MacroEcon Exam II

1. Countercyclical discretionary fiscal policy calls for: A) deficits during recessions and surpluses during periods of demand-pull inflation. B) surpluses during both recessions and periods of demand-pull inflation. C) deficits during both recessions and periods of demand-pull inflation. D) surpluses during recessions and deficits during periods of demand-pull inflation.

A) deficits during recessions and surpluses during periods of demand-pull inflation.

1. The immediate determinants of investment spending are the A) expected rate of return on capital goods and the real interest rate. B) interest rate and the expected price level. C) level of saving and the real interest rate. D) marginal propensity to consume and the real interest rate.

A) expected rate of return on capital goods and the real interest rate.

Assume the government purposely incurs a budget deficit that is financed by borrowing. As a result, interest rates rise and the volume of private investment spending declines. This illustrates: A) the crowding-out effect. B) the equation-of-exchange effect. C) the wealth effect. D) the paradox of thrift.

A) the crowding-out effect.

Which of the following will tend to increase consumption spending? A) the expectation of future shortages of essential consumer goods. B) the expectation of a future decline in the consumer price index C) a large stock of durable goods currently in the possession of consumers D) a currently low level of household debt.

A) the expectation of future shortages of essential consumer goods.

The most important determinant of consumer spending is A) the level of income. B) the level of household debt. C) consumer expectations. D) the stock of wealth. The MPC can be defined as that fraction of a A) given total income that is consumed. B) change in income that is spent. C) change in income that is not spent. D) given total income that is not consumed.

A) the level of income. B) change in income that is spent.

A private closed economy will expand when A) unplanned decreases in inventories occur. B) unplanned increases in inventories occur. C) aggregate expenditures are less than GDP. D) actual GDP is less than potential GDP.

A) unplanned decreases in inventories occur.

In which of the following situations for a private closed economy will the level of GDP expand? A) when planned investment exceeds saving B) when saving exceeds consumption C) when consumption exceeds investment D) when planned investment exceeds consumption

A) when planned investment exceeds saving

Which of the following statements is correct? A. Built-in stability only partially offsets fluctuations in economic activity. B. Built-in stability works in halting inflation, but it cannot alleviate unemployment. C. Built-in stability can be relied upon to eliminate completely any fluctuation in economic activity. D. Built-in stability has eliminated the need for discretionary fiscal policy.

A. Built-in stability only partially offsets fluctuations in economic activity.

24. Which one of the following is true about the U.S. Federal Reserve System? A. There are 12 regional Federal Reserve Banks. B. The head of the U.S. Treasury also chairs the Federal Reserve Board. C. There are 14 members of the Federal Reserve Board. D. The Open Market Committee is smaller in size than the Federal Reserve Board.

A. There are 12 regional Federal Reserve Banks.

26. The seven members of the Board of Governors of the Federal Reserve System are: A. appointed by the President with the confirmation of the Senate. B. elected by Congress from a slate of nominees provided by the President. C. appointed by the Senate Finance Committee. D. appointed by the presidents of the twelve Federal Reserve Banks.

A. appointed by the President with the confirmation of the Senate.

15. In the United States, the money supply (M1) is comprised of: A. coins, paper currency, and checkable deposits. B. currency, checkable deposits, and Series E bonds. C. coins, paper currency, checkable deposits, and credit balances with brokers. D. paper currency, coins, gold certificates, and time deposits.

A. coins, paper currency, and checkable deposits.

The real burden of an increase in the public debt: A. may be very small or conceivably zero when the economy is in a severe depression. B. will be smaller when full employment exists than when the economy has large quantities of idle resources. C. can be shifted to future generations if the debt is internally financed. D. can best be measured by the dollar increase in the size of the debt.

A. may be very small or conceivably zero when the economy is in a severe depression.

If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to: A. sell government securities, raise reserve requirements, and raise the discount rate. B. buy government securities, raise reserve requirements, and raise the discount rate. C. sell government securities, lower reserve requirements, and lower the discount rate. D. sell government securities, raise reserve requirements, and lower the discount rate.

A. sell government securities, raise reserve requirements, and raise the discount rate.

The crowding-out effect is: A. strongest when the economy is at full employment. B. strongest when the economy is in a deep recession. C. weakest when there is demand-pull inflation. D. equally strong, regardless of the state of the macroeconomy.

