Question 1

One side effect of expansionary fiscal policy is that

Accepted Answer

A) higher interest rates cause a change in the composition of GDP 
B) higher interest rates significantly increase private saving 
C) consumption spending is crowded out 
D) the Fed has to reinforce the policy through open market sales 
E) all of the above 
A) higher interest rates cause a change in the composition of GDP 
B) higher interest rates significantly increase private saving 
C) consumption spending is crowded out 
D) the Fed has to reinforce the policy through open market sales 
E) all of the above

Question 2

When the LM-curve is vertical,

Accepted Answer

A) the monetary policy multiplier is zero 
B) monetary policy is at its weakest but fiscal policy has a maximum effect on income 
C) monetary policy has a maximum effect, but fiscal policy has no effect on income 
D) fiscal policy's impact on interest rates will not affect investment 
E) monetary policy affects interest rates but no change in investment spending results 
A) the monetary policy multiplier is zero 
B) monetary policy is at its weakest but fiscal policy has a maximum effect on income 
C) monetary policy has a maximum effect, but fiscal policy has no effect on income 
D) fiscal policy's impact on interest rates will not affect investment 
E) monetary policy affects interest rates but no change in investment spending results

Question 3

The term "quantitative easing" refers to a policy by the Fed to

Accepted Answer

A) massively buy long-term assets in order to directly lower long-term interest rates 
B)  massively sell short-term assets in order to quickly change short-term interest rates 
C)  directly appeal to banks to ease credit in order to stimulate investment spending 
D) "peg" the interest rate at a pre-determined level through the use of open market operations 
E) none of the above 
A) massively buy long-term assets in order to directly lower long-term interest rates 
B)  massively sell short-term assets in order to quickly change short-term interest rates 
C)  directly appeal to banks to ease credit in order to stimulate investment spending 
D) "peg" the interest rate at a pre-determined level through the use of open market operations 
E) none of the above

Question 4

Assume we combine restrictive monetary policy with expansionary fiscal policy.Which is most likely to occur?

Accepted Answer

A) unemployment and interest rates will both go down 
B) unemployment will go down but interest rates will stay the same 
C) investment and consumption will both increase 
D) interest rates and the budget deficit will both decrease 
E) investment will decrease and the budget deficit will increase 
A) unemployment and interest rates will both go down 
B) unemployment will go down but interest rates will stay the same 
C) investment and consumption will both increase 
D) interest rates and the budget deficit will both decrease 
E) investment will decrease and the budget deficit will increase

Question 5

When conducting monetary policy, a central bank should

Accepted Answer

A) never monetize the budget deficit since this will lower the level of investment 
B) be less concerned with current conditions than with future conditions 
C) always try to keep interest rates low 
D) always respond to expansionary fiscal policy by expanding money supply 
E) none of the above 
A) never monetize the budget deficit since this will lower the level of investment 
B) be less concerned with current conditions than with future conditions 
C) always try to keep interest rates low 
D) always respond to expansionary fiscal policy by expanding money supply 
E) none of the above

Question 6

Crowding out occurs when

Accepted Answer

A) an increase in defense spending causes a decrease in consumption 
B) expansionary monetary policy fails to stimulate economic growth 
C) expansionary fiscal policy causes interest rates to rise, thereby reducing private spending 
D) tax increases result in a drop in consumption 
E) a policy designed to increase the budget surplus causes the economy to enter a recession 
A) an increase in defense spending causes a decrease in consumption 
B) expansionary monetary policy fails to stimulate economic growth 
C) expansionary fiscal policy causes interest rates to rise, thereby reducing private spending 
D) tax increases result in a drop in consumption 
E) a policy designed to increase the budget surplus causes the economy to enter a recession

Question 7

Which of the following is TRUE?

Accepted Answer

A) the German policy mix in the early 1990s was the exact opposite of that in the U.S. in the early 1980s 
B) the inflation rate in Germany in 1991 was 5.1% and was a matter of great concern 
C) nominal interest rates in Germany decreased from 1990-92, while real interest rates increased 
D) real GDP growth remained remarkably strong in Germany from 1990-92 
E) none of the above 
A) the German policy mix in the early 1990s was the exact opposite of that in the U.S. in the early 1980s 
B) the inflation rate in Germany in 1991 was 5.1% and was a matter of great concern 
C) nominal interest rates in Germany decreased from 1990-92, while real interest rates increased 
D) real GDP growth remained remarkably strong in Germany from 1990-92 
E) none of the above

Question 8

During the recession of 2007-09 in the United States,

Accepted Answer

A) the monetary base more than doubled but M-2 did not, as banks were reluctant to fund loans 
B) short-term interest rates fell close to zero percent, so the Fed felt compelled to buy large quantities of financial assets to reduce long-term interest rates 
C) a strong fiscal stimulus package intended to stimulate aggregate demand was implemented 
D) all of the above 
E) only A and C 
A) the monetary base more than doubled but M-2 did not, as banks were reluctant to fund loans 
B) short-term interest rates fell close to zero percent, so the Fed felt compelled to buy large quantities of financial assets to reduce long-term interest rates 
C) a strong fiscal stimulus package intended to stimulate aggregate demand was implemented 
D) all of the above 
E) only A and C

Question 9

Assume you would like to stimulate investment but leave the level of GDP roughly the same. What policy mix would you propose?

