Deck 35: Monetary Policy

Question 1

Figure: Aggregate Demand and Fiscal Policy Reference: Ref 18-1 (Figure: Aggregate Demand and Fiscal Policy) In the best case scenario, an economy in a recession at Point Y would use fiscal policy to increase spending growth to

A) 5 percent.
B) 7 percent.
C) 15 percent.
D) 10 percent.

Answer 1

D

Question 2

The largest component of GDP is

A) consumption spending.
B) investment spending.
C) government spending.
D) imports.

Answer 2

A

Question 3

When using fiscal policy to fight a recession, the government will

A) decrease taxes and/or increase government expenditures.
B) increase taxes and/or decrease government expenditures.
C) institute technological advancement in the economy.
D) decrease government expenditures.

Answer 3

A

Question 4

Economists believe that government spending sometimes increases growth for all of these reasons EXCEPT

A) spending can lower inflation and keep prices and wages steady.
B) spending can put all of the factors of production to greater use.
C) spending can encourage additional private investment.
D) spending can increase consumer confidence.

Question 5

Suppose the economy is initially at Point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD1 to AD4, then the government can avoid a short run increase in inflation by

A) increasing taxes so that the AD curve shifts back to AD1.
B) increasing taxes so that the AD curve shifts further out to AD5.
C) increasing government spending so that the AD curve shifts back to AD1.
D) increasing government spending so that the AD curve shifts further out to AD5.

Question 6

Fiscal policy can offset a positive shock to aggregate demand by raising

A) the discount rate.
B) the growth rate of the money supply.
C) taxes.
D) government spending.

Question 7

Figure: Aggregate Demand and Fiscal Policy (Figure: Aggregate Demand and Fiscal Policy) In the best case scenario, effective short-run fiscal policy would take which action to correct an economy in recession at Point Z?

A) increase aggregate demand, returning the economy to Point X.
B) increase the Solow growth curve to a level above 3 percent.
C) decrease the Solow growth curve to a level below 2 percent.
D) increase aggregate demand to move the economy to Point W.

Question 8

Which of the following could be sources of funding for a government that wants to increase government expenditures? I. taxes II. borrowing from the public III. previous years' surpluses if the government does not have national debt

A) I only
B) I and II only
C) II and III only
D) I, II, and III

Question 9

As the recession continued in early 2009, consumer confidence most likely

A) increased.
B) decreased.
C) remained constant.
D) became too difficult to calculate accurately.

Question 10

Which of these would help a government fight a recession?

A) raising taxes
B) cutting taxes
C) cutting spending
D) paying down the national debt

Question 11

The primary tools of fiscal policy are

A) money supply and money demand.
B) government expenditure and money supply.
C) government expenditure and taxation.
D) taxation and interest rates.

Question 12

Fiscal policy can best be defined as the use of

A) government expenditure and taxation to mitigate recessions only.
B) government expenditure, borrowing, and taxation to influence the business cycle.
C) money supply manipulation to influence the business cycle.
D) international political relations to influence the business cycle.

Question 13

To fight a recession, the government can I. increase spending. II. cut taxes. III. buy bonds.

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 14

Fiscal policy is

A) government borrowing to finance the national debt.
B) government taxes and spending that affect the income distribution among people.
C) government taxes, spending, and borrowing that affect business fluctuations.
D) the change of the money supply that affects business fluctuations.

Question 15

Fiscal policy involving ____________ is designed to influence business cycle fluctuations.

A) the taxation of income
B) government spending
C) government borrowing
D) Each of these answers is correct.

Question 16

When consumers reduce spending, the reduction in velocity of money is split between

A) a decrease in growth and an increase in inflation.
B) a decrease in growth and a decrease in inflation.
C) a decrease in money supply and a decrease in growth.
D) a decrease in money supply and decrease in inflation.

Question 17

In working to correct a recession with fiscal policy, the government can

A) wait for wages and prices to become more flexible.
B) increase the money supply.
C) increase its expenditures and/or decrease taxes to raise the Solow growth curve.
D) raise its expenditures and/or lower taxes to increase aggregate demand.

Question 18

Examples of expansionary fiscal policy include increases I. in government spending. II. in income taxes. III. of the money supply.

A) I only
B) II only
C) I and II only
D) I and III only

Question 19

When consumers cut back on spending what falls?

A) the velocity of money
B) the money supply
C) interest rates
D) tax rates

Question 20

Which federal government policy influences business cycle fluctuations by taking action on taxes, spending, and borrowing?

