Question 1

If an increase in interest rates reduces investment spending by $25m:

Accepted Answer

A)  real GDP will decrease by $25 million
B)  GDP will decrease by $25 million
C)  GDP will decrease by more than $25 million
D)  GDP will decrease by less than $25 million x C

Question 2

When the government increases its purchases, the increase in aggregate demand could be more than or less than the increase in government purchases, depending on whether the multiplier effect or the crowding-out effect is larger.

Accepted Answer

A) True 
 B)False  True

Question 3

A reduction in direct taxes will result in:

Accepted Answer

A)  an increase in output and a little inflation if the economy is near full employment
B)  a decrease in inflation and a small increase in output if the economy is near full employment
C)  a leftward shift in the AD curve
D)  no shift in the AD curve of these B

Question 4

When the government reduces taxes, households' take-home pay:

Accepted Answer

A)  increases, households' saving increases and households' consumption increases
B)  decreases, households' saving decreases and households' consumption decreases
C)  increases, households' saving is unaffected and households' consumption increases
D)  increases, households' saving increases and households' consumption is unaffected

Question 5

Supply-side economists focus on:

Accepted Answer

A)  how fiscal policy affects aggregate demand
B)  how tax-policy affects the incentives to work
C)  how fiscal policy affects aggregate supply
D)  both A and B
E)  both B and C

Question 6

Assuming that the crowding-out effect is $100 billion and the multiplier effect of an increase in government purchases is $120 billion, then the total effect on aggregate demand will be:

Accepted Answer

A)  an $80 billion increase
B)  an $80 billion decrease
C)  a $20 billion increase
D)  a $20 billion decrease

Question 7

According to the Ricardian equivalence theory, what would happen if the government were to cut taxes without changing its spending?

Accepted Answer

A)  Public and national saving would fall
B)  Public and national saving would rise
C)  Public and national saving would not change
D)  Private saving would rise, public saving would fall, and national saving would be unaffected

Question 8

Which of the following policies would Keynes have supported when the economy is experiencing unemployment?

Accepted Answer

A)  An open-market purchase
B)  A reduction in tax rates
C)  An increase in government purchases
D)  All of the above

Question 9

Suppose government purchases increase by $100 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.9.What is the total effect of this increase in government purchases?

Accepted Answer

A)  $90 billion
B)  $111 billion
C)  $900 billion
D)  $1000 billion

Question 10

When the economy goes into a recession, the amount of taxes collected by the government falls automatically.Why?

Accepted Answer

The answer of When the economy goes into a recession,...

Question 11

The global financial crisis has shown that the Australian government can influence the behaviour of the economy only with fiscal policy.

Accepted Answer

A) True 
 B)False

Question 12

The notion that when the government increases its purchases of aeroplanes, the owners and employees of the aeroplane manufacturing companies will also purchase more as their incomes rise, and hence total purchases will increase by more than the initial change in government purchases, is known as the:

Accepted Answer

A)  crowding-out effect
B)  Keynesian effect
C)  multiplier effect
D)  acceleration effect

Question 13

What are the key determinants of the interest rate in the short run? What are the key determinants of the interest rate in the long run?

Accepted Answer

The answer of What are the key determinants of the...

Question 14

An increase in government purchases of $100 billion will shift the aggregate-demand curve to the:

Accepted Answer

A)  left by more than $100 billion
B)  left by more or less than $100 billion
C)  right by more than $100 billion
D)  right by more or less than $100 billion

Question 15

An increase in Australia's marginal propensity to import will:

Accepted Answer

A)  have no effect on GDP, because GDP only includes spending in Australia
B)  cause an increase in GDP, because Australians have risen their spending
C)  cause a decrease in GDP, because some existing spending will demand production overseas instead of in Australia
D)  always be bad for the economy

Question 16

For a given fixed price level, an increase in the money supply will lead to:

Accepted Answer

A)  an increase in the interest rate, which in turn decreases the quantity of goods and services demanded
B)  an increase in the interest rate, which in turn increases the quantity of goods and services demanded
C)  a fall in the interest rate, which in turn increases the quantity of goods and services demanded
D)  a fall in the interest rate, which in turn decreases the quantity of goods and services demanded

Question 17

An increase in money supply shifts the money supply curve to the _____, _____the equilibrium interest rate in the money market.

Accepted Answer

A)  right; reducing
B)  right; raising
C)  left; reducing
D)  left; raising

Question 18

According to the theory of liquidity preference, the money demand curve is downward sloping, reflecting _____.

Accepted Answer

A)  the opportunity cost holding money
B)  the cost of buying goods and services
C)  the effect of unforeseen inflation
D)  the risk of holding money

Question 19

Changes in government spending affect saving and growth in the long run, and aggregate demand and employment in the short run.

Accepted Answer