Fiscal and Monetary Policy
Assume that with a proportional tax system, the government always sets the tax rate at a level that yields a balanced budget at full employment. Which of the following is necessarily true?
The national debt will increase in any year the economy operates below full employment.
Which of the following is a determinant of the amount of money the commercial banking system can create?
The reserve requirement
The money demanded for the purpose of purchasing goods and services is known as
a transactions demand
Expansionary fiscal policy will most likely result in
an increase in nominal interest rates
Suppose that the government decreases taxes and at the same time the central bank decreases the discount rate. The combined actions will result in
an increase in the real gross domestic product and an indeterminate change in theinterest rate
Of the following, the most liquid asset is
currency
A discretionary fiscal policy action to reduce inflation in the short run would be to
increase taxes or decrease government spending
An increase in government deficit spending can crowd out private investment by
increasing the real interest rate
In one year, spending on consumption, invest- ment, and government purchases was equalto 103 percent of a country's gross domestic product. This would be possible only if
net exports were negative
Crowding out refers to the decrease in
private investment due to increased bor-rowing by the government
In the short run, government deficit spending will most likely
raise nominal interest rates
Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains. The legal reserve requirement is 10 percent. If Maggie deposits the $100 bill she received as a graduation gift from her grandmother into her checking account, the maximum increase in the total money supply will be
$900
Which of the following changes would most likely cause an increase in interest rates in the short run?
An increase in government spending financed by borrowing
Following a decrease in exports, what fiscal policy would restore the economy to the original equilibrium?
An increase in government transfer payments
Which of the following policy combinations could reduce a government deficit without changing aggregate demand?
An increase in taxes and an increase in the money supply
Which of the following will lower the prices of a country's outstanding government bonds?
An outflow of financial capital to other countries
Supply-side economists are most likely to favor which of the following short-run policies?
Cutting marginal tax rates to promote savings, investment, and work
An appropriate fiscal policy to combat recession would be to increase which of the following?
Government spending
Crowding out is most likely to occur with which of the following changes?
Increase in budget deficit
With a constant money supply, if the demand for money decreases, the equilibrium interest rate and quantity of money will change in which of the following ways?
Int Rate: Decrease Q$: Not Change
Expansionary monetary policy will most likely cause interest rates and investment to change in which of the following ways in the short run?
Int Rates: Decrease Investment: Increase
Assume that the Federal Reserve pursues a contractionary monetary policy. Based on the resulting change in the interest rate, what will happen to the international value of the dollar, United States imports, and United States exports?
Inter. Value of Dollar: Increase US Imports: Increase US Exports: Decrease
Which of the following sequences of events would occur if the Federal Reserve implemented contractionary monetary policy?
Interest rates increase, investment and consumption spending decrease, aggregate demand decreases, and output and prices decrease.
If the federal government reduces itsbudget deficit when the economy is close to full employ- ment, which of the following will most likely result?
Interest rates will decrease.
Assume a country's government has a balanced budget. If the economy goes into a recession, what will happen to the government's budget in the short run?
It will be in deficit, because there will be an automatic decrease in tax receipts
Assume that the economy is at full employment. Policymakers wish to maintain the price level but want to encourage greater investment. Which of the following combinations of monetary and fiscal policies would best achieve this goal?
Monetary Policy: Expansionary Fiscal Policy: Contractionary
An increase in inflationary expectations will most likely affect nominal interest rates and bond prices in which of the following ways in the short run
Nom. IR: Increase Bond Prices: Decrease
A contraction in the money supply will most likely change the nominal interest rate and aggregate demand in which of the following ways in the short run?
Nom. Int. Rate: Increase AD: Decrease
When the central bank sells government bonds on the open market, which of the following will most likely increase?
Nominal interest rates
When an economy is operating below the full- employment level of output, an appropriate monetary policy would be to increase which of the following?
Open market purchases of government bonds
Which of the following will lead to an increase in the money supply?
Open-market purchase of securities by the central bank
With an upward-sloping aggregate supply curve, an increase in the money supply will affect the price level and real gross domestic product (GDP) in the short run in which of the following ways?
PL: Increase Real GDP: Increase
If an economy is operating with significant unemployment, an increase in which of the following will most likely cause employment to increase and the interest rate to decrease?
Purchases of government bonds by the central bank
Which Federal Reserve action can shift the aggregate demand curve to the left?
Raising the discount rate
If fiscal policy is used to correct a recessionary gap, which of the following would most likely occur in the absence of crowding out in the short run
Real Output: Increase Unemployment: Decrease
If a central bank significantly increases its sales of government bonds, it is most likely responding to which of the following?
Rising price levels
Which of the following combinations of economic policies would be most effective to correct a severe recession?
Taxes: Decrease MS: Increase
Suppose that the Federal Reserve buys$400 billion worth of government securities from the public. If the required reserve ratio is 20 percent, the maximum increase in the money supply is
$2,000 billion
A bank has $800 million in demand deposits and $100 million in reserves. If the reserve requirement is 10 percent, the bank's excess reserves equal
$20 million
Automatic stabilizers can do which of the following?
Cause tax revenues to decrease when gross domestic product (GDP) decreases and to increase when GDP increases
If the reserve requirement is 10 percent and the central bank sells $10,000 in government bonds on the open market, the money supply will
decrease by a maximum of $100,000
The Federal Reserve decreases the federal funds rate by
buying government bonds on the open market
f the economy is in a severe recession, which of the following policy actions is most appropriate?
Increasing both the money supply and government spending
Which of the following policy choices represents a combination of fiscal and monetary policies designed to bring the economy out of a recession
Increasing government spending anddecreasing the federal funds rate
If nominal gross domestic product in a country is $1,600 and the money supply is $400, what is the velocity of money?
4
Which of the following is most likely to occur if the Federal Reserve engages in open market operations to reduce inflation?
A decrease in reserves in the banking system
Which of the following is NOT a function of fiat money?
A source of intrinsic value
If an increase in government spending, financed by borrowing, crowded out an equal amount of private spending, which of the following would result?
Aggregate demand would remainunchanged.
The aggregate demand curve is downward sloping because an increase in the general price level will cause the demand for money, interest rates, and investment to change in which of the following ways?
D for $: Increase Int. Rates: Increase Investment: Decrease
An increase in government spending will affect the demand for money and nominal interest rates in which of the following ways?
D of Money: Increase Nom. Int. Rate: Increase