A) real business cycle policy
B) fiscal policy
C) monetary policy
D) growth policy

Question 21

An increase in government spending growth will cause inflation to fall in

A) the short run only.
B) the long run only.
C) both the short run and the long run.
D) neither the short run nor the long run.

Question 22

Which of the following is NOT a major limit to the effectiveness of fiscal policy?

A) A single increase in government spending is rarely enough to stimulate the economy.
B) The crowding out effect is transmitted through financial markets.
C) Fiscal policy is not very effective in combating supply side shocks.
D) A multiplier effect is associated with changes in spending and taxation.

Question 23

A decrease in consumption growth will cause the Solow growth curve to

A) shift inward.
B) shift outward.
C) remain unchanged.
D) first shift outward and then shift inward.

Question 24

Other things being equal, a decrease in government spending growth causes

A) the dynamic AD curve to shift to the right.
B) the dynamic AD curve to shift to the left.
C) the Solow growth curve to shift to the right.
D) the Solow growth curve to shift to the left.

Question 25

(Figure: Aggregate Demand Conditions) Figure: Aggregate Demand Conditions Beginning at Point A in the diagram, a decrease in consumption growth will cause real growth to fall in

A) the short run only.
B) the long run only.
C) both the short run and the long run.
D) neither the short run nor the long run.

Question 26

If, in the best case scenario, increased government spending were used to revive the economy from a recession, the increased spending would

A) be offset by a decrease in inflation.
B) be a little more than the fall in consumer confidence in order to help make up for lost GDP.
C) not need to be as large as the fall in consumer consumption.
D) be exactly the same as the fall in consumer consumption.

Question 27

If consumption decreases, the existence of the government spending multiplier effect means that in order to counter the recession

A) the government cannot use fiscal policy.
B) the government is forced to use both tax cuts and increases in .
C) fiscal policy needs to raise by less than the decrease in .
D) fiscal policy needs to raise by more than the decrease in .

Question 28

An increase in government spending growth will cause the Solow growth curve to

A) shift inward.
B) shift outward.
C) remain unchanged.
D) first shift outward and then shift inward.

Question 29

In what way are monetary and fiscal policies similar?

A) They both target aggregate demand to overcome business fluctuations.
B) They are both somewhat ineffective when the economy suffers real shocks.
C) They both involve some amount of borrowing from the public.
D) Each of these answers is correct.

Question 30

When the government increases its spending growth, the subsequent increase in non-government spending stimulates aggregate demand and is called the _________ effect.

A) crowding out
B) endowment
C) multiplier
D) automatic stabilizing

Question 31

(Figure: Aggregate Demand and Fiscal Policy) Figure: Aggregate Demand and Fiscal Policy Assume that the government of an economy in recession at Point Y in the diagram is aware of the expenditure multiplier when it formulates policy decisions. If it chooses to increase government expenditures by 4 percent, it should expect

A) the economy to move at least to Point W.
B) the economy to move at least to Point X.
C) the economy to move at least to Point Z.
D) the economy to stay at Point Y.

Question 32

When expansionary fiscal policy increases income and consumer spending, the subsequent increase in AD is called the ________ effect.

A) expansionary
B) secondary
C) multiplier
D) None of these answers is correct.

Question 33

A decrease in consumption growth will cause inflation to fall in

A) the short run only.
B) the long run only.
C) both the short run and the long run.
D) neither the short run nor the long run.

Question 34

As the government builds new schools, the construction workers and material vendors employed on the project spend more in the community where they work. What is the economic term for this effect?

A) hastening
B) multiplier
C) duplicator
D) spending

Question 35

An increase in government spending growth will cause real growth to fall in

A) the short run only.
B) the long run only.
C) both the short run and the long run.
D) neither the short run nor the long run.

Question 36

Assume that because the government cancels a large infrastructure program construction firms earn less and lay off workers. Consequently, the region where they live suffers from decreased sales. This story illustrates

A) a reverse multiplier effect.
B) an increase in aggregate demand.
C) a negative technology shock.
D) Each of these answers is correct.

Question 37

The multiplier effect is the

A) subsequent consumer spending that increases AD from expansionary fiscal policy.
B) subsequent consumer spending that increases AD from contractionary fiscal policy.
C) increase in GDP from an increase in the money supply and decrease in taxes.
D) increase in GDP from increased consumer savings and private investment.

Question 38

A decrease in consumption growth will cause aggregate demand to

A) shift inward.
B) shift outward.
C) remain unchanged.
D) first shift outward and then shift inward.

Question 39

An increase in government spending growth will cause the AD curve to

A) shift inward.
B) shift outward.
C) remain unchanged.
D) first shift outward and then shift inward.