A. strongest when the economy is at full employment.

27. To say that the Federal Reserve Banks are quasi-public banks means that: A. they are privately owned, but managed in the public interest. B. they deal only with banks of foreign nations and do not have direct business contact with U.S. banks. C. they deal only with commercial banks, and not the public. D. they are publicly owned, but privately managed.

A. they are privately owned, but managed in the public interest.

If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is A) 10 percent. B) 22 percent. C) zero percent. D) 2 percent.

B) 22 percent

The investment-demand curve will shift to the right as the result of A) an increase in business taxes. B) businesses becoming more optimistic about future business conditions. C) an increase in the real interest rate. D) the availability of excess production capacity.

B) businesses becoming more optimistic about future business conditions.

Other things equal, a 10 percent decrease in corporate income taxes will A) shift the investment-demand curve to the left. B) shift the investment-demand curve to the right. C) decrease the market price of real capital goods. D) have no effect on the location of the investment-demand curve.

B) shift the investment-demand curve to the right.

Built-in stability means that: A) an annually balanced budget will offset the procyclical tendencies created by state and local finance and thereby stabilize the economy. B) with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus. C) government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year. D) Congress will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity.

B) with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus.

41. Which of the following best describes the cause-effect chain of a restrictive monetary policy? A. A decrease in the money supply will lower the interest rate, increase investment, and increase AD and GDP. B. A decrease in the money supply will raise the interest rate, decrease investment, and decrease AD and GDP. C. An increase in the money supply will raise the interest rate, decrease investment, and decrease AD and GDP. D. An increase in the money supply will lower the interest rate, decrease investment, and increase AD and GDP.

B. A decrease in the money supply will raise the interest rate, decrease investment, and decrease AD and GDP.

20. The basic policy-making and regulatory body in the U.S. banking system is the: A. Federal Open Market Committee (FOMC). B. Board of Governors of the Federal Reserve. C. Federal Monetary Authority. D. Council of Economic Advisers.

B. Board of Governors of the Federal Reserve.

16. Paper money (currency) in the United States is issued by the: A. United States Mint. B. Federal Reserve Banks. C. United States Treasury. D. national banks.

B. Federal Reserve Banks.

22. In the U.S. economy the money supply is controlled by the: A. U.S. Treasury. B. Federal Reserve System. C. Senate Committee on Banking and Finance. D. Congress.

B. Federal Reserve System.

Under liquidity trap conditions: A. Fiscal stimulus is rendered less effective. B. Monetary expansion is rendered less effective. C. Fiscal stimulus becomes more effective. D. Monetary expansion becomes more effective.

B. Monetary expansion is rendered less effective.

Which of the following combination of interest rates would be considered money market rates? A. The Treasury bill rate and the FED discount rate. B. The Treasury bill rate and the federal funds rate. C. The corporate bond rate and the federal funds rate. D. The 30-year FHA mortgage rate and the Treasury bill rate.

B. The Treasury bill rate and the federal funds rate.

An appropriate fiscal policy for a severe recession is: A. a decrease in government spending. B. a decrease in tax rates. C. appreciation of the dollar. D. an increase in interest rates.

B. a decrease in tax rates.

The reserves of a commercial banks consists of: A. the amount of money market funds it holds. B. deposits at the Federal Reserve Bank and vault cash. C. government securities that the bank holds. D. the bank's net worth.

B. deposits at the Federal Reserve Bank and vault cash.

The crowding-out effect suggests that: A. tax increases are paid primarily out of saving and therefore are not an effective fiscal device. B. government borrowing to finance the public debt increases the real interest rate and reduces private investment. C. it is very difficult to have excessive aggregate spending in a capitalist economy. D. consumer and investment spending always vary inversely.

B. government borrowing to finance the public debt increases the real interest rate and reduces private investment.

Suppose the Federal government had budget deficits of $80 billion in year 1 and $120 billion in year 2 but had budget surpluses of $10 billion in year 3 and $40 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the Federal government's public debt would have: A. increased by $50 billion. B. increased by $150 billion. C. decreased by $200 billion. D. decreased by $150 billion.

