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

If the required reserve ratio is 10%, what is the simple deposit multiplier?

Accepted Answer

$$\frac{1}{0.10} = 10$$

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

Higher inflation with no long-term impact on real output.

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 reduces 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' in fiscal policy?

Accepted Answer

Government borrowing raises interest rates, reducing private investment.

Question 12

If the government increases taxes and decreases spending by the same amount, what is the effect on aggregate demand according to the balanced-budget multiplier?

Accepted Answer

Aggregate demand increases by the amount of the change.

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 main difference between automatic stabilizers and discretionary fiscal policy?

Accepted Answer

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

Question 15

Suppose the marginal propensity to consume (MPC) is 0.75. If the government increases spending by $100 million, what is the total change in GDP according to the government spending multiplier?

Accepted Answer

$$\frac{1}{1-0.75} 	imes 100 = 400$$ million

Question 16

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 the long-run aggregate supply curve to the right.

Question 17

What is the main goal of fiscal policy?

Accepted Answer

To influence aggregate demand and stabilize the economy.

Question 18

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

Accepted Answer

To counteract fluctuations in output and employment by adjusting government spending and taxes.

Question 19

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 20

Which of the following is NOT a limitation of fiscal policy?

Accepted Answer

It can be implemented instantly without delays.

Key Concepts in Monetary and Fiscal Policy: Study Guide

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