Question 1

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

Accepted Answer

To serve as a medium of exchange, a unit of account, and a store of value.

Question 2

A bank receives a deposit of $1,000. If 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 is constant, what happens to the price level if real output remains unchanged?

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 GDP.

Question 5

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

Accepted Answer

Inflation and unemployment.

Question 6

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

Accepted Answer

Changing the marginal tax rate.

Question 7

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

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 reduce inflation.

Question 9

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

Accepted Answer

A government passes a new stimulus package to combat a recession.

Question 10

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

Accepted Answer

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

Question 11

If the government increases spending by $100 million and the marginal propensity to consume (MPC) is 0.8, what is the total increase in aggregate demand using the government spending multiplier?

Accepted Answer

$500 million

Question 12

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

Accepted Answer

Government borrowing increases interest rates, reducing private investment.

Question 13

What is the balanced-budget multiplier in the context of fiscal policy?

Accepted Answer

It is equal to 1, meaning that an equal increase in government spending and taxes increases output by the same amount.

Question 14

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

Accepted Answer

A government implements a supply-side tax simplification to encourage investment.

Question 15

If the marginal propensity to consume (MPC) is 0.75, what is the value of the tax multiplier?

Accepted Answer

$$-3$$

Question 16

Which of the following statements about the AD-AS model is correct?

Accepted Answer

A leftward shift in aggregate demand can cause both output and the price level to fall in the short run.

Question 17

Which of the following best describes the government purchases multiplier?

Accepted Answer

$$\frac{1}{1-MPC}$$

Question 18

Suppose the government increases taxes by $50 billion and the MPC is 0.6. What is the expected change in equilibrium output using the tax multiplier?

Accepted Answer

$$-75$$ billion

Question 19

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

Accepted Answer

It increases incentives to work and invest, potentially shifting aggregate supply to the right.

Question 20

Which of the following best explains why active fiscal policy can be challenging to implement effectively during the business cycle?

Accepted Answer

There are time lags in recognizing economic problems, deciding on policy, and implementing changes.

Key Concepts in Monetary and Fiscal Policy for Macroeconomics

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