Accepted Answer

A)   	an income tax cut combined with monetary expansion 
B) 	a tax cut combined with monetary restriction 
C)   	a cut in government spending combined with monetary expansion 
D)   	a cut in government spending combined with monetary restriction 
E)   	an investment subsidy combined with monetary expansion 
A)   	an income tax cut combined with monetary expansion 
B) 	a tax cut combined with monetary restriction 
C)   	a cut in government spending combined with monetary expansion 
D)   	a cut in government spending combined with monetary restriction 
E)   	an investment subsidy combined with monetary expansion

Question 10

Monetary policy becomes less effective as

Accepted Answer

A) the marginal propensity to consume increases 
B) the interest sensitivity of money demand decreases 
C) the interest sensitivity of investment decreases 
D) the LM-curve becomes steeper 
E) the IS-curve becomes flatter 
A) the marginal propensity to consume increases 
B) the interest sensitivity of money demand decreases 
C) the interest sensitivity of investment decreases 
D) the LM-curve becomes steeper 
E) the IS-curve becomes flatter

Question 11

Which of the following was true for the recession of 1981/82?

Accepted Answer

A) nominal interest rates declined from 14.0% in 1981 to 10.7% in 1982, while real interest rates increased from 4.0% to 4.5% 
B) the unemployment rate went above 11%, a higher level than in the Great Depression 
C) the T-bill rate was lower than it ever was in the 1970s 
D) real interest rates decreased steadily after 1981 
E) all of the above 
A) nominal interest rates declined from 14.0% in 1981 to 10.7% in 1982, while real interest rates increased from 4.0% to 4.5% 
B) the unemployment rate went above 11%, a higher level than in the Great Depression 
C) the T-bill rate was lower than it ever was in the 1970s 
D) real interest rates decreased steadily after 1981 
E) all of the above

Question 12

If money supply is held constant, a cut in government transfer payments will eventually cause interest rates to

Accepted Answer

A) decline, enhancing the expansionary impact of the policy 
B) decline, decreasing the restrictive impact of the policy 
C) increase, decreasing the expansionary impact of the policy 
D) increase, decreasing the restrictive impact of the policy 
E) increase, enhancing the restrictive impact of the policy 
A) decline, enhancing the expansionary impact of the policy 
B) decline, decreasing the restrictive impact of the policy 
C) increase, decreasing the expansionary impact of the policy 
D) increase, decreasing the restrictive impact of the policy 
E) increase, enhancing the restrictive impact of the policy

Question 13

In an IS-LM model, if we assume that money demand is completely insensitive to changes in the interest rate,

Accepted Answer

A) fiscal policy cannot change the level of output but will change the composition of GDP 
B) monetary policy is totally ineffective in changing the level of output 
C) interest rates cannot be lowered by fiscal or monetary policy 
D) the economy cannot be stimulated by fiscal or monetary policy 
E) monetary policy can change income but not interest rates 
A) fiscal policy cannot change the level of output but will change the composition of GDP 
B) monetary policy is totally ineffective in changing the level of output 
C) interest rates cannot be lowered by fiscal or monetary policy 
D) the economy cannot be stimulated by fiscal or monetary policy 
E) monetary policy can change income but not interest rates

Question 14

Assume that policy mix A combines restrictive monetary policy with expansionary fiscal policy, while policy mix B combines expansionary monetary policy with restrictive fiscal policy.Compared to policy mix B, policy mix A will cause

Accepted Answer

A) a lower level of investment 
B) a higher level of investment 
C) a lower level of consumption 
D) a higher level of saving 
E) both C and D 
A) a lower level of investment 
B) a higher level of investment 
C) a lower level of consumption 
D) a higher level of saving 
E) both C and D

Question 15

If we were in a liquidity trap,

Accepted Answer

A) investment would be totally interest insensitive 
B)  fiscal expansion would be unlikely to drive interest rates up 
C)  monetary policy would be more powerful than fiscal policy 
D) an increase in government spending would be totally offset by a decrease in private investment 
E) crowding out would be made worse by the inability of monetary policy to accommodate fiscal policy 
A) investment would be totally interest insensitive 
B)  fiscal expansion would be unlikely to drive interest rates up 
C)  monetary policy would be more powerful than fiscal policy 
D) an increase in government spending would be totally offset by a decrease in private investment 
E) crowding out would be made worse by the inability of monetary policy to accommodate fiscal policy

