Question 1

Which of the following best describes the primary function of money?

Accepted Answer

A medium of exchange, a unit of account, and a store of value.

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 using the simple deposit multiplier?

Accepted Answer

$10,000

Question 3

According to the quantity theory of money, if the money supply increases by 5% and velocity and real output remain constant, what happens to the price level?

Accepted Answer

The price level increases by 5%.

Question 4

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

Accepted Answer

Sustained inflation if output is at potential.

Question 5

The short-run Phillips curve illustrates the relationship between:

Accepted Answer

Inflation and unemployment.

Question 6

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

Accepted Answer

Changing income tax rates.

Question 7

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

Accepted Answer

Shifts the aggregate demand curve to the right.

Question 8

Which of the following best describes a contractionary monetary policy?

Accepted Answer

A policy that decreases the money supply to increase interest rates.

Question 9

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

Accepted Answer

A government stimulus package passed in response to a recession.

Question 10

What is the government purchases multiplier if the marginal propensity to consume (MPC) is 0.8?

Accepted Answer

$$\frac{1}{1-0.8} = 5$$

Question 11

Which of the following best explains the concept of 'crowding out'?

Accepted Answer

Government borrowing increases interest rates, reducing private investment.

Question 12

If the government increases taxes and decreases spending simultaneously, what is the likely effect on aggregate demand?

Accepted Answer

Aggregate demand will decrease.

Question 13

Which of the following is an example of an automatic stabilizer?

Accepted Answer

Unemployment insurance payments that rise during a recession.

Question 14

What is the balanced-budget multiplier if the marginal propensity to consume (MPC) is 0.75?

Accepted Answer

1

Question 15

Which of the following best describes the difference between automatic stabilizers and discretionary fiscal policy?

Accepted Answer

Automatic stabilizers operate without new government action; discretionary policy requires deliberate action.

Question 16

If the marginal propensity to consume (MPC) is 0.6, what is the tax multiplier?

Accepted Answer

$$-\frac{0.6}{1-0.6} = -1.5$$

Question 17

Which of the following is a supply-side effect of a tax simplification policy?

Accepted Answer

It can increase labor supply and investment by reducing distortions.

Question 18

If the government runs a budget deficit, which of the following is true?

Accepted Answer

Government expenditures exceed government revenues.

Question 19

Which of the following best describes the role for active fiscal policy in the business cycle?

Accepted Answer

To stabilize output and employment during economic fluctuations.

Question 20

If the marginal propensity to consume (MPC) is 0.9, what is the value of the government purchases multiplier?

Accepted Answer

$$\frac{1}{1-0.9} = 10$$

Key Concepts in Monetary and Fiscal Policy: Exam Study Guide

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