Practice Problems 30-32

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Cordelia McLaughlin
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1 Practice Problems The budget balance is calculated as: A. T G TR B. T + G TR C. T G + TR D. T + G + TR E. TR T G 2. The government budget balance equals: A. Taxes + Government purchases + Government transfers. B. Taxes Government purchases Government transfers. C. Taxes Government purchases + Government transfers. D. Taxes + Government purchases Government transfers. E. Government transfers - Taxes + Government purchases. 3. The cyclically-adjusted budget balance is: A. an estimate of the contractionary fiscal policy needed to close an inflationary gap. B. an estimate of the tax increase needed to compensate for larger government transfers so that the budget remains balanced. C. an estimate of the expansionary fiscal policy needed to close a recessionary gap. D. an estimate of what the budget balance would be if real GDP was exactly equal to potential output. E. an estimate of what the budget balance would be if the unemployment rate was equal to zero. 4. When the federal government finances a deficit, the government may: A. lower taxes. B. increase spending. C. reduce interest rates. D. borrow funds. E. increase transfer payments. 5. When the budget is in deficit, governments generally: A. lower taxes. B. increase the public debt. C. sell public assets like national parks. D. increase military spending. E. increase transfer payments. 6. A government would be able to pay off its debt, if: A. both GDP and the government's debt grow at the same rate. B. their debt-gdp ratio is increasing. C. the debt grows faster than the population. D. the debt grows faster than the GDP. E. the GDP grows faster than the government's debt. 7. The government deficit: A. is the essentially the same as the government debt. B. is much higher than the government debt. C. measures the difference between the amount which government spends and the amount it collects in tax revenues in a given period of time. D. is the total amount of money a government owes at a particular point in time. E. is the total amount of money a government owes to other nations. 8. A government encounters a recessionary gap and uses expansionary fiscal policy to correct this problem. It may: A. find the policy ineffective especially if a budget deficit is present and 'crowding occurs. B. find the policy effective, even if they have to borrow. C. cause its budget balance to move towards a surplus. D. find the budget balance to be rising. E. find that interest rates fall as more government borrowing is used to fund expansionary policies. 9. During an expansion, economists generally believe that an economy should: A. balance its budget. B. run a budget deficit. C. run a budget surplus. D. be able to pay off all of its debt. E. see rising levels of unemployment. 10. The economy of Franklandia is producing beyond potential GDP. In this situation, we expect that sound fiscal policies should create A. a budget deficit as tax revenues should exceed government spending. B. a budget surplus as tax revenues should exceed government spending. C. a budget deficit as tax revenues should fall short of government spending. D. a balanced budget as tax revenues should exceed government spending. E. a budget surplus as tax revenues should fall short of government spending.

2 Figure 31-2: Changes in the Money Supply 11. Use the Changes in the Money Supply Figure If the supply of money shifts from S 1 to S 2, the Fed must have government bonds in the open market. A. sold B. bought C. issued new D. borrowed E. lent 12. When the Fed buys Treasury bills, this leads to: A. a decrease in the money supply. B. an increase in the money supply. C. an increase in short-term interest rates. D. an increase in the Fed funds rate. E. a decrease in the quantity of money. 13. Expansionary monetary policy: A. increases the money supply, interest rates, consumption, and investment. B. decreases the money supply, interest rates, consumption, and investment. C. increases the money supply, decreases interest rates, and increases consumption and investment. D. decreases the money supply, increases interest rates, and decreases consumption and investment. E. increases the money supply, decreases interest rates, and decreases consumption and investment. 14. To close a recessionary gap using monetary policy, the Fed should the money supply to investment and consumer spending, and shift the aggregate demand curve to the. A. increase; increase; left B. decrease; decrease; left C. increase; increase; right D. decrease; decrease; right E. decrease; increase; right 15. Monetary policy affects aggregate demand through changes in: A. government spending. B. both consumption and investment spending. C. tax receipts. D. investment spending, but not consumption spending. E. consumption spending, but not investment spending. 16. Contractionary monetary policy: A. is appropriate if there is a recessionary gap. B. decreases aggregate demand. C. increases aggregate demand. D. helps solve the problem of unemployment. E. is an appropriate mechanism for long-run economic growth. 17. Expansionary monetary policy causes: A. a decrease in interest rates, an increase in in B. a decrease in interest rates, a decrease in in C. an increase in interest rates, an increase in in D. an increase in interest rates, a decrease in planned investment spending, and a decrease in E. a decrease in interest rates, an increase in planned investment spending, and a decrease in 18. Contractionary monetary policy causes: A. a decrease in interest rates, an increase in in B. a decrease in interest rates, a decrease in planned investment spending, and a decrease in C. an increase in interest rates, an increase in in D. an increase in interest rates, a decrease in planned investment spending, and a decrease in E. an increase in interest rates, a decrease in planned investment spending, and a increase in

3 19. To close an inflationary gap using monetary policy, the Fed should the money supply to investment and consumer spending, and shift the aggregate demand curve to the. A. increase; increase; left B. decrease; decrease; left C. increase; increase; right D. decrease; decrease; right E. decrease; increase; right 20. Given a recessionary gap, the Fed will use monetary policy to interest rates and aggregate demand. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease E. decrease; hold constant Figure 31-3: The Money Supply and Aggregate Demand 21. Use the The Money Supply and Aggregate Demand Figure If the economy is experiencing a recessionary gap, the Fed would government bonds, which would the money supply and interest rates. This is shown in Panel. A. sell; decrease; increase; (b) B. buy; decrease; decrease; (a) C. buy; increase; decrease; (a) D. sell; increase; decrease; (a) E. buy; increase; decrease; (b) 22. An increase in the supply of money will lead to in equilibrium real GDP and in equilibrium interest rate. A. an increase; an increase B. an increase; a decrease C. a decrease; an increase D. a decrease; a decrease Figure 31-5: Monetary Policy I E. an increase; no change 23. A decrease in the supply of money will lead to in equilibrium real GDP and in equilibrium price level. A. an increase; an increase B. an increase; a decrease C. a decrease; an increase D. a decrease; a decrease E. no change; a decrease 24. To fight a recession