Economics Multiple Choices


1. The Keynesians would recommend

A. Higher taxes when there is excess aggregate demand

B. Lower government expenditures when there is a shortfall in aggregate demand

C .Reliance on the market rather than the government for the adjustment when an undesirable level of aggregate demand occurs

D. Lower taxes when there is excess aggregate demand

2. which of the following would cause both an increase in the price level and an increase in real output?

A. A tax hike

B. Decrease in productions cost

C. An increase in transfer payments

D.A decrease in government spending

3. Assume the economy is operating at full employment. Which of the following policy actions will allow aggregate spending to increase but will not increase the size of the government in the process?

A. Increase government spending and leave tax rates unchanged

B .Decrease tax rates and leave government spending unchanged

C. Increasing government spending and taxes by the same amount

D .Decrease government spending by more than an increase in taxes

4. If the aggregate demand increases by the amount of the recessionary GDP gap and the aggregate supply is upward sloping

A. The economy will move to full employment

B. An AD surplus will occur

C.A recessionary GDP gap will still exist

D. An inflationary GDP gap will develop

5. Assume the MPC is 0.75.The change in total spending for the economy due to $150 billion government spending increase is:

A. $75 billion

B. $150 billion

C. $600 billion

D. $750 billion

6. To eliminate an AD shortfall of $120 billion when the economy has an MPC of 0.75,the government should decrease taxes by:

A. $400billion

B. $120billion

C. $30 billion

D. $40 billion

7. The fiscal stimulus associated with a tax cut is:

A. The same as the stimulus associated with an increase in transfer payment.

B. The same as the stimulus associated with a decreased in transfer payment

C .Less than the stimulus associated with the increase in transfers’ payments

D. Greater than the stimulus associated with an increase in government spending

8. Assume the MPC is 0.60, if the government cuts spending by $10billion and cuts taxes by $10 billion simultaneously, the federal budget will:

A. Not change and the aggregate demand unchanged

B. Not change and the aggregate demand will decrease by $10billion

C. Not change and aggregate demand will increase by $10billion

D. Decrease by $10billion and the aggregate demand will decrease by $10billion

9. Suppose the government decides to increase taxes by $20 billion in order to increase social security benefits by the same amount .if prices remain at the current levels, this combined tax-transfer policy will:

A .Leave aggregate demand unchanged

B .Increase aggregate demand by $20 billion.

D .Increase aggregate demand more than $20 billion after all multiplying effects.

D. Decrease aggregate demand by $20billion

10. The crowding out effect refers to a decrease in

A. Consumption or investment as a result of an increase in government borrowing

B. Investment resulting from an increase in consumption and a decrease in savings

C. Government spending as a result from a decrease in taxes

D. Consumption resulting from an increase in investment

11. Which of the following is an appropriate fiscal prescription for the government to follow?

A. Deficit reduction during a recession

B. Deficit reduction where there is excess AD

C. Deficit expansion in an inflationary gap

D. Deficit reduction during war

12. Which of the following is more likely to cause budget surplus?

A. Fiscal restraint when an economy is in recession

B. Fiscal restraint when the economy is booming

C. Fiscal stimulus when the economy is in recession

D. Balancing the budget when the economy is in recession

13. Automatic stabilizers tend to stabilize the level of the economy activity because they:

A. Are changed quickly by the Congress

B. Increase the size of the multiplier

C. Increase spending during recessions and reduce spending inflationary periods

D. Control the rate of change in prices

14. The structural deficit represents:

A. Federal revenues at full employment minus federal expenditures at full employment under the current fiscal policy.

B. Federal Reserves minus expenditures under current fiscal policy at current output

C. A measure in the size of recessionary or inflationary gaps

D. The differences between expenditures at full employment and expenditures at cyclical employment

15. The major reason why budgets deficits were reduced during the 1990s and why there was a budget surplus in 1998-2000 is because of:

