiscal policy D) Increased investment in response to expansionary fiscal policy.

Increased investment in response to expansionary fiscal policy.

A temporary income tax cut will be ______________ effective as a fiscal policy than a permanent change ______________. A) More; because the government deficit will not increase by as much as it will if the tax cut is permanent B) More; because future income is not affected C) Less; because the government deficit will increase by more than it will if the tax cut is permanent D) Less; because future income is not affected

Less; because future income is not affected

An economy is producing at a level of output that is equal to the full-employment level of output. Prices of a fundamental resource, such as oil, decrease significantly. What would be the best monetary policy? A) stimulative policy B) A restrictive policy C) No monetary or fiscal policy would be required. D) There is no obviously correct policy, unless you can specify your goal

No monetary or fiscal policy would be required.

Consider the following quote: "Over one and a half million people were laid off from jobs following the doubling of oil prices in 1979." What was the policy dilemma faced by monetary and fiscal policy makers? A) Rising prices and falling unemployment B) Rising prices and rising unemployment C) Rising prices and rising interest rates D) Rising prices and increased consumer confidence

Rising prices and rising unemployment

Which of the following statements comparing the lags of monetary and fiscal policy is accurate? A) The lag between the initiation of fiscal policy and the effect on real GDP is longer than the lag between the initiation of monetary policy and its effects. B) The policy-making lag for fiscal policy is longer than monetary policy. C) Monetary policy takes longer to have an effect on the economy if the economy is growing than if the economy is entering a recession. D) The total amount of time from beginning to end for fiscal policy is significantly shorter than for monetary policy.

The policy-making lag for fiscal policy is longer than monetary policy.

Assume the economy faces high unemployment but stable inflation. Which combination of government policies is most likely to reduce unemployment? A) The purchase of government securities in the open market and an increase in government spending. B) The sale of government securities in the open market and a decrease in taxes. C) The sale of government securities in the open market and a decrease in government spending. D) The purchase of government securities in the open market and an increase in taxes.

The purchase of government securities in the open market and an increase in government spending.

An economy is producing at a level of output that is equal to the full-employment level of output. Prices of a fundamental resource, such as oil, increase significantly. What would be the best monetary policy? A) stimulative policy B) A restrictive policy C) A stimulative policy followed by a restrictive policy D) A restrictive policy followed by a stimulative policy E) There is no obviously correct policy, unless you can specify your goals.

There is no obviously correct policy, unless you can specify your goals.

Once decisions have been made to use monetary policy and fiscal policy to solve a problem, it will take more time for monetary policy to have an effect on real GDP and the inflation rate than would an increase in government spending.

True

"An increase in the budget deficit can be beneficial for the economy," said a member of Congress during the November budget debates. Could this statement be true?

Yes

If the economy were encountering a severe recession, proper monetary and fiscal policies would call for: A) selling government securities, raising the reserve ratio, lowering the discount rate, increasing interest paid on reserves held at Fed banks, and a budgetary surplus. B) buying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deficit. C) buying government securities, raising the reserve ratio, raising the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary surplus. D) buying government securities, reducing the reserve ratio, raising the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deficit.

buying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deficit.