Question

1- To fight inflation, the Fed should

Select one:

a. buy securities, which would decrease interest rates, increase aggregate demand, and therefore decrease the price level.

b. buy securities, which would increase interest rates, decrease aggregate demand, and therefore decrease the price level.

c. sell securities, which would decrease interest rates, increase aggregate demand, and therefore decrease the price level.

d. sell securities, which would increase interest rates, decrease aggregate demand, and therefore decrease the price level.

2- An argument in favor of using discretionary fiscal policy to achieve economic goals would be:

Select one:

a. the crowding out effect

b. lags associated with the use of fiscal policy

c. in the long run we are all dead

d. all of the above

3- The multiplier effect of a one billion dollar tax cut differs from the multiplier effect of a one billion dollar increase in government purchases because

Select one:

a. tax cuts increase the deficit; an increase in government purchases does not.

b. households generally maintain their level of saving even though taxes rise.

c. a tax cut is not all spent; instead part is saved.

d. there is no difference.They both have the same effect.

4- Suppose GDP in the economy is currently $1,600 billion.If total consumption expenditures are
$1,200 billion, planned investment expenditures are $100 billion, government purchases of goods and services are $300 billion, and net exports are -$50 billion, then

Select one:

a. firms are experiencing an unplanned increase in inventories.

b. firms are experiencing an unplanned decrease in inventories.

c. the economy is at equilibrium GDP.

d. firms are experiencing no unplanned change in inventories

Answer 1

(1) (d)

Inflation is lowered by reducing aggregate demand by contractionary monetary policy.

(2) (c)

Even if economy self-adjusts, it takes too long and in long run we are all dead, before experiencing benefits of the self-adjusting mechanism.

(3) (d)

Tax multiplier is lower than government spending multiplier.

(4) (a)

PAE = C + I + G + NX = 1200 + 100 + 300 - 50 = 1550 < GDP (Y)

Therefore firms can't sell entire output which increases planned inventory accumulation.