A. President Clinton’s deficit reduction policies

B. The significant reductions in federal spending

C. Structural surpluses during the period

D. The growth of the U.S. economy

16. The national debt

A.Is paid of each fiscal year when the debt is refinanced

B. Will never be paid off in any given year, but it will be entirely paid when it is refinanced over a number of years.

C. Will be paid off when the budget is finally balanced

D. Equals the dollar amount of outstanding U.S Treasury bonds

17. The US federal debt that accumulated between 1970 and 1997:

A. Caused economic significant damage to the US economy

B .Is an asset and liability to US economy

C. Occurred at the expense of foreign sector

D. Occurred without an increase in the size of the government sector

18. Which of the following is true concerning the external financing of the debt?

A. It shifts production possibilities to the right

B. It allows us to get more public sectors goods by cutting back private sectors goods

C. It must be repaid with exports of real goods and services

D. The true burden falls to current generation

19. Savings accounts are included in:

A.M1, M2, and M3

B.M1 but not M2

C.M2 but not M3

D.M2 and M3 but not M1

20. Suppose Oscar withdraws $100 from his checking account and deposits it into savings account .this transaction causes M1 to:

A. Increase by $100 and M2 remains the same

B. Decrease by $100 and M2 remains the same

C. Decrease by 100 and M2 to increase by $100

D. Remain the same and M2 to increase by $100

21.Suppose a banking system has $120million in deposits, a required reserve ratio of 20 percent and total bank reserves for the whole system of $100million.Then the potential deposit creating for the whole system is equal to

A. $120million

B. $76million

C. Zero

D. $380million

22. Suppose all the banks in the Federal Reserve System have $500 billion in transactions accounts, the required reserve ratio is 0.30 and there are no excess reserves in the system If the required reserve ratio is changed to 0.25, then the total lending capacity of the system is increased by:

A. $1billion

B. $30 billion

C. $25 billion

D. $100 billion

23. A change in the reserve requirement is the tool used least often by Federal Reserve because it:

A. Does not affect bank reserves

B. Can cause abrupt changes in the money supply

D. Does not affect the money multiplier

D. Has no impact on the lending capacity of the banking system

24. If excess reserve is too large a bank is likely to:

A. Buy government securities

B. Borrow in the federal funds market

C. Borrow reserves from the discount window

D. Buy stock in a corporation

25. The Federal Reserve can increase the federal funds by

A. Selling bonds which causes market interest rates to rise

B. Buying bonds

C. Simply announcing a higher rate since the Fed has direct control of this interest rate

D. Changing the money multiplier

26. In order to increase the money supply the Fed can:

A. Raise the reserve requirements, increase the discount rate, or sell bonds.

B. Raise the reserve requirements, increase the discount rate, or buy bonds.

C. Lower the reserve requirements, increase the discount rates, or buy bonds

D. Lower the reserve requirements, decrease the discount rate, or buy bonds

27.During periods of hyperinflation money does not hold its value long enough to make everyday market purchases therefore people hold as little as possible for a short as time as possible. This description implies that the

A. Transactions demand for money has decreased

B. Precautionary demand for money has increased

C .Speculative demand for money has decreased

D. Portfolio demand for money has decreased

28. The market demand for money is:

A. A horizontal curve, where the quantity demanded changes but the interest is constant

B. An upward sloping demand curve, where more money is held when interest rates goes higher.

C. A vertical demand curve, where the same amount of money is held regardless of the interest rate

D. A downward sloping demand curve, where money is held at lower interest rate.

29. Which of the following shifts in the demand for money or supply of money is most likely to occur as the result of recession?

