Question

1. A fiscal polciy offset will occur whenever

A) the price level rises. B) the interest rate rises. C) the government increases spending in an area that competes with the private sector. D) a, b, and c.

2.  During normal times, discretionary fiscal policy

A) is more effective in influencing real GDP than at times of a recession. B) works well because there are no lag problems in influencing real GDP. C) is probably not very effective in influencing real GDP due to time lags. D) is more effective in influencing real GDP than automatic stabilizers.

3. 32) When the Federal Reserve sells a government security to a commercial bank

A) the loans of the commercial bank will increase. B) the balance sheet of the commercial bank is thrown off balance. C) the net worth of the commercial bank increases. D) the cash reserves of the commercial bank decrease.

4. Open market operations are

A) the buying and selling of existing U.S. government securities in open private markets by citizens. B) the selling of new government securities in open private markets by banks in order to finance the deficit. C) the selling of new government securities by banks in order to increase the money supply. D) the buying and selling of existing U.S. government securities in open private markets by the Fed in order to change the money supply.

5. The appropriate monetary policy in the event of a recessionary gap would be to

A) increase the difference between the discount rate and the federal funds rate. B) increase the difference between the federal funds rate and the required reserve ratio. C) engage in an open market purchase of U.S. government securities. D) raise the required reserve ratio.

Answer 1

1. C) the government increases spending in an area that competes with the private sector.

Explanation: When a government increases spending in an area that competes with the private sector, private investment in that area falls.

2. Option C

Explanation: Discretionary fiscal policy in normal times results in changes in tax policies which creates uncertainty.

3.Option D

Explanation: The cash reserve worth the value of the bond goes to the Fed from the bank.

4. D

Explanation: In open market operations, the Fed buys or sells government securities in the private market to control the money supply.

5. C

Explanation: This will increase the money supply.