Multiple Choice Answers

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1. The Fed can decrease the federal funds rate by:
A) Selling bonds.
B) Buying bonds which causes market interest rates to fall.
C) Simply announcing a lower rate since the Fed has direct control of this interest rate.
D) Changing the money multiplier.
2. Which of the following is an appropriate fiscal policy prescription for the government to follow?
A) Deficit reduction during recession.
B) Deficit reduction when there is excess AD.
C) Deficit expansion in an inflationary gap.
D) All of the above.

3. Which of the following describes a budget deficit?
A) Tax revenues fall short of expenditures over the fiscal year.
B) Discretionary fiscal spending is used to achieve macro equilibrium.
C) The U.S. Treasury engages in refinancing activities.
D) The government uses fiscal policy.

4. Deficit spending results whenever the government:
A) Issues bonds to finance the debt.
B) Finances expenditures that exceed tax revenues.

C) Refinances the debt.
D) Uses fiscal policy.

5 Which of the following policies will reduce the budget deficit while achieving greater fiscal restraint?
A) More government expenditure and higher taxes.
B) More government expenditure and lower taxes.
C) Less government expenditure and higher taxes.
D) Less government expenditure and lower taxes.

6. With greater deficit spending, ceteris paribus,
A) Aggregate spending should fall.
B) Any inflationary gap would become larger.
C) There are greater leakages.
D) There is inadequate information to tell what happens to aggregate spending.

7. If full-employment output exceeds desired spending, greater deficit spending will result in a:
A) Smaller recessionary gap.
B) Smaller inflationary gap.

C) Larger recessionary gap.
D) Larger inflationary gap.

8. With an increase in deficit spending, the:
A) U.S. Treasury buys more bonds.
B) Consumption function shifts downward.

C) Aggregate supply curve shifts to the right.
D) Aggregate demand curve shifts to the right.

9. According to Keynes, an unbalanced budget is appropriate if:
A) The economy is below full employment.
B) Leakages and injections are out of balance.

C) Macro equilibrium is above full employment.
D) All of the above.

10. Which of the following is an argument against balancing the federal budget?
A) The federal government spends and interferes with the economy too much.
B) The government may not be able to pay off its debts.
C) The government may be unable to pull the economy out of recession if it does so.
D) An equivalent increase in government spending and taxes has no effect on income.

11. Which of the following is not an automatic stabilizer?
A) Unemployment compensation.
B) Income taxes.

C) Social security benefits.
D) Welfare payments.

12. Automatic stabilizers tend to stabilize the level of economic activity because they:
A) Are changed quickly by Congress.
B) Increase the size of the multiplier.
C) Increase spending during recessions and reduce spending during inflationary periods.
D) Control the rate of change in prices.

13. Which of the following is an automatic stabilizer that reduces tax receipts during a recession?
A) Welfare benefits.
B) Medicaid.

C) Corporate income taxes.
D) Indexed retirement and social security benefits.

14. Which of the following contributes to greater deficits when unemployment rises, but reduces the deficit during an inflationary gap?
A) Unemployment insurance benefits.
B) Welfare benefits.

C) Progressive personal income taxes.
D) All of the above.

15. In order to increase the money supply the Fed can:
A) Raise the reserve requirement, increase the discount rate, or sell bonds.
B) Raise the reserve requirement, increase the discount rate, or buy bonds.
C) Lower the reserve requirement, increase the discount rate, or buy bonds.
D) Lower the reserve requirement, decrease the discount rate, or buy bonds.

16. Which of the following is a possible effect of automatic stabilizers on the federal budget?
A) A decrease in the deficit during recessions.
B) An increase in the deficit when there is AD excess.
C) An increase in the structural deficit during recessions.
D) A decrease in the deficit during an expansion.

17. An increase in unemployment, ceteris paribus:
A) Leads to increased government expenditures.
B) Leads to reduced government revenues.
C) Functions to increase a budget deficit and/or reduce a budget surplus.
D) All of the above.

18. The two components responsible for the total budget balance reflect:
A) Cyclical changes and changes in uncontrollables.
B) Cyclical changes and changes in discretionary fiscal policy.
C) Structural changes and changes in discretionary fiscal policy.
D) Structural changes and changes in uncontrollables.

19. Which of the following equals the current yield on a bond?
A) Required reserve ratio ´ total deposits.
B) Total reserves – required reserves.
C) (Total reserves – required reserves) ´ the money multiplier.
D) Annual interest payment ¸ price paid for bond.

20. If the annual interest rate printed on the face of a bond is 12 percent, the face value of the bond is $1,000, and you purchase the bond for $500, what is the current yield on the bond?
A) 60 percent.

B) 10 percent.
C) 24 percent.
D) 6 percent.

21. If the Fed wants to sell more bonds than people are willing to buy, then the Fed should:
A) Decrease the price it asks for the bonds.
B) Switch to another type of monetary policy lever.
C) Switch to fiscal policy.
D) Encourage a government agency to buy the bonds.

22. If full-employment income and equilibrium income are equal for a country, then a tax cut will result in:
A) Excess AD.
B) Output exceeding desired expenditure.

C) Leakages exceeding injections.
D) Undesired inventory accumulation.

23. A progressive income tax system is particularly effective as an automatic stabilizer because:
A) It reduces demand when income falls.
B) In a booming economy taxpayers move into higher tax brackets, which restrains their spending.
C) During a recession it causes the budget deficit to fall.
D) It falls more heavily on taxpayers with high MPCs, which stimulates aggregate demand.