Question 40

Because of the multiplier effect, if a shock causes aggregate demand to increase by $200 million, then the government should __________ in order to restore the economy back to its original growth rate.

A) do nothing
B) increase government spending by more than $200 million
C) reduce government spending by less than $200 million
D) increase government spending by $200 million and cut taxes by $200 million

Question 41

Crowding out occurs when I. the government borrows money from the public that firms would have used for investment funds. II. the government sells bonds, raising interest rates and causing people to save more and consume less. III. an economy is closed and does not trade with the outside world.

A) I only
B) I and II only
C) II and III only
D) I, II, and III

Question 42

Which fiscal stimulus policy will provide a greater incentive to work?

A) a tax rebate program
B) an income tax rate cut
C) an income tax increase
D) a bond purchase program

Question 43

As a result of _________, a temporary tax rebate tends to create a small increase in spending over many years rather than a big increase in the present.

A) spending averaging
B) intertemporal substitution
C) consumption smoothing
D) the bandwagon effect

Question 44

If $500,000 in new taxes is raised and spent on building a new school and $300,000 in private spending would have been spent anyway, how much is added to short-run aggregate demand?

A) $100,000
B) $200,000
C) $300,000
D) $500,000

Question 45

The difficulties of using fiscal policy to affect the economy include I. the automatic stabilizing effect. II. the crowding out effect. III. the time lag in policy effects.

A) I only
B) II only
C) I and II only
D) II and III only

Question 46

Government spending becomes a more effective policy tool when

A) the economy is above the Solow growth curve.
B) the government raises taxes to finance spending.
C) consumers are pessimistic and not spending.
D) interest rates in the economy are rising simultaneously.

Question 47

When the government sells bonds, some of the funds that would have gone to private investments go to the government. This situation is called

A) overcrowding.
B) funneling.
C) crowding out.
D) under bidding.

Question 48

When consumers are very reluctant to spend in a recessionary environment, the government's most effective strategy is to

A) increase spending through bond financing.
B) decrease income taxes.
C) decrease corporate taxes.
D) do nothing; the economy will self-correct in the short run.

Question 49

When an increase in government spending leads to a decrease in private spending it is called

A) crowding out.
B) a drop in the bucket.
C) bad timing.
D) None of the answers is correct.

Question 50

Raising taxes and government spending is most effective at improving short-term aggregate demand when

A) private sector spending is very low.
B) wages stay low.
C) banks are not lending.
D) consumers are increasing their spending.

Question 51

Which of the following is TRUE of the difference between a tax cut and a tax rebate?

A) A tax cut only increases the incentive to spend, while a tax rebate only increases the incentive to work.
B) A tax cut only increases the incentive to work, while a tax rebate only increases spending.
C) A tax cut increases the incentive to work and the incentive to spend, while a tax rebate only increases the incentive to spend.
D) A tax cut only increases the incentive to spend, but a tax rebate increases the incentive to work and the incentive to spend.

Question 52

When the government sells more bonds, what else happens?

A) Interest rates go down and consumer spending rises.
B) Interest rates go down and savings go up.
C) Interest rates go up and consumer spending rises.
D) Interest rates go up and savings go up.

Question 53

Why did the tax rebate of $78 billion in 2008 have few net stimulus benefits?

A) Consumers overspent the rebate and fell into debt.
B) Consumers used much of the rebate to pay off existing debt.
C) Consumers spent the money on frivolous items that did not have a multiplier effect.
D) Consumers decided to save all of their rebate money.

Question 54

Which of the following poses a limit to fiscal policy?

A) crowding out
B) size of government expenditures
C) timing lags
D) Each of these answers is correct.

Question 55

What are the four major limits to fiscal policy?

A) crowding out, a drop in the bucket, a matter of timing, and real shocks
B) poor information, the multiplier effect, the bandwagon effect, and election timing
C) sticky wages, Ricardian equivalence, recognition lag, and crowding out
D) aggregate demand deficiency, unemployed resources, long- run expenses, and implementation lag

Question 56

What primary benefit can a temporary investment tax credit have?

A) It can accelerate capital outlay in an economic downturn.
B) It can encourage workers to work extra hours.
C) It can encourage consumers to save more.
D) It can encourage firms to hire more workers.

Question 57

Which of the following refers to the decrease in private spending when government spending increases?

A) the multiplier effect
B) the timing effect
C) the automatic stabilizing effect
D) the crowding out effect

Question 58

When consumers spend all of their tax rebate checks, what will take place in the economy?

A) Aggregate demand shifts up and right.
B) Aggregate demand shifts down and left.
C) The Solow growth curve shifts left.
D) Inflation decreases.

