Question

1) Open market purchase will result in:

1. increase in bank reserves and a decrease in the federal funds rate.
2. increase in bank reserves and an increase in the federal funds rate.
3. decrease in bank reserves and a decrease in the federal funds rate.
4. decrease in bank reserves and an increase in the federal funds rate.

2) An increase in government expenditure would shift the:

A) aggregate demand curve rightward.

2. aggregate demand curve leftward.
3. aggregate supply curve rightward.
4. aggregate supply curve leftward.

3) An increase in taxes would shift the:

A) aggregate demand curve rightward.

2. aggregate demand curve leftward.
3. aggregate supply curve rightward.
4. aggregate supply curve leftward.

4) An increase in foreign real income would shift the:

A) aggregate demand curve rightward.

2. aggregate demand curve leftward.
3. aggregate supply curve rightward.
4. aggregate supply curve leftward.

5) Features of the U.S. federal government expenditure and taxation programs that tend to automatically slow the economy during times of high economic activity and boost the economy during periods of recession are called:

A) discretionary expenditures.

2. automatic stabilizers.
3. non-automatic stabilizers.
4. none of the above.

6) In February 2002, the euro/dollar exchange rate was 1.20, and in May 2002, the euro/dollar exchange rate was 1.10. What happened to the exchange rate during this period?

A) Euro appreciated against the dollar.

2. Euro depreciated against the dollar.
3. Dollar appreciated against the euro.
4. Both B and C.

7) A recession occurs, and government-funded unemployment compensation is paid to laid-off workers. This is an example of:

a) a discretionary fiscal policy

b) a monetary policy

c) an automatic fiscal stabilizer

8) Congress votes to fund a new jobs program designed to put unemployed workers to work. This is an example of:

a) a discretionary fiscal policy

b) a monetary policy

c) an automatic fiscal stabilizer

9) The Federal Reserve decides to reduce the quantity of money in circulation in an effort to slow inflation. This is an example of:

a) a discretionary fiscal policy

b) a monetary policy

c) an automatic fiscal stabilizer

10) Under powers authorized by an act of Congress, the president decides to authorize an emergency release of funds for spending programs intended head off economic crises. This is an example of:

a) a discretionary fiscal policy

b) a monetary policy

c) an automatic fiscal stabilizer

11) Suppose that the economy is presently operating at full employment. If there is an increase in national income, which of the following will occur automatically?

a) An increase in unemployment compensation spending

b) An increase in tax rates

c) A decrease in tax rates

d) An increase in tax revenues

12) Fiscal policy is likely to be more effective

a) when government borrowing does not increase interest rates substantially

b) during abnormal times as opposed to more normal times

c) when there are less offsetting reductions in private sector spending

d) All of the above

13) In the short run, if the economy has a recessionary gap, an increased government budget deficit resulting from higher government spending or lower taxes is most likely to

a) have no effect on aggregate demand or real GDP after direct and indirect offsets are counted

b) increase aggregate demand, which will move the economy toward full employment real GDP

c) increase aggregate demand, raising prices and creating an inflationary gap

d) decrease aggregate demand, reducing prices and increasing the recessionary gap

Answer 1

1) A. increase in bank reserves and a decrease in the federal funds rate.
(Open market purchase leads to increase in money supply which increases bank reserves and decreases federal funds rate.)

2) A) aggregate demand curve rightward.
(Increase in G increases AD which shifts AD to the right.)

3) B) aggregate demand curve leftward.
(Increase in T decreases AD which shifts AD to the left.)

4) A) aggregate demand curve rightward.
(Increase in foreign income, increases the demand for exports so AD increases which shifts AD to the right.)

(Note: Post 4 MCQs at a time.)