Question

1. The size of the money multiplier will be greatest when the reserve ratio is:

a. 0.1

b. 0.2

c. 0.3

d. 0.4

2. If the economy grows, the government's budget position will automatically:

a. improve due to increased spending

b. worsen

c. improve due to greater tax revenues

e. stay the same

3. Higher interest rates:

a. Encourage borrowing

b. Encourage savings

c. Increase injections into the economy

d. Reduce withdrawals into the economy

4. Demand side policies are most likely to lead to inflation when:

a. They reduce aggregate demand

b. Aggregate supply is perfectly elastic

c. Aggregate supply is price elastic

d. The economy is at full employment

Answer 1

1. The size of money multiplier will be greatest when the reserve ratio is 0.1. Because least the reserve ratio, more is the lending in the economy in the form of loan.

2. If the economy grows, the government's budget position will automatically improve due to greater tax revenue. Because as the income increases, tax revenue increase as ( T = t Y) where t= tax rate.

3. Higher interest rate encourage saving because it makes saving more attractive.

4. Demandside policies are most likely to lead to inflation when the economy is at full employment.