Question 59

Crowding out I. limits increases in aggregate demand due to fiscal policy. II. affects expansionary fiscal policy. III. increases the multiplier effect.

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 60

If the government increases its spending, financing methods that can cause crowding out include I. raising individual income taxes. II. raising corporate investment taxes. III. selling bonds.

A) III only
B) I and II only
C) II and III only
D) I, II, and III

Question 61

The time necessary for the government to put a fiscal policy plan in place is called a(n)

A) legislative lag.
B) recognition lag.
C) implementation lag.
D) Each of these answers is correct.

Question 62

Suppose the federal government gives taxpayers a tax rebate financed by borrowing. If taxpayers use the tax rebate to pay off their debts, total spending will

A) increase.
B) decrease.
C) remain unchanged.
D) first increase and then decrease.

Question 63

The time necessary to recognize that an economic problem exists is called a(n)

A) legislative lag.
B) recognition lag.
C) implementation lag.
D) Each of these answers is correct.

Question 64

Which of the following is NOT a lag associated with fiscal policy?

A) the time it takes to implement a policy once it's decided
B) the time to recognize a recession once the data are collected
C) the time it takes to assess whether the policy has worked
D) the time it takes to assess whether to use fiscal or monetary policy

Question 65

If Ricardian equivalence holds, then an expansionary fiscal policy will

A) decrease aggregate demand in the short run.
B) increase aggregate demand in the short run but not in the long run.
C) increase aggregate demand in both the short run and in the long run.
D) have no effect on aggregate demand either in the short or in the long run.

Question 66

When consumers save their tax cut for a future tax increase they are adhering to

A) the bandwagon effect.
B) intertemporal substitution.
C) the multiplier effect.
D) Ricardian equivalence.

Question 67

Which of the following is a hindrance in implementing fiscal policy to deal with a short-term economic downturn?

A) recognizing the problem
B) proposing a plan
C) implementing the plan
D) Each of these answers is correct.

Question 68

Ricardian equivalence

A) will occur more when consumers practice consumption smoothing.
B) does not occur when a political administration is set to change.
C) has not occurred in the United States.
D) is less significant when consumers deem tax cuts or rebates as permanent.

Question 69

Which statement is TRUE about the difference between monetary and fiscal policy?

A) Fiscal policy can quickly adjust to changes in aggregate demand.
B) Fiscal policy can have a more direct impact.
C) Monetary policy is subject to many long lags.
D) Monetary policy can affect the economy regardless of the actions banks take.

Question 70

Which of these is a form of fiscal policy?

A) changes in government spending.
B) tax rebates.
C) tax cuts.
D) Each of these answers is correct.

Question 71

Consumers are more likely to spend tax rebates that they believe are

A) permanent.
B) temporary.
C) large.
D) small.

Question 72

The tax rebate of 2008 had a relatively small impact because taxpayers primarily used the rebate to

A) purchase their annual Christmas gifts.
B) take vacations.
C) reduce their debts.
D) Each of these answers is correct.

Question 73

Which of the following reduces the effectiveness of tax cuts meant to stimulate AD? I. Ricardian equivalence II. a very low percentage of people above the minimum income requirement for tax assessment III. a very high percentage of people above the minimum income requirement for tax assessment

A) I only
B) I and II only
C) I and III only
D) II and III only

Question 74

Mistimed contractionary fiscal policy can cause

A) a real shock.
B) rising interest rates.
C) a recession.
D) inflation.

Question 75

If the federal government were to have huge spending increases of approximately $800-$900 billion, what percent of GDP would this affect?

A) 2
B) 5
C) 7
D) 10

Question 76

The time between which an economic shock is recognized and when the government passes a plan to carry out a policy response is called a(n)

A) recognition lag.
B) legislative lag.
C) effectiveness lag.
D) adjustment lag.

Question 77

The time necessary for Congress to propose and pass a fiscal policy plan is called a(n)

A) legislative lag.
B) recognition lag.
C) implementation lag.
D) Each of these answers is correct.

Question 78

If the government gave a tax rebate to the people but aggregate demand remained unchanged, the most likely reason is that

A) people saved all the additional money from the rebate in order to pay for future tax increases.
B) people spent all the additional money from the rebate.
C) the government spent the same amount as the total amount of the tax rebate.
D) the government financed the tax rebate through printing more money.

Question 79

If Ricardian equivalence is correct, any tax cut will cause consumer spending to

A) increase.
B) decrease.
C) remain unchanged.
D) change in an unpredictable manner.

Question 80

In a typical year, changes in government spending compared to overall spending are relatively

A) small.
B) large.
C) unpredictable.
D) well-timed.