1. If rapid inflation occurs in an economy that is operating near full employment, the monetary and fiscal policies that should be used include
A. a government budget deficit, the sale of securities in the open market, and a higher discount rate.
B. a government budget deficit, the purchase of securities in the open market, and a higher discount rate.
C. a government budget surplus, the sale of securities in the open market, and a higher discount rate.
D. a government budget surplus, the purchase of securities in the open market, and a lower discount rate.
2. A large federal/public debt imposes a burden on future generations if it
A. is used to eliminate a current recession.
B. reduces the current level of investment and, thus, capital accumulation.
C. reduces current interest rates and, thus, increases current investment.
D. increases the current level of technology.
3. The basic factor underlying the balanced-budget multiplier is that
A. tax increases are subject to a larger multiplier than are increases in government spending.
B. many taxes (e.g., social security taxes) are legally linked to specific entitlement programs (e.g., social security benefits).
C. decreases in government spending automatically cause increases in gross private domestic investment.
D. individuals and businesses reduce their spending by less than any increase in their taxes.
4. Which of the following is an example of how automatic stabilizers work?
A. As real GDP decreases, income tax revenues decrease and transfer payments increase.
B. As real GDP decreases, income tax revenues increase and transfer payments decrease.
C. As real GDP decreases, income tax revenues and transfer payments decrease.
D. As real GDP decreases, income tax revenues and transfer payments increase.
5. At the beginning of the depression in the early 1930s, the U.S. federal government attempted to reduce its budget deficit and generate a budget surplus. This policy
A. lead to cost-push inflation.
B. made the depression worse.
C. helped to eliminate the depression.
D. moved the economy toward a demand-pull inflation.
6. Monetary policy is often ineffective when used to eliminate a recession because at such times
A. banks lack the reserves to make loans.
B. there may not be a strong demand for loans.
C. the Fed cannot engage in open market operations.
D. the public may suddenly convert near money into money.
7. The maximum amount that an individual commercial bank can safely lend is A. an amount equal to its actual reserves.
B. an amount equal to its excess reserves.
C. an amount equal to one half of its excess reserves.
D. an amount equal to some multiple of its excess reserves.
8. How will increasing government spending on goods and services when unemployment is 10% have a different effect from a similar increase when unemployment is 2%?
A. At 10% unemployment, it is more likely that government spending would require a reduction in the production of private goods.
B. At 2% unemployment, it is more likely that government spending would require a reduction in the production of private goods.
C. At 10% unemployment, government spending is more likely to increase prices than real output.
D. At 2% unemployment, government spending is more likely to increase real output than prices.
9. The built-in stabilizers automatically
A. balance the government’s budget over the course of the business cycle.
B. tend to produce a surplus in the government’s budget during a period of inflation.
C. tend to produce a deficit in the government’s budget during a period of inflation.
D. tend to produce a surplus in the government’s budget during a period of recession.
10. Large U.S. federal government budget deficits
A. decrease U.S. interest rates, decrease the international value of the dollar, and increase U.S. net exports
B. increase U.S. interest rates, increase the international value of the dollar, and decrease U.S. net exports
C. increase U.S. interest rates, increase the international value of the dollar, and increase U.S. net exports.
D. increase U.S. interest rates, decrease the international value of the dollar, and increase U.S. net exports
11. Suppose you heard the following: “The gap between actual output and potential output for this year is estimated to be 6 percent to 7 percent of potential output. Wholesale prices are virtually unchanged from one year ago. Unemployment is 8.8 percent of the civilian work force, the same level as three months ago.”
Which of the following stabilization policies would be the most appropriate?
A. reductions in the federal debt
B. purchases of securities by the Federal Reserve
C. increases in corporate and personal income taxes
D. reductions in the length of time unemployed workers can receive unemployment benefits
12. The reason that commercial banks have the ability to create money is because of
A. the margin requirement.
B. the Federal Reserve System.
C. the fractional reserve system.
D. the private ownership of commercial banks.
E. the fact that commercial banks charge interest on loans.
13. The existence of cost-push inflation (stagflation) is a problem for a contractionary fiscal policy and a contractionary (tight) money policy because
A. the decrease in aggregate demand will reduce both unemployment and inflation.
B. the increase in aggregate demand will increase both unemployment and inflation.
C. the increase in aggregate demand will reduce inflation but will increase unemployment.
D. the decrease in aggregate demand will reduce inflation but will increase unemployment.
14. The Federal Reserve Board of Governors would choose to pursue an expansionary (easy) money policy
A. during a period of demand-pull inflation.
B. if it wishes to remain neutral in the economy.
C. if it wishes to increase total spending in the economy.
D. if it wishes to reduce total spending in the economy.
15. The “crowding-out effect” suggests that
A. excessive population in the cities is pushing people into the suburbs.
B. if consumption spending increases investment spending must decrease.
C. tax increases are paid primarily out of saving and, therefore, are not an effective fiscal policy tool.
D. increases in government borrowing will increase the interest rate and thus reduce private investment.
16. The U.S. public (federal/national) debt
A. is primarily an external debt, with a small portion being an internal debt.
B. reduces current interest rates and thus increases current investment.
C. increases the current level of technology.
D. is used to eliminate a current recession.
E. is the sum of all budget deficits incurred by the federal government.
17. A problem that is common to both fiscal and monetary policy is that
A. neither type of policy is effective in controlling cost-push inflation.
B. a considerable period of time elapses before either type of policy can be implemented.
C. politicians are responsible for determining both monetary and fiscal policy, and political considerations often outweigh economic considerations.
D. None of the above — neither monetary nor fiscal policy has any shortcomings.
