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1 |  |  In the U.S., expansionary monetary policy is most often conducted in the following way: |
|  | A) | the Treasury Department issues new bonds to finance an increase in the budget deficit |
|  | B) | the Fed asks banks to increase their lending activity |
|  | C) | the Fed buys bonds from banks or government security dealers in exchange for money |
|  | D) | the Fed sells bonds to the government |
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2 |  |  The economy is said to be in a liquidity trap, if |
|  | A) | money demand is completely interest elastic |
|  | B) | money demand is completely interest inelastic |
|  | C) | investment is completely interest inelastic |
|  | D) | a government spending increase is totally crowded out by a decrease in private investment |
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3 |  |  In the classical case, |
|  | A) | the transmission mechanism does not work |
|  | B) | fiscal policy is most effective in changing the level of output |
|  | C) | an increase in public spending will be completely crowded out by a decrease in private spending |
|  | D) | a tax cut will increase consumption without affecting investment |
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4 |  |  One side effect of expansionary fiscal policy is that |
|  | A) | in order to be effective, it always has to be accommodated by monetary policy |
|  | B) | higher interest rates significantly decrease consumption |
|  | C) | higher interest rates cause a change in the composition of GDP |
|  | D) | it decreases private saving and therefore investment |
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5 |  |  If the central bank decides to peg interest rates, |
|  | A) | open market sales have to be undertaken after every fiscal expansion |
|  | B) | the central bank has to adjust money supply every time the IS-curve shifts |
|  | C) | fiscal policy changes will not affect the level of consumption or investment |
|  | D) | all of the above |
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6 |  |  The term crowding out refers to the fact that |
|  | A) | the level of consumption is reduced when the income tax rate is increased |
|  | B) | the level of investment is reduced after the removal of an investment subsidy |
|  | C) | fiscal policy changes affect the composition of GDP by changing interest rates |
|  | D) | fiscal policy is totally ineffective in the liquidity trap |
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7 |  |  Fiscal policy is at its strongest and monetary policy is at its weakest when |
|  | A) | we are in the liquidity trap |
|  | B) | we are in the classical case |
|  | C) | investment is very sensitive to interest rate changes |
|  | D) | money demand is completely interest inelastic |
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8 |  |  If the government stimulates the economy via an investment subsidy, |
|  | A) | the level of investment and output will increase, but consumption will remain unaffected |
|  | B) | part of the increase in investment will be offset by an increase in interest rates |
|  | C) | an increase in the interest rate can be avoided |
|  | D) | the central bank's help is still needed since, for the subsidy to work, interest rates can't rise |
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9 |  |  Assume we combine restrictive fiscal policy with expansionary monetary policy. Which is most likely to occur? |
|  | A) | output and interest rates will both go up |
|  | B) | output will stay roughly the same but interest rates will go down |
|  | C) | investment and consumption will both decrease |
|  | D) | investment and the budget surplus will both decrease |
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10 |  |  If the central bank refuses to accommodate a large increase in government spending, the most likely outcome will be |
|  | A) | a surplus in the current account of the balance of payments due to changing interest rates |
|  | B) | a decrease in the level of consumption due to changing interest rates |
|  | C) | a change in the composition of GDP |
|  | D) | all of the above |
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