Q: Suppose a bank receives a deposit of $1,000 and the required reserve ratio is 10%. What is the maximum potential increase in the money supply as a result of this deposit, using the simple deposit multiplier formula?

$$\frac{1}{0.10} = 10$$, so $$1,000 \times 10 = 10$$,000

Q: Suppose the government increases spending by $$\200$ million and the marginal propensity to consume (MPC) is 0.8$. What is the total change in aggregate demand using the government spending multiplier?

Multiplier $$= \frac{1}{1-0.8} = 5$$, so $$200 \times 5 = \1$$,000$ million

Question 1

Which of the following best describes the primary function of money in an economy?

Accepted Answer

Money serves as a store of value, a unit of account, and a medium of exchange.

Question 2

Suppose a bank receives a deposit of $1,000 and the required reserve ratio is 10%. What is the maximum potential increase in the money supply as a result of this deposit, using the simple deposit multiplier formula?

Accepted Answer

$$\frac{1}{0.10} = 10$$, so $$1,000 	imes 10 = 10$$,000

Question 3

According to the quantity theory of money, if the velocity of money ($$V) $$and real output ($$Y) $$are constant, what happens to the price level ($$P) if $$the money supply ($$M) $$doubles?

Accepted Answer

The price level ($$P) $$will double.

Question 4

Which of the following is a long-term implication of the quantity theory of money for monetary policy?

Accepted Answer

Sustained increases in the money supply lead to proportional increases in the price level (inflation) in the long run.

Question 5

The short-run Phillips curve illustrates the relationship between which two economic variables?

Accepted Answer

Inflation and unemployment

Question 6

Which of the following is NOT a tool of monetary policy?

Accepted Answer

Changing government spending

Question 7

In the AD-AS model, what is the likely short-run effect of an expansionary monetary policy?

Accepted Answer

Aggregate demand shifts to the right, increasing output and the price level.

Question 8

Which of the following best describes a contractionary monetary policy?

Accepted Answer

A policy that reduces the money supply to increase interest rates and decrease inflation.

Question 9

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

Accepted Answer

Unemployment insurance payments that increase during a recession.

Question 10

What is the main difference between automatic stabilizers and discretionary fiscal policy?

Accepted Answer

Automatic stabilizers work without new government action, while discretionary policy requires deliberate legislative changes.

Question 11

Suppose the government increases spending by $$\200$ million and the marginal propensity to consume (MPC) is 0.8$. What is the total change in aggregate demand using the government spending multiplier?

Accepted Answer

Multiplier $$= \frac{1}{1-0.8} = 5$$, so $$200 	imes 5 = \1$$,000$ million

Question 12

Which of the following best describes the concept of 'crowding out' in fiscal policy?

Accepted Answer

Government borrowing increases interest rates, reducing private investment.

Question 13

If the government increases taxes by $$\100$ million and the MPC is 0.75$, what is the total decrease in aggregate demand using the tax multiplier?

Accepted Answer

Tax multiplier $$= -\frac{MPC}{1-MPC} = -\frac{0.75}{0.25} = -3$$, so $$-3 	imes 100 = -\300$ million

Question 14

Which of the following is an example of discretionary fiscal policy?

Accepted Answer

Congress passes a new stimulus bill to increase government spending.

Question 15

What is the balanced-budget multiplier, and what is its value?

Accepted Answer

It is the effect on aggregate demand when government spending and taxes increase by the same amount; its value is 1.

Question 16

Which of the following best describes the supply-side effects of a tax simplification policy?

Accepted Answer

It can increase incentives to work and invest, potentially shifting the long-run aggregate supply curve to the right.

Question 17

If the government wants to use fiscal policy to close a recessionary gap, which combination of policies would be most effective?

Accepted Answer

Increase government spending and/or decrease taxes.

Question 18

Which of the following statements about the two limits of fiscal policy is correct?

Accepted Answer

Fiscal policy can be limited by time lags and the potential for crowding out private investment.

Question 19

Which of the following best describes the government purchases multiplier?

Accepted Answer

It is calculated as $$\frac{1}{1-MPC}$$ and measures the total change in output from a change in government spending.

Question 20

In the context of the AD-AS model, what is the effect of a contractionary fiscal policy?

Accepted Answer

Aggregate demand shifts to the left, reducing output and the price level.

Key Concepts in Monetary and Fiscal Policy: Study Guide

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