B. increased by $150 billion.

Suppose the Federal government had budget deficits of $40 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the Federal government's public debt would have: A. increased by $90 billion. B. increased by $20 billion. C. decreased by $70 billion. D. decreased by $20 billion.

B. increased by $20 billion.

29. The Federal Reserve System: A. has the same status as the Supreme Court. B. is basically an independent agency. C. has the status of a Congressional committee. D. is an agency of the executive branch of the Federal government.

B. is basically an independent agency.

19. The Federal Open Market Committee: A. has sole responsibility for regulating the safety of the commercial banking system. B. is basically responsible for conducting open market operations. C. is basically responsible for formulating fiscal policy for the federal government. D. is an agency of the executive branch of the Federal government.

B. is basically responsible for conducting open market operations.

If in the market for money the quantity of money demanded exceeds the money supply, the interest rate will: A. fall, causing households and businesses to desire to hold less money. B. rise, causing households and businesses to desire to hold less money. C. rise, causing households and businesses to desire to hold more money. D. fall, causing households and businesses to desire to hold more mo

B. rise, causing households and businesses to desire to hold less money.

30. If in the market for money the quantity of money demanded exceeds the money supply, the interest rate will: A. fall, causing households and businesses to hold less money. B. rise, causing households and businesses to hold less money. C. rise, causing households and businesses to hold more money. D. fall, causing households and businesses to hold more money.

B. rise, causing households and businesses to hold less money.

If the economy has a standardized (natural rate) budget surplus, this means that: A. the public sector is exerting an expansionary impact on the economy. B. tax revenues would exceed government expenditures if the natural rate of output is achieved. C. the actual budget is necessarily also in surplus. D. the economy is actually operating at its natural rate.

B. tax revenues would exceed government expenditures if the natural rate of output is achieved.

18. Checkable deposits include: A. both large and small-denominated time deposits. B. the deposits of banks and thrifts on which checks can be written. C. only the checkable deposits of commercial banks. D. only the checkable deposits of thrift institutions.

B. the deposits of banks and thrifts on which checks can be written.

When current government expenditures exceed current tax revenues and the economy is achieving full employment: A. the standardized (natural rate) budget has neither a deficit nor a surplus. B. the standardized (natural rate) budget has a structural deficit. C. fiscal policy is contractionary. D. nominal GDP and real GDP are equal.

B. the standardized (natural rate) budget has a structural deficit.

Built-in stability means that: A. an annually balanced budget will offset the procyclical tendencies created by state and local finance and thereby stabilize the economy. B. with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit while a decline in income will result in a deficit. C. Congress will automatically change the tax and spending programs to correct upswings and downswings in business activity. D. government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year.

B. with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit while a decline in income will result in a deficit.

Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $88,000. The expected rate of return on this tool is A) 6 percent. B) 8 percent. C) 10 percent. D) 12 percent.

C) 10 percent.

Planned investment plus unintended increases in inventories equals A) unintended saving. B) consumption minus saving. C) actual investment. D) consumption of fixed capital.

C) actual investment.

Assume the economy is at its natural rate and that investment spending declines dramatically. Under these conditions government fiscal policy should be directed toward: A) an equality of tax receipts and government expenditures. B) a reduction of subsidies and transfer payments and an increase in tax rates. C) an excess of government expenditures over tax receipts. D) an excess of tax receipts over government expenditures.

C) an excess of government expenditures over tax receipts.

Assume that aggregate demand in the economy is excessive, causing demand-pull inflation. Which of the following would be most in accord with appropriate government fiscal policy? A) an increase in the size of income tax exemptions for each dependent B) an increase in soil conservation subsidies to farmers C) an increase in Federal income tax rates D) passage of legislation providing for the construction of new school buildings

C) an increase in Federal income tax rates

Investment and saving are, respectively A) income and wealth. B) leakages and injections. C) injections and leakages. D) stocks and flows.

C) injections and leakages.

1. Actual investment may be defined as A) unintended increases in inventories less planned investment. B) the ratio of planned investment to unintended increases in inventories. C) planned investment plus unintended increases in inventories. D) gross investment less replacement investment.

C) planned investment plus unintended increases in inventories.

