Quiz Ch 15 & 17: Monetary and Fiscal Policy

How does the central bank use an open market operation to expand the money supply?

• Buying bonds on the open market causes an increase in the money supply.

• Donating money to the open market causes an increase in the money supply.

• Selling bonds on the open market causes an increase in the money supply.

• Donating money to banks causes an increase in the money supply.

Buying bonds on the open market causes an increase in the money supply.

How does the Fed use the reserve requirement to expand the money supply?

• Raising reserve requirements expands the money supply as banks are able to charge higher interest rates.

• Lowering reserve requirements expands the money supply as banks are able to issue more loans.

• Lowering reserve requirements expands the money supply as banks are able to hold riskier assets.

• Raising reserve requirements expands the money supply as banks are able to issue more loans.

Lowering reserve requirements expands the money supply as banks are able to issue more loans.

How does the Fed use the discount rate to expand the money supply?

• Raising the discount rate increases the price of borrowing, so the money supply increases because banks charge their users more.

• Lowering the discount rate reduces the price of borrowing, so banks borrow more reserves and the money supply increases as the reserves are lent out.

• Raising the discount rate reduces the price of borrowing, so the money supply increases because banks pass this discount on to their users.

• Lowering the discount rate reduces the incentive for Federal Reserve Governors to oversee banks in their district and fraudulent checks cashed with abandon cause the money supply to increase.
  

Lowering the discount rate reduces the price of borrowing, so banks borrow more reserves and the money supply increases as the reserves are lent out.

Which kind of monetary policy would you expect in response to high inflation:

• Expansionary monetary policy would increase the money supply, lowering interest rates and preventing prices from falling.

• Contractionary monetary policy would reduce the money supply, lowering interest rates and preventing prices from falling.

• Expansionary monetary policy would increase the money supply, raising the quantity of borrowers and further increasing prices.

• Contractionary monetary policy would reduce the money supply, raising interest rates and preventing prices from rising so quickly.

Contractionary monetary policy would reduce the money supply, raising interest rates and preventing prices from rising so quickly.

All other things being equal, by how much will nominal GDP expand if the central bank increases the money supply by $100 billion, and the velocity of money is 3?

• $300 billion ($100 billion x 3 = P x Y)

• $97 billion ($100 billion - 3 = P x Y)

• $300 billion ($100 billion x 3 = P / Y)

• $33.33 billion ($100 billion / 3 = P x Y)

$300 billion ($100 billion x 3 = P x Y)

Specify either expansionary or contractionary FISCAL POLICY as most appropriate in response to

A recession.

You may benefit from sketching a diagram with aggregate demand and aggregate supply curves to illustrate your answer.

• Expansionary

• Contractionary

Expansionary

Specify either expansionary or contractionary FISCAL POLICY as most appropriate in response to

Extremely rapid growth of exports.

You may benefit from sketching a diagram with aggregate demand and aggregate supply curves to illustrate your answer.

• Contractionary

• Expansionary

Contractionary

Specify either expansionary or contractionary FISCAL POLICY as most appropriate in response to

A stock market collapse that hurts consumer and business confidence.

You may benefit from sketching a diagram with aggregate demand and aggregate supply curves to illustrate your answer

• Expansionary

• Contractionary

Expansionary

Specify either expansionary or contractionary FISCAL POLICY as most appropriate in response to

Rising inflation.

You may benefit from sketching a diagram with aggregate demand and aggregate supply curves to illustrate your answer.

• Expansionary

• Contractionary

Contractionary

Specify either expansionary or contractionary FISCAL POLICY as most appropriate in response to

An increase in the natural rate of unemployment.

You may benefit from sketching a diagram with aggregate demand and aggregate supply curves to illustrate your answer.

• Contractionary (and continue to increase unemployment)

• Expansionary (but cause inflation in the long term)

Expansionary (but cause inflation in the long term)

Specify either expansionary or contractionary FISCAL POLICY as most appropriate in response to

A rise in the price of oil.

You may benefit from sketching a diagram with aggregate demand and aggregate supply curves to illustrate your answer.

• Expansionary

• Contractionary

Contractionary

In the 1980s the U.S. Central Bank had the goal of increasing the interest rate and decreasing the money supply. To implement its goal the Central Bank uses a ________ monetary policy.

• relaxed

• contractionary

• expansionary

• inflationary

contractionary

The main risk of quantitative easing is ________.

• inflation

• decreased productivity

• Unemployment.

• reduced exports.

inflation

Which of the following is NOT an important role of the Federal Reserve?

• oversee macroeconomic policies outside the U.S.

• attempt to keep the economy stable.

• regulate the supply of money in the country.

• affect interest rates.

oversee macroeconomic policies outside the U.S.

If a bank does not have enough assets to pay back its liabilities, then

• the bank is insolvent.

• the bank is solvent.

• it has positive net worth.

• the bank can avoid bankruptcy.

the bank is insolvent.

Which of the following is an example of an automatic fiscal policy stabilizer?

• Congress cuts individual income tax rates.

• Tax revenues fall as real GDP decreases.

• Congress decides to cut spending on national defense.

• Tax revenues rise after Congress raises corporate tax rates.

Tax revenues fall as real GDP decreases.

A major concern of fiscal policy is

• how changes to the budget affect the money supply.

• how federal government taxing and spending affects aggregate demand.

• controlling international trade balances

• how changes to the money supply affect aggregate demand.

how federal government taxing and spending affects aggregate demand.

When does a budget surplus occur?

• When government spending equals government tax revenues.

• When government spending exceeds government tax collections.

• When government tax revenues exceed government spending.

• When the increase in the rate of government spending is smaller than the rate for government tax collections.

When government tax revenues exceed government spending.

During a recession, automatic stabilizers include

• Social Security payments.

• unemployment benefits.

• income tax rates.

• an increase in government defense spending.

unemployment benefits.

In order to increase the level of aggregate demand in the economy, the government can use ________ in the form of ________.

• an expansionary fiscal policy; an increase in corporate taxes.

• a contractionary fiscal policy; a decrease in government spending.

• an expansionary fiscal policy; an increase in government spending.

• a contractionary fiscal policy; an increase in taxes.

an expansionary fiscal policy; an increase in government spending.

When the government passes a new law that explicitly increases overall tax rates and reduces spending levels, the policy it is enacting is:

• discretionary and contractionary

• automatic and expansionary.

• contractionary and automatic.

• discretionary and expansionary.

discretionary and contractionary

In 2010, Microsoft will pay corporate income tax to the federal government based on the company's ________.

• regressive tax rate.

• progressive tax rate.

• profits

• gross Revenues.

 

profits

State and local tax revenue sources do NOT include

• transfers from the federal government.

• income taxes.

• sales taxes.

• social security taxes.

 

social security taxes

Which of the following examples describe a progressive tax?

• Income tax with a 10% tax rate on low income households and 20-30% tax rates on higher income households.

• State income tax with a 10% tax rate on low income households and 8% tax rates on higher income households.

• Social Security tax rate of 6.2% on earned income below $117,000 and 0% on income earned above $117,000.

• Medicare payroll tax of 2.9% of income for everyone, regardless of how much they earn.

Income tax with a 10% tax rate on low income households and 20-30% tax rates on higher income households.