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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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