Question 1

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

Accepted Answer

Medium of exchange, unit of account, and store of value.

Question 2

Suppose the required reserve ratio is 10%. If a customer deposits $1,000 in cash into a checking account at a commercial bank, what is the maximum possible increase in the money supply, assuming banks lend out all excess reserves and there are no currency leakages? Use the deposit multiplier formula.

Accepted Answer

The deposit multiplier is $$\frac{1}{0.10} = 10$$, so the maximum increase is $$1,000 	imes 10 = 10$$,000.

Question 3

According to the quantity theory of money, if the velocity of money ($$V) $$and real output ($$Y) $$are constant, what is the long-term effect of doubling the money supply ($$M) on $$the price level ($$P$$)? Use the equation $$MV = PY.$$

Accepted Answer

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

Question 4

Which of the following is NOT one of the four main goals of monetary policy?

Accepted Answer

Maximizing government revenue.

Question 5

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

Accepted Answer

It shifts the aggregate demand (AD) curve to the right.

Question 6

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 7

Suppose the government increases its purchases by $$\200$ million, and the marginal propensity to consume (MPC) is 0.8$. What is the total change in equilibrium GDP, using the government-purchases multiplier formula?

Accepted Answer

The multiplier is $$\frac{1}{1-0.8} = 5$$, so the total change is $$200 	imes 5 = \1$$,000$ million.

Question 8

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

Accepted Answer

Discretionary fiscal policy requires new government action, while automatic stabilizers operate without new legislation.

Question 9

If the government increases taxes by $$\100$ million and the marginal propensity to consume (MPC) is 0.75$, what is the total change in equilibrium GDP, using the tax multiplier formula?

Accepted Answer

The tax multiplier is $$-\frac{MPC}{1-MPC} = -\frac{0.75}{0.25} = -3$$, so the total change is $$-3 	imes 100 = -\300$ million.

Question 10

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

Accepted Answer

Government borrowing increases interest rates, which reduces private investment.

Question 11

Suppose the government increases both spending and taxes by $$\50$ million. If the marginal propensity to consume (MPC) is 0.6$, what is the total change in equilibrium GDP, using the balanced-budget multiplier?

Accepted Answer

The balanced-budget multiplier is 1, so the total change is $$\50$ million.

Question 12

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

Accepted Answer

It increases incentives to work and invest, potentially shifting the long-run aggregate supply (LRAS) curve to the right.

Question 13

Which of the following would cause a movement along the short-run Phillips curve (SRP)?

Accepted Answer

A change in aggregate demand that alters the unemployment rate.

Question 14

What is the implication of the long-run Phillips curve (LRP) for monetary policy?

Accepted Answer

There is no long-run trade-off between inflation and unemployment; monetary policy cannot permanently reduce unemployment below the natural rate.

Question 15

During Chairman Volcker's tenure at the Federal Reserve, which monetary policy action was most closely associated with the movement along the Phillips curve?

Accepted Answer

A sharp contractionary monetary policy that reduced inflation but temporarily increased unemployment.

Question 16

If the central bank wants to implement a contractionary monetary policy, which of the following actions would it most likely take?

Accepted Answer

Sell government securities in the open market.

Question 17

Which of the following scenarios best illustrates the multiplier effect in the AD-AS model?

Accepted Answer

An initial increase in government spending leads to a larger overall increase in aggregate demand and output.

Question 18

Which of the following best describes required reserves in the banking system?

Accepted Answer

The minimum fraction of deposits that banks must hold as reserves, as mandated by the central bank.

Question 19

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

Accepted Answer

The multiplier is $$\frac{1}{1-0.9} = 10.$$

Question 20

Which of the following would shift the short-run Phillips curve (SRP) to the right?

Accepted Answer

An increase in expected inflation.

Macroeconomics Exam Study Guide: Money, Monetary & Fiscal Policy, and Phillips Curve

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