Question 16

During the recession of 2007-09, the U.S.Fed

Accepted Answer

A) lowered the federal funds rate to almost zero percent 
B) bought large numbers of securities that were backed by private mortgages 
C) took actions that increased the monetary base to more than double its original size 
D) made loans to targeted sectors of the financial market 
E) all of the above 
A) lowered the federal funds rate to almost zero percent 
B) bought large numbers of securities that were backed by private mortgages 
C) took actions that increased the monetary base to more than double its original size 
D) made loans to targeted sectors of the financial market 
E) all of the above

Question 17

If investment is not very sensitive to interest rate changes,

Accepted Answer

A) fiscal policy will be largely ineffective in changing output 
B) monetary policy will be very effective in changing output 
C) the economy is in the classical case 
D) monetary policy cannot be used to lower interest rates 
E) the size of the crowding out effect following expansionary fiscal policy will be small 
A) fiscal policy will be largely ineffective in changing output 
B) monetary policy will be very effective in changing output 
C) the economy is in the classical case 
D) monetary policy cannot be used to lower interest rates 
E) the size of the crowding out effect following expansionary fiscal policy will be small

Question 18

A policy mix designed to promote increased investment spending by firms might involve

Accepted Answer

A) open market sales combined with income tax cuts 
B) a government spending increase financed by a tax increase 
C) cuts in government purchases combined with higher investment tax credits 
D) an increase in government purchases combined with monetary restriction 
E) removal of investment subsidies 
A) open market sales combined with income tax cuts 
B) a government spending increase financed by a tax increase 
C) cuts in government purchases combined with higher investment tax credits 
D) an increase in government purchases combined with monetary restriction 
E) removal of investment subsidies

Question 19

The transmission mechanism between an open market purchase by the central bank and an increase in aggregate demand can break down if

Accepted Answer

A) banks are unwilling to lend to private firms 
B) money demand is totally interest inelastic 
C) investment is very interest sensitive 
D) bond prices increase too much 
E) none of the above 
A) banks are unwilling to lend to private firms 
B) money demand is totally interest inelastic 
C) investment is very interest sensitive 
D) bond prices increase too much 
E) none of the above

Question 20

The crowding out effect is zero if

Accepted Answer

A) the LM-curve is horizontal 
B) the LM-curve is vertical 
C) the central bank conducts open market sales following fiscal expansion 
D) income is stimulated via a tax cut rather than an increase in government spending 
E) none of the above 
A) the LM-curve is horizontal 
B) the LM-curve is vertical 
C) the central bank conducts open market sales following fiscal expansion 
D) income is stimulated via a tax cut rather than an increase in government spending 
E) none of the above

Exam 12: Monetary and fiscal policy

One side effect of expansionary fiscal policy is that

When the LM-curve is vertical,

The term "quantitative easing" refers to a policy by the Fed to

Assume we combine restrictive monetary policy with expansionary fiscal policy.Which is most likely to occur?

When conducting monetary policy, a central bank should

Crowding out occurs when

Which of the following is TRUE?

During the recession of 2007-09 in the United States,

Assume you would like to stimulate investment but leave the level of GDP roughly the same. What policy mix would you propose?

Monetary policy becomes less effective as

Which of the following was true for the recession of 1981/82?

If money supply is held constant, a cut in government transfer payments will eventually cause interest rates to

In an IS-LM model, if we assume that money demand is completely insensitive to changes in the interest rate,

Assume that policy mix A combines restrictive monetary policy with expansionary fiscal policy, while policy mix B combines expansionary monetary policy with restrictive fiscal policy.Compared to policy mix B, policy mix A will cause

If we were in a liquidity trap,

During the recession of 2007-09, the U.S.Fed

If investment is not very sensitive to interest rate changes,

A policy mix designed to promote increased investment spending by firms might involve

The transmission mechanism between an open market purchase by the central bank and an increase in aggregate demand can break down if

The crowding out effect is zero if

Introduction

National income accounting

Growth and accumulation

Growth and policy

Aggregate supply and demand

Aggregate supply and the phillips curve

Unemployment

Inflation

Policy preview

Income and spending

Money, interest, and income

International linkages

Consumption and saving

Investment spending

The demand for money

The fed, money, and credit

Policy

Financial markets and asset prices

The national debt

Recession and depression

Inflation and hyperinflation

International adjustment and interdependence

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