Question 1

A firm is considering ways to finance a new factory. Which of the following is NOT a method the firm can use to finance this capital expenditure?

Accepted Answer

Paying dividends

Question 2

Suppose a company’s perceived risk increases due to a scandal. What is the most likely effect on the price of its stock, and why?

Accepted Answer

The price will fall because higher risk reduces demand for the stock.

Question 3

Which of the following best describes a capital gain?

Accepted Answer

When you can sell an asset for more than you paid for it.

Question 4

A share of stock provides which of the following benefits to its owner?

Accepted Answer

All of the above

Question 5

If the expected dividend of a stock increases, what is the likely effect on the price of the stock, all else equal?

Accepted Answer

The price will rise.

Question 6

Which of the following is an example of a stock market price bubble?

Accepted Answer

A period when everyone expects that everyone else expects stock prices to rise, driving prices up.

Question 7

Suppose the Federal Reserve Board takes several months to realize the economy is in a recession. This delay is best described as:

Accepted Answer

A recognition lag

Question 8

Which of the following best describes the response lag in economic policy?

Accepted Answer

The time it takes for a new policy to affect behavior in the economy.

Question 9

If policy makers decide on a policy at time $$t_3$$ but it does not affect the economy until period $$t_6$$, what is the likely effect of this policy?

Accepted Answer

Destabilizing

Question 10

If the United States continues to run large structural deficits year after year, what must the government do to finance these deficits?

Accepted Answer

Borrow money to finance them

Question 11

Other things equal, how do higher interest rates affect the government deficit?

Accepted Answer

They increase the deficit because of higher government interest payments.

Question 12

The legislative intent of the Gramm-Rudman-Hollings Act was to:

Accepted Answer

Reduce the federal deficit by a set amount each year.

Question 13

Which institution declared that part of the Gramm-Rudman-Hollings Act was illegal, requiring Congress to approve automatic spending cuts?

Accepted Answer

The U.S. Supreme Court

Question 14

Which of the following is an example of an automatic stabilizer in the U.S. economy?

Accepted Answer

Government spending rising during a recession

Question 15

Suppose the government targets the deficit during a negative aggregate demand shock. What is the likely effect on the economy?

Accepted Answer

It causes further negative aggregate demand shocks.

Question 16

During an economic expansion, which of the following is an example of an automatic stabilizer at work?

Accepted Answer

Taxes rising

Question 17

How does the U.S. government typically borrow money to finance deficits?

Accepted Answer

By the U.S. Treasury selling bills and bonds

Question 18

A policy lag can make economic policy inappropriate when it takes effect. Which of the following is NOT a reason for this?

Accepted Answer

Question 19

Suppose the implementation lag for fiscal policy is longer than for monetary policy. What does this imply for the effectiveness of fiscal policy in responding to economic shocks?

Accepted Answer

Fiscal policy may be less effective due to delayed implementation.

Question 20

If policy makers believe the economy is at point $$E$$ when it is actually at point $$G$$, which type of lag is this an example of?

Accepted Answer

Recognition lag

Chapter 14: Financing, Stock Markets, Policy Lags, and Fiscal Policy – Guided Study

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