Question 1

Which of the following best defines fiscal policy?

Accepted Answer

The use of government spending and taxation to influence the economy.

Question 2

Who is credited with developing modern fiscal policy, and during which historical period did it become widely adopted?

Accepted Answer

John Maynard Keynes during the Great Depression.

Question 3

If the economy is experiencing a recession, which fiscal policy action is most appropriate?

Accepted Answer

Increase government spending and/or decrease taxes.

Question 4

Which of the following is NOT one of the three main time lags associated with fiscal policy?

Accepted Answer

Transmission lag

Question 5

Automatic stabilizers in fiscal policy are best described as:

Accepted Answer

Government programs that automatically increase spending or decrease taxes when the economy slows, without new legislative action.

Question 6

A government budget deficit occurs when:

Accepted Answer

Government expenditures exceed government revenues in a given year.

Question 7

Which of the following statements about the U.S. national debt is correct?

Accepted Answer

It is the total accumulation of past government deficits minus surpluses.

Question 8

Which of the following is an example of an entitlement program?

Accepted Answer

Social Security

Question 9

Which of the following is NOT one of the four primary functions of money?

Accepted Answer

Means of production

Question 10

In a barter economy, which of the following problems is most significant?

Accepted Answer

The double coincidence of wants

Question 11

Which of the following assets is considered the most liquid?

Accepted Answer

Currency (cash)

Question 12

A fiduciary monetary system is one in which:

Accepted Answer

Money is backed by the trust in the issuing authority rather than a physical commodity.

Question 13

Which of the following is included in the M1 money supply?

Accepted Answer

Demand deposits (checking accounts)

Question 14

Which of the following best describes the Federal Reserve System (the Fed)?

Accepted Answer

A central bank with a Board of Governors and 12 regional Federal Reserve Banks.

Question 15

Which of the following is NOT a function of the Federal Reserve?

Accepted Answer

Setting fiscal policy

Question 16

The FDIC (Federal Deposit Insurance Corporation) was created to:

Accepted Answer

Insure deposits in commercial banks up to a certain limit.

Question 17

Suppose the government increases spending by $100 million during a recession. If the marginal propensity to consume (MPC) is 0.8, what is the total increase in GDP according to the simple spending multiplier formula?

Accepted Answer

The spending multiplier is $$\frac{1}{1-0.8} = 5$$, so the total increase in GDP is $$100 	ext{ million} 	imes 5 = 500 	ext{ million}.$$

Question 18

If the government runs a budget deficit for several consecutive years, which of the following is the most likely long-term consequence?

Accepted Answer

An increase in the national debt.

Question 19

Which of the following scenarios best illustrates the use of an automatic stabilizer?

Accepted Answer

Unemployment insurance payments increase automatically when more people lose their jobs during a recession.

Question 20

If the Federal Reserve wants to decrease the money supply, which of the following actions would it most likely take?

Accepted Answer

Sell government securities in the open market.

Macroeconomics Study Notes: Fiscal Policy, Public Debt, and Money & Banking (Chapters 13-15)

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