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 short-term implication of expansionary monetary policy according to the short-run Phillips curve?

Accepted Answer

Lower unemployment and higher inflation.

Question 5

What is the main goal of monetary policy?

Accepted Answer

To achieve price stability and full employment.

Question 6

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

Accepted Answer

Aggregate demand shifts left, leading to lower output and lower price level.

Question 7

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

Accepted Answer

A government stimulus package passed during a recession.

Question 8

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

Accepted Answer

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

Question 9

Which of the following best describes a contractionary fiscal policy?

Accepted Answer

An increase in taxes or a decrease in government spending.

Question 10

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

$$ \500$$ 	ext{ million} $

Question 11

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

Accepted Answer

It is always equal to 1.

Question 12

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

Accepted Answer

Government borrowing raises interest rates, reducing private investment.

Question 13

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

Accepted Answer

Unemployment insurance payments.

Question 14

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

Accepted Answer

$$ \frac{1}{1-0.75} = 4 $$

Question 15

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

Accepted Answer

Changing the income tax rate.

Question 16

What is the main difference between expansionary and contractionary monetary policy?

Accepted Answer

Expansionary policy increases the money supply, while contractionary policy decreases it.

Question 17

Which of the following best describes the supply-side effects of a tax simplification policy?

Accepted Answer

It can increase aggregate supply by encouraging work and investment.

Question 18

If the government implements a tax cut and simultaneously increases government spending by the same amount, what is the expected effect on aggregate demand according to the balanced-budget multiplier?

Accepted Answer

Aggregate demand increases by the amount of the change in government spending.

Question 19

Which of the following is a key argument for active fiscal policy in the business cycle?

Accepted Answer

Active fiscal policy can help stabilize output and employment during recessions.

Question 20

Which of the following equations represents the quantity theory of money?

Accepted Answer

$$ M V = P Y $$

Monetary and Fiscal Policy: Key Concepts and Applications

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