42. Refer to the diagram below. Which of the following would explain why an easy monetary policy might shift the aggregate demand curve from AD1 to AD2 rather than AD3? A) the domestic interest rate rises, the dollar depreciates,and net exports fall B) the domestic interest rate rises,the dollar appreciates,and net exports fall C) the domestic interest rate falls, the dollar depreciates,and net exports rise D) the domestic interest rate falls, the dollar appreciates, and net exports rise

C) the domestic interest rate falls, the dollar depreciates,and net exports rise

If an expansionary fiscal policy were to shift the aggregate demand curve rightward within the intermediate range of the aggregate supply curve: A) tax revenues would fall because of built-in stability. B) the price level would fall. C) the effect of the fiscal policy on real GDP would be weakened D) the effect of the fiscal policy on real GDP would be strengthened.

C) the effect of the fiscal policy on real GDP would be weakened

Which of the following best describes the built-in stabilizers as they function in the United States? A. The size of the balanced-budget multiplier varies inversely with the level of GDP. B. Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises. C. Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP. D. Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

C. Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP.

25. Which of the following statements best describes the twelve Federal Reserve Banks? A. They are privately owned but privately controlled central banks whose basic goal is to provide an ample and orderly market for U.S. Treasury securities. B. They are privately owned but publicly controlled central banks whose basic function is to minimize the risks in commercial banking in order to make it a reasonably profitable industry. C. They are privately owned but publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare. D. They are privately owned and publicly controlled central banks whose basic goal is to earn profits for their owners.

C. They are privately owned but publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare.

If government increases the size of its standardized (natural rate) surplus, we can: A. assume that government is causing interest rates to rise. B. not determine government's impact on the economy without also knowing the status of the actual budget. C. assume that government is having a contractionary effect on the economy. D. assume that government is having an expansionary effect on the economy.

C. assume that government is having a contractionary effect on the economy.

28. Which of the following is the basic or primary economic policy function of the Federal Reserve Banks? A. holding the deposits or reserves of commercial banks B. acting as fiscal agents for the Federal government C. controlling the supply of money D. the collection or clearing of checks among commercial banks

C. controlling the supply of money

Under normal circumstances, an expansion of the money supply: A. increases the interest rate and decreases aggregate demand. B. increases both the interest rate and aggregate demand. C. lowers the interest rate and increases aggregate demand. D. lowers both the interest rate and aggregate demand.

C. lowers the interest rate and increases aggregate demand.

A major advantage of the built-in or automatic stabilizers is that they: A. simultaneously stabilize the economy and reduce the absolute size of the public debt. B. automatically produce surpluses during recessions and deficits during inflations. C. require no legislative action by Congress to be made effective. D. guarantee that the Federal budget will be balanced over the course of the business cycle.

C. require no legislative action by Congress to be made effective.

The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes: A. the supply-side effects of fiscal policy. B. built-in stability. C. the crowding-out effect. D. the net export effect.

C. the crowding-out effect.

Other things equal, which of the policies will have the most expansionary effect on the economy? A) a budget surplus held as an idle money balance B) a balanced budget C) a budget surplus used for debt retirement D) a budget deficit financed by creating new money

D) a budget deficit financed by creating new money

For a private closed economy, an unintended decline in inventories suggests that A) aggregate expenditures are less than the business sector expected them to be. B) planned investment is greater than consumption. C) actual investment exceeds saving. D) aggregate expenditures exceed current GDP.

D) aggregate expenditures exceed current GDP.

The investment-demand curve will typically shift to the right as a result of A) an increase in the acquisition and maintenance cost of capital goods. B) technological progress. C) an increase in business taxes. D) an increase in the excess production capacity available in industry.

D) an increase in the excess production capacity available in industry.

A rightward shift of the investment-demand curve might be caused by A) an increase in business taxes. B) an increase in the price level. C) a decline in the real interest rate. D) an increase in the expected rate of return on investment.

D) an increase in the expected rate of return on investment.

Given the expected rate of return on all possible investment opportunities in the economy A) a change in the real interest rate will have no impact on the level of investment. B) a decrease in the real rate of interest will reduce the level of investment. C) an increase in the real interest rate will increase the level of investment. D) an increase in the real rate of interest will reduce the level of investment.

D) an increase in the real rate of interest will reduce the level of investment.

