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| 1 | |
In the U.S., expansionary monetary policy is most often conducted in the following way: |
| | A) | the Treasury Department issues new bonds to finance an increase in the budget deficit |
| | B) | the Fed asks banks to increase their lending activity |
| | C) | the Fed buys bonds from banks or government security dealers in exchange for money |
| | D) | the Fed sells bonds to the government |
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| 2 | |
The transmission mechanism refers to |
| | A) | the process through which expansionary fiscal policy is crowded out |
| | B) | the process in which monetary policy affects aggregate demand |
| | C) | the adjustment process that occurs after a shift in the IS-curve |
| | D) | the effects of a change in the income tax rate on consumption and investment |
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| 3 | |
After the central bank undertakes open market purchases, which of the following is part of the transmission mechanism? |
| | A) | people hold excess funds and begin to buy bonds or other financial assets |
| | B) | people's portfolio adjustments cause bond prices and therefore interest rates to change |
| | C) | following money expansion, interest rates decrease, stimulating aggregate demand |
| | D) | all of the above |
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| 4 | |
The economy is said to be in a liquidity trap, if |
| | A) | money demand is completely interest elastic |
| | B) | money demand is completely interest inelastic |
| | C) | investment is completely interest inelastic |
| | D) | a government spending increase is totally crowded out by a decrease in private investment |
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| 5 | |
When the economy is in the liquidity trap, |
| | A) | monetary policy is ineffective in changing the interest rate |
| | B) | monetary policy is ineffective in changing the level of output |
| | C) | fiscal policy is most effective in changing the level of output |
| | D) | all of the above |
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| 6 | |
In the classical case, |
| | A) | the transmission mechanism does not work |
| | B) | fiscal policy is most effective in changing the level of output |
| | C) | an increase in public spending will be completely crowded out by a decrease in private spending |
| | D) | a tax cut will increase consumption without affecting investment |
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| 7 | |
In the classical case, |
| | A) | money demand is completely interest inelastic |
| | B) | the fiscal policy multiplier is zero |
| | C) | crowding out is complete |
| | D) | all of the above |
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| 8 | |
One side effect of expansionary fiscal policy is that |
| | A) | in order to be effective, it always has to be accommodated by monetary policy |
| | B) | higher interest rates significantly decrease consumption |
| | C) | higher interest rates cause a change in the composition of GDP |
| | D) | it decreases saving and therefore investment |
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| 9 | |
If the central bank decides to peg interest rates, |
| | A) | open market sales have to be undertaken after every fiscal expansion |
| | B) | the central bank has to adjust money supply every time the IS-curve shifts |
| | C) | fiscal policy changes will not affect the level of consumption or investment |
| | D) | all of the above |
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| 10 | |
The term crowding out refers to the fact that |
| | A) | the level of consumption is reduced when the income tax rate is increased |
| | B) | the level of investment is reduced after the removal of an investment subsidy |
| | C) | fiscal policy changes affect the composition of GDP by changing interest rates |
| | D) | fiscal policy is totally ineffective in the liquidity trap |
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| 11 | |
Expansionary fiscal policy has no negative impact on the level of investment if |
| | A) | money demand is completely interest inelastic |
| | B) | a government spending increase is accompanied by a tax increase |
| | C) | a government spending increase is accompanied by open market sales by the central bank |
| | D) | it is implemented via an investment subsidy rather than an income tax cut |
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| 12 | |
Fiscal policy is at its strongest and monetary policy is at its weakest when |
| | A) | we are in the liquidity trap |
| | B) | we are in the classical case |
| | C) | investment is very sensitive to interest rate changes |
| | D) | money demand is completely interest inelastic |
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| 13 | |
If the government stimulates the economy via an investment subsidy, |
| | A) | the level of investment and output will increase, but consumption will remain unaffected |
| | B) | part of the increase in investment will be offset by an increase in interest rates |
| | C) | an increase in the interest rate can be avoided |
| | D) | the central bank's help is still needed since, for the subsidy to work, interest rates can't rise |
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| 14 | |
If the government wants to stimulate investment without increasing aggregate demand, it can do so by |
| | A) | combining restrictive fiscal policy with expansionary monetary policy |
| | B) | combining an increase in government spending with restrictive monetary policy |
| | C) | cutting income taxes as soon as the economy shows any sign of weakening |
| | D) | asking banks to increase their lending activity |
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| 15 | |
Assume we combine restrictive fiscal policy with expansionary monetary policy. Which is most likely to occur? |
| | A) | output and interest rates will both go up |
| | B) | output will stay roughly the same but interest rates will go down |
| | C) | investment and consumption will both decrease |
| | D) | investment and the budget surplus will both decrease |
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| 16 | |
If the central bank refuses to accommodate a large increase in government spending, the most likely outcome will be |
| | A) | a surplus in the current account of the balance of payments due to changing interest rates |
| | B) | a decrease in the level of consumption due to changing interest rates |
| | C) | a change in the composition of GDP |
| | D) | all of the above |
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| 17 | |
The U.S. experienced its deepest recession since the Great Depression in which of the following years? |
| | A) | 1974/75 |
| | B) | 1981/82 |
| | C) | 1990/91 |
| | D) | 2001 |
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| 18 | |
Economic policy in the U.S. in the early 1980s departed radically from the policies of the previous two decades since |
| | A) | restrictive monetary policy was followed by expansionary fiscal policy |
| | B) | the Fed tried to peg interest rates in an effort to accommodate fiscal policy |
| | C) | tax cuts were finally matched by government spending cuts |
| | D) | unemployment was kept very low despite a high inflation rate |
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| 19 | |
In the 1990s, |
| | A) | the U.S. economy had its longest peace time expansion |
| | B) | U.S. inflation and unemployment rates remained fairly low |
| | C) | the U.S. stock market boomed for most of the decade |
| | D) | all of the above |
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| 20 | |
During the U.S. recession in 2001 |
| | A) | the Fed responded much too late, in effect worsening the recession |
| | B) | the Fed aggressively reduced interest rates which helped to mitigate the economic downturn |
| | C) | U.S. GDP experienced four quarters of negative growth |
| | D) | the government failed to fiscally stimulate the economy due to concerns over budget deficits |
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