A. The demand curve shifts leftward

B .The supply curve shifts leftward

C. The demand curve shifts rightward

D. The supply curve shifts rightward

30. Ceteris paribus, if the Fed sells bonds through open market operations, the money;

A. Supply curve should shift rightward

B. Supply curve should shift leftward

C. Demand curve should shift rightward

D. Demand curve should shift leftward

31. The most visible market signal of the fed’s activity is the:

A. Equilibrium interest rate

B. Federal funds rate

C. Discount rate

D. Prime lending rate

32. If the fed’s objectives to stimulate the economy, which of the following gives the correct sequence of events?

A .The money supply increases, interest rate decrease, investment increases, AD increases

B. The money supply increases, interest rate decrease, investment increases, AS increases

C. The money supply decreases, interest rate increase, investment decreases, AD decreases

D. The money supply decreases, interest rate increase, investment increases, AD increases

33. The Fed could sell bonds in the open market in an effort to keep interest rates constant when;

A. The discount rate increases.

B. The money demand increases.

C. The reserve requirement increases

D. Money demand decreases

34. Which shift is mostly to occur if the Fed increases the discount rate?

A.AS should shift leftward

B.AS should shift rightward

C.AD should shift leftward

D.AD should shift rightward

35. All the following impact the effectiveness of the Fed policy except:

A. How well the Treasury follows the Fed’s direction for releasing money

B. The willingness or the reluctance of banks to lend funds

C. Global sources of money

D. The responsiveness of interest rates to changes in the money supply

36. Which of the following is true about monetary policy in the liquidity trap?

A. Monetary policy will be unable to reduce interest rates further to stimulate investments

B. The opportunity cost of holding money is relatively high at interest rates implied by the liquidity trap.

C. An expansion of the money supply will have the perverse effect of raising interest rates when the economy is in the liquidity trap

D. The demand for money is interest-inelastic in the liquidity trap.

37. If the real output increases by 5 percent per year and velocity is stable, in order to keep the price level stable:

A. The interest rate must increase by 5 percent per year

B. Velocity must increase by 5 percent per year

C. The money supply must increase by 5 percent per year

D. The money supply must increase by more than 5 percent per year because nominal output is greater than 5 percent

38. Assuming effective price controls and a constant velocity of money, a decrease in the discount rate could temporally result in:

A. Higher V

B. Higher Q

C. Higher P

D. Lower M

39. The trade –off between unemployment and inflation originates in the:

A. Vertical AS curves

B. Downward sloping AS curve

C. Upward sloping AD curve

D. Upward sloping AS curve.

40. Which of the following will cause the Phillips curve to shift to the left?

A. Attacks from terrorists

B. Increasing regulation in the economy

C .Increasing the marginal tax rate on excess profit

D. Job-search assistance

41. Macro misery diminished during the first Reagan administration which means that the Phillips curve:

A. Maintained its position despite important changes in the composition of the labor force

B. Shifted to the left, implying an easy of the tradeoff between inflation and unemployment

C. Shifted the right, implying that stagflation had become a more acute problem than before.

D. Flattened out, implying that some amount of inflation is consistent with any rate of unemployment

42. A decrease in marginal tax rates will cause entrepreneurship to —— and AS to shift to the ———

A. Increase; left

b. Increase; right

C. Decrease; left

D. Decrease; right

43. Supply- siders believe:

A. Tax rebates shifts the Phillips curve to the left

B. Tax rebates have no effect on work effort

C. Tax rebates provide greater incentives for work, production and investments

D. Tax rebates directly affect the supply side of the economy

44. For a given amount of fiscal restraint, an open economy will experience, ceteris paribus, a shift in the aggregate demand is:

A. Greater than in closed economy resulting in a larger decrease in GDP

B. Less than in a closed economy resulting in larger decrease in GDP

C. Greater than in closed economy resulting in a smaller decrease in GDP

D. Less than in a closed economy resulting in a smaller decrease in GDP

45. Advocates of “fixed policy rules” believe:

A. That fine-tuning can improve macro outcomes

B. In constant increases in the money supply and balanced federal budgets

C. That the economy is better off using discretionary policy

D. That politicians can best determine when to stimulate and restrain the economy

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