43. Refer to the diagram below. The shift of the aggregate demand curve from AD1 to AD2 might result from the Fed: A) selling bonds in the open market. B) increasing the discount rate. C) increasing the reserve ratio. D) buying bonds in the open market.

D) buying bonds in the open market.

A contractionary U.S. fiscal policy that reduces domestic interest rates is most likely to: A) depreciate the international value of the dollar and decrease U.S. net exports. B) appreciate the international value of the dollar and decrease U.S. net exports. C) appreciate the international value of the dollar and increase U.S. net exports. D) depreciate the international value of the dollar and increase U.S. net exports.

D) depreciate the international value of the dollar and increase U.S. net exports.

Which of the following fiscal actions would be the most effective in curbing inflation? A) incurring a budget surplus which is used to retire debt held by the public B) incurring a budget deficit by borrowing from the public C) incurring a budget surplus which is used to retire debt held by commercial banks D) incurring a budget surplus and impounding that surplus

D) incurring a budget surplus and impounding that surplus

Fiscal policy refers to the: A) manipulation of government spending and taxes to achieve greater equality in the distribution of income. B) altering of the interest rate to change aggregate demand. C) fact that equal increases in government spending and taxation will be contractionary. D) manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.

D) manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.

Answer the questions next four questions based on the following assumptions: the reserve ratio on deposits is 10%, borrowers withdraw cash (C) equal to 50% of deposits (C/D), and the banking system is not fully loaned up, holding idle excess reserves (E) equal to 40% of deposits (E/D), where: [∆M/ ∆R] = [1 + C/D] / [C/D + R/D + E/D] where: ∆R = initial change in reserves, or ∆B=change in monetary base M = Money supply (M1) = D + C ∆M = ∆D + ∆C= ∆D + (C/D)*∆D D = Deposits C = Currency R = Reserves B = Monetary Base = R + C ∆B = ∆R + ∆C C/D= Currency ratio R/D = Reserve ratio E = Excess reserves E/D = Excess reserve ratio 10. If the Fed purchases $1,200 in government securities from banks, then a. the money supply will increase by $2,400. b. the money supply will increase by $1,800. c. the money supply will increase by $1,200. d. deposits will remain unchanged. 11. If the Fed purchases $1,200 in government securities from banks, then a. deposits will increase by $1,800. b. deposits will increase by $1,200. c. deposits will increase by $600. d. deposits will remain unchanged. 12. If the Fed purchases $1,200 in government securities from banks, then a. the monetary base and reserves will both increase by $1,200. b. the monetary base will increase by $1,200 and reserves will increase by $600. c. the monetary base will increase by $120 while reserves will increase by $600. d. the monetary base will increase by $480 while reserves will increase by $600. 13. If the Fed purchases $1,200 in government securities from banks, then a. currency in circulation will increase by $1,200. b. currency in circulation will increase by $900. c. currency in circulation will increase by $600. d. currency in circulation will increase by $300.

10. a. the money supply will increase by $1,800. 11. b. deposits will increase by $1,200. 12. b. the monetary base will increase by $1,200 and reserves will increase by $600. 13. c. currency in circulation will increase by $600.

31. Refer to the above market for money diagrams. If the interest rate was at 3 percent, people would: A. sell bonds, which would cause bond prices to fall and the interest rate to rise. B. buy bonds, which would cause bond prices to fall and the interest rate to rise. C. sell bonds, which would cause bond prices to rise and the interest rate to rise. D. buy bonds, which would cause bond prices to rise but have an uncertain effect upon the interest rate. 32. Refer to the above market for money diagrams. If the interest rate was at 8 percent, people would: A. sell bonds, which would cause bond prices to fall and the interest rate to fall. B. buy bonds, which would cause bond prices to rise and the interest rate to fall. C. have insufficient liquidity, which would cause them to reduce their spending on consumer goods. D. buy bonds, which would cause bond prices to fall and the interest rate to rise. 33. Refer to the above market for money diagrams. If the Federal Reserve increased the stock of money, the: A. S curve would shift leftward and the equilibrium interest rate would rise. B. S curve would shift rightward and the equilibrium interest rate would fall. C. D3 would shift leftward and the equilibrium interest rate would fall. D. D3 curve would shift leftward and the equilibrium interest rate would rise. 34. Refer to the above market for money diagrams. Other things equal, if there is an increase in nominal GDP: A. the demand for money will decrease. B. the interest rate will rise. C. bond prices will rise. D. consumption spending will fall. 35. Other things equal, if the supply of money is reduced: A. the demand for money will increase. B. the interest rates will fall. C. bond prices will fall. D. investment spending will increase.

