1) Let c=0.9. Then in our simple model of aggregate demand a dollar decrease in taxes causes
a) A 9 dollar increase in the equilibrium output.
b) A 10 dollar decrease in the equilibrium output.
c) A 4 dollar increase in the equilibrium output.
d) A 9 dollar decrease in the equilibrium output.
e) None.
Please show your calculation (3 points).
2) Let c=0.9. Then in our simple model of aggregate demand a dollar increase in government expenditures causes
a) A 9 dollar increase in the equilibrium output.
b) A 5 dollar decrease in the equilibrium output.
c) A 10 dollar increase in the equilibrium output.
d) A 10 dollar decrease in the equilibrium output.
e) None.
Please show your calculation (3 points).
3) Which of the following is true?
a) A recessionary gap can be closed completely because of sticky wages.
b) Empirical studies show that a recessionary gap can be closed quickly if the government implements the appropriate fiscal policy.
c) Wages decrease dramatically in the time of recession for reasons such as minimum wage, union contacts, and government restrictions.
d) Firms tend to dramatically reduce wages during a recession without a fear of losing their best workers.
e) None of the above.
(1 point)
4) Which of the following is true?
a) The multipliers of government expenditures and taxes are not easily calculated by the government.
b) Fiscal policy is usually successful because the government can control the money supply.
c) Fiscal policy cannot fix the economy overnight because tax and spending policies affect aggregate supply more than aggregate demand.
d) None of the above.
e) a and c.
(2 points)
5) Contractionary fiscal policy
a) Is designed to increase aggregate demand.
b) Is designed to decrease aggregate demand.
c) Is designed to increase aggregate supply.
d) Is designed to decrease aggregate supply.
(1 point)
6) Which of the following is true?
a) Supply side policies cause inflation.
b) Supply side tax cuts can potentially affect aggregate supply faster than aggregate demand.
c) Supply side policies decrease the government’s budget deficit.
d) All of the above.
e) None.
(2 points)
12) The self-correcting mechanism during inflation refers to
a) Shifts in the aggregate demand to the left as a result of increasing input prices.
b) Shifts in the aggregate demand to the right as a result of decreasing input prices.
c) Shifts in the aggregate supply to the left as a result of increasing input prices.
b) Shifts in the aggregate supply to the right as a result of decreasing input prices.
(1 point)
13) Which of the following is an example of contractionary fiscal policy?
a) Increasing capital gains taxes.
b) Decreasing the budget for national defense.
c) Buying treasury bills.
d) a and b.
e) None of the above.
(2 points)
14) Which of the following is true?
a) Tax multiplier is larger than government expenditure multiplier.
b) Tax multiplier is smaller than government expenditure multiplier.
c) The balanced budget multiplier is equal to 1.
d) a, c.
e) b, c.
(2 points)
15) If the government increases its expenditures by 1000,000,000 dollars and finances it by an equal increase in taxes, then
a) Output increases by 1000,000,000 dollars.
b) Output decreases by 1000,000,000 dollars.
c) Output increases by more than 1000,000,000 dollars.
d) Output increases by less than 1000,000,000 dollars.
Please show your calculation (3 points)
5) Which of the following is true?
a) To tackle inflation, the Fed buys treasury bills, thereby decreases the interest rate.
b) To tackle recession the Fed purchases treasury bills, thereby shifts the supply of treasury bills to the left.
c) To tackle inflation the Fed sells treasury bills, thereby decreases the interest rate.
d) None of the above.
6) Contractionary monetary policy
a) Increases investment and aggregate demand.
b) Aims to decrease aggregate supply.
c) May include a reduction in the rate of required reserves.
d) Increases the money supply
e) None.
f) Both c and d.
7) Contractionary fiscal policy
a) Decreases interest rate and aggregate demand.
b) Aims to decrease the money supply.
c) Includes a reduction in the rate of required reserves.
d) Includes a reduction in taxes.
e) a and d.
f) All of the above.
8) Which of the following is true?
a) The negative relationship between the FFR and the price of treasury bills is a result of a change in the supply of treasury bills.
b) The price of treasury bills is likely to increase in the time of recession because the Fed increases the demand of treasury bills.
c) The price of treasury bills is likely to decrease in the time of recession as a result of a decrease in the Federal Funds Rate.
d) a and b.
e) a and c.
9) Regulating the banking system is necessary
a) Because the banking system tends to shift the aggregate supply continuously to the right.
b) Because the banking system determines the money supply and money supply affects aggregate demand.
c) To minimize run on banks.
d) b and c.
e) All of the above.
10) Open market operations in the time of recession
a) Refers to selling treasury bills in order to increase interest rate.
b) Refers to buying treasury bills in order to decrease money supply
c) Refers to buying treasury bills in order to decrease the interest rate.
d) Refers to buying treasury bills in order to increase money supply.
e) c and d.
f) b and d.