Macro Unit 4 Quiz #3

Which of the following policies would most likely be recommended in an economy with an annual inflation rate of 3 percent and an unemployment rate of 11 percent?

A decrease in the tax rate on corporate profits and a decrease in the discount rate

Which of the following could cause simultaneous increases in inflation and unemployment?

An increase in inflationary expectations

Which of the following would most likely cause the United States economy to fall into a recession?

An open market sale by the Federal Reserve

If crowding out only partially offsets the effects of a tax cut, which of the following changes in interest rates and gross domestic product are most likely to occur?

Both interest rates and GDP would increase

Faced with a large budget deficit the government decides to decrease expenditures and tax revenues by the same amount. This action will affect output and interest rates in which of the following ways?

Both output and interest rates would decrease

Which of the following changes will occur to the demand for United States dollars and the international value of the dollar in the short run if investors in the United States and abroad increase their purchases of United States government bonds?

Both the demand for the dollar and the international value of the dollar will increase

Policymakers concerned about fostering long-run growth in an economy that is currently in a recession would most likely recommend which of the following combinations of monetary and fiscal policy actions?

Buy bonds and make no change to fiscal policy

Which of the following policy combinations is most likely to cure a severe recession?

Buy securities, decrease taxes and increase government spending

If investors feel that business conditions will deteriorate in the future, the demand for loans and real interest rate in the loanable funds market will change in which of the following ways in the short run?

Demand for loans will decrease and real interest rates will decrease

Suppose that the Federal Reserve is committed to keeping the nominal interest rate fixed. To maintain the interest rate target in the face of an expansionary fiscal policy, the Federal Reserve can do which of the following?

Engage in open-market purchases

An increase in which of the following will increase aggregate demand

Government spending

If the economy is in a severe recession, which of the following is the fiscal policy most effective in stimulating production?

Government spending increases

A reduction in inflation can best be achieved by which of the following combinations of fiscal and monetary policy?

Increase taxes and sell government bonds

A simultaneous increase in inflation and unemployment could be explained by an increase in which of the following?

Inflationary expectations

If the Federal Reserve institutes a policy to reduce inflation, which of the following is most likely to increase?

Interest rates

Which of the following occurs as investment becomes more responsive to changes in the interest rate?

Monetary policy becomes more effective at changing real gross domestic product

In a flexible system of exchange rates, an open market sale of bonds by the Federal Reserve will most likely change the money supply, the interest rate, and the value of the United States dollar in which of the following ways?

Money supply will decrease, interest rates will increase and the value of the dollar will increase

Assume that the economy is in equilibrium. If aggregate demand increases, nominal interest rates and bond prices will most likely change in which of the following ways?

Nominal interest rates will increase and bond prices will decrease

Assume that a perfectly competitive financial market for loanable funds is in equilibrium. Which of the following is most likely to occur to the quantity demanded and quantity supplied of loanable funds if the government imposes an effective interest rate ceiling?

Quantity demanded would increase and quantity supplied would decrease

Which of the following monetary and fiscal policy combinations would most likely result in a decrease in aggregate demand?

Raise the discount rate, sell bonds and decrease government spending

An increase in the money supply is most likely to have which of the following short-run effects on real interest rates and real output?

Real interest rates will decrease and real output will increase

Assume that the government implements a deficit-reduction policy that results in changes in aggregate income and output. Then the Federal Reserve engages in monetary policy actions that reverse the changes in income and output caused by fiscal policy action. Which of the following sets of changes in taxes, government spending, the required reserve ratio, and the discount rate is most consistent with these policies?

Taxes will increase, government spending will decrease, required reserve ratio will decrease and the discount rate will not change

If higher United States interest rates cause foreign demand for the dollar to increase, which of the following will occur to the international value of the dollar and to United States exports?

The international dollar will increase and exports will decrease

Which of the following will occur if the federal government runs a budget deficit?

The size of the national debt will increase

Which of the following is true of supply shocks?

They tend to change both relative prices and the general price level in the economy

An inflationary gap could be reduced by

an increase in the income tax rate

An inflationary gap can be eliminated by all of the following EXCEPT

an increase in the money supply

An increase in Japan's demand for United States goods would cause the value of the dollar to

appreciate because Japan would be buying more United States dollars

If the economy was in a severe recession, the most expansionary fiscal policy would be to

decrease personal income taxes and increase government spending by equal amounts

An increase in government spending with no change in taxes leads to a

higher interest rate

Compared to expansionary monetary policies adopted to counteract a recession, expansionary fiscal policies tend to result in

higher interest rates

Crowding out due to government borrowing occurs when

higher interest rates decrease private sector investment

To stimulate investment in new plant and equipment without increasing the level of real output, the best policy mix is to

increase the money supply and decrease government spending

If the Federal Reserve wishes to use monetary policy to reinforce Congress' fiscal policy changes, it should

increase the money supply when government spending is increased

An increase in the money supply affects output more if

investment is sensitive to interest rates

Which of the following combinations of monetary and fiscal policies is coordinated to increase output?

purchase securities and decrease taxes

When the Federal Reserve increases the money supply to stimulate aggregate demand, workers believe that this action will cause inflation in the future and ask for higher wages to offset the expected increase in inflation. This is an example of

rational expectations

The demand for money increases when national income increases because

spending on goods and services increases

The short-run aggregate supply curve is likely to shift to the left when there is an increase in

the cost of productive resources

The price of one nation's currency expressed in terms of another nation's currency is called

the exchange rate

The real value of the United States dollar is determined by

the goods and services it will buy

An increase in the money supply will have the greatest effect on real gross domestic product if

the quantity of money demanded is not very sensitive to interest rates