31. A. sell bonds, which would cause bond prices to fall and the interest rate to rise. 32. B. buy bonds, which would cause bond prices to rise and the interest rate to fall. 33. B. S curve would shift rightward and the equilibrium interest rate would fall. 34. B. the interest rate will rise. 35. C. bond prices will fall.

Quantecon is a country in which the 'so-called' early version of the quantity theory of money operates. The country has a constant technology, population, and capital stock. In year 1, real GDP was $240, the price level was 2.0, and the velocity of circulation of money was 8. (Answer the next two questions on the basis of this information.) 8. In Year 1: A. the quantity of money is 60 and the value of nominal GDP is $480. B. the quantity of money is 60 and the value of nominal GDP is $1,920. C. the quantity of money is 16 and the value of nominal GDP is $480. D. the quantity of money is 16 and the value of nominal GDP is $1,920. 9. If, in year 2, the money supply is 25% higher than in year 1, then. A. In year 2, the price level will be 2.00 and the level of real GDP will be $240. B. In year 2, the price level will be 2.50 and the level of real GDP will be $240. C. In year 2, the price level will be 2.00 and the level of real GDP will be $360. D. In year 2, the price level will be 2.50 and the level of real GDP will be $360.

8. A. the quantity of money is 60 and the value of nominal GDP is $480. 9. B. In year 2, the price level will be 2.50 and the level of real GDP will be $240.

The investment-demand curve suggests A) there is a direct relationship between the real rate of interest and the level of investment spending. B) that an increase in business taxes will tend to stimulate investment spending. C) that changes in the real interest rate will not affect the amount invested. D) there is an inverse relationship between the real rate of interest and the level of investment spending.

D) there is an inverse relationship between the real rate of interest and the level of investment spending.

If the U. S. stock market booms, causing U.S. consumption to rise. Economists refer to this outcome as the A) Keynes effect. B) interest-rate effect. C) multiplier effect. D) wealth effect.

D) wealth effect.

21. The Federal Reserve System was created in: A. 1926. B. 1946. C. 1895. D. 1913.

D. 1913

40. Which of the following best describes the cause-effect chain of an expansionary monetary policy [AD=Agg. Demand]? A. A decrease in the money supply will lower the interest rate, increase investment, and increase AD and GDP. B. A decrease in the money supply will raise the interest rate, decrease investment, and decrease AD and GDP. C. An increase in the money supply will raise the interest rate, decrease investment, and decrease AD and GDP. D. An increase in the money supply will lower the interest rate, increase investment, and increase AD and GDP.

D. An increase in the money supply will lower the interest rate, increase investment, and increase AD and GDP.

23. The group that sets the Federal Reserve Systems policy on buying and selling government securities (bills, notes, and bonds) is: A. Federal Deposit Insurance Corporation (FDIC). B. Federal Bond Sale Authority. C. Council of Economic Advisers. D. Federal Open Market Committee (FOMC).

D. Federal Open Market Committee (FOMC).

17. A $20 bill is a: A. gold certificate. B. Treasury note. C. Treasury bill. D. Federal Reserve Note.

D. Federal Reserve Note.

14. The paper money used in the United States is: A. National Bank Notes. B. Treasury Notes. C. United States Notes. D. Federal Reserve Notes.

D. Federal Reserve Notes.

An appropriate fiscal policy for severe demand-pull inflation is: A. an increase in government spending. B. depreciation of the dollar. C. a reduction in interest rates. D. a tax rate increase.

D. a tax rate increase.

Under the liquidity trap conditions, individual investors have a desire to be liquid (at least beyond their transactions needs): A. when interest rates are abnormally low. B. because they fear capital losses by investing in other financial assets like bonds. C. because of fear of government default. D. both A and B are correct.

D. both A and B are correct.