Question

Financial problems began in Greece in late 2009, when:
A. the Greek government revealed that it had understated its budget deficits and debt.

B. the European Union forced Greece to give up its membership.
C. Greece adopted the euro.
D. the United Nations imposed trade sanctions on Greece.

The only government policy that has a DIRECT effect on the aggregate demand curve is:

A. changing the quantity of money.

B. raising or lowering the tax rate.
C. changing the level of government purchases of final goods and services.

D. changing the level of government transfers.

Aggregate demand will DECREASE if:

A. the aggregate price level falls.

B. the government raises tax rates.

C. productivity declines.

D. the money supply increases.

If the economy is at potential output and consumption spending suddenly decreases because of a fall in consumer confidence, the appropriate fiscal policy is:

A. a decrease in government transfers.

B. an increase in government spending.

C. a decrease in government spending.

D. an increase in the money supply to decrease interest rates

Suppose a country has floated its currency and the central bank sets a contractionary monetary policy. Which of the following is LIKELY to occur?

A) The country's currency will depreciate.
B) Interest rates will rise, the currency will appreciate, and any inflationary gap will shrink.

C) Interest rates will fall, which will reduce aggregate demand.
D) Net exports will be larger.

Answer 1

1. A. the Greek government revealed that it had understated its budget deficits and debt.
(Problems began in Greece when it revealed about understating its debt and deficit.)

2. C. changing the level of government purchases of final goods and services.
(This has a direct effect on AD.)

3. B. the government raises tax rates.
(AD will decrease if tax increases.)

4. B. an increase in government spending.
(AD needs to be increased through increase in AD.)

5. B) Interest rates will rise, the currency will appreciate, and any inflationary gap will shrink.
(Contractionary monetary policy will reduce money supply which will increase interest rates, and currency will appreciate. So, NX decrease and inflationary gap will shrink.)