Question 1

Which of the following is NOT a function of money?

Accepted Answer

Source of government revenue

Question 2

If the required reserve ratio is 10%, what is the maximum deposit multiplier according to the simple money multiplier formula?

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 best describes the short-run Phillips curve?

Accepted Answer

It shows an inverse relationship between inflation and unemployment

Question 5

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

Accepted Answer

Balanced budget

Question 6

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

Accepted Answer

Aggregate demand shifts to the right

Question 7

Which of the following is an example of a contractionary monetary policy?

Accepted Answer

The central bank sells government bonds

Question 8

Which are the two main tools of fiscal policy?

Accepted Answer

Government spending and taxation

Question 9

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

Accepted Answer

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

Question 10

If the marginal propensity to consume (MPC) is 0.8, what is the government spending multiplier?

Accepted Answer

$$\frac{1}{1-0.8} = 5$$

Question 11

Which of the following best describes crowding out?

Accepted Answer

Government borrowing raises interest rates, reducing private investment

Question 12

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

Accepted Answer

Unemployment insurance payments

Question 13

If the government increases taxes by $100 billion and the marginal propensity to consume (MPC) is 0.75, what is the tax multiplier?

Accepted Answer

$$-\frac{0.75}{1-0.75} = -3$$

Question 14

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

Accepted Answer

It increases incentives to work and invest

Question 15

In the AD-AS model, how does a positive government purchases multiplier affect equilibrium output?

Accepted Answer

It increases equilibrium output by more than the initial increase in government spending

Question 16

Which of the following best describes discretionary fiscal policy?

Accepted Answer

Deliberate changes in government spending or taxes to influence the economy

Question 17

If the federal government runs a budget deficit, what happens to the national debt?

Accepted Answer

The national debt increases

Question 18

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

Accepted Answer

Increasing government spending on infrastructure

Question 19

If the economy is experiencing high inflation, which policy combination is most appropriate?

Accepted Answer

Contractionary monetary and contractionary fiscal policy

Question 20

Which equation represents the Quantity Theory of Money?

Accepted Answer

$$M 	imes V = P 	imes Y$$

Monetary and Fiscal Policy: Key Concepts and Applications

Study Guide - Practice Questions

Study Guide - Flashcards