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

Suppose the required reserve ratio is 10%. If a customer deposits $1,000 in cash into a checking account, what is the maximum potential increase in the money supply, assuming banks lend out all excess reserves?

Accepted Answer

$9,000

Question 3

According to the quantity theory of money, if the money supply increases by 5% and velocity and real output remain constant, what is the expected percentage change in the price level?

Accepted Answer

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

A sustained increase in the inflation rate.

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 stimulus package passed in response to 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 according to the simple government spending multiplier?

Accepted Answer

$500 million

Question 12

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

Accepted Answer

Government borrowing increases 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 tax multiplier?

Accepted Answer

$-3$

Question 15

Which of the following best describes the balanced-budget multiplier?

Accepted Answer

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

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 raising long-run aggregate supply.

Question 17

Which of the following is NOT a component of the federal government deficit?

Accepted Answer

Private investment spending.

Question 18

If the government increases both taxes and government spending by $50 billion, what is the expected effect on aggregate demand according to the balanced-budget multiplier?

Accepted Answer

Aggregate demand increases by $50 billion.

Question 19

Which of the following statements about the role for active fiscal policy in the business cycle is most accurate?

Accepted Answer

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

Question 20

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

Accepted Answer

An initial change in spending leads to a larger change in aggregate demand due to repeated rounds of spending.

Key Concepts in Monetary and Fiscal Policy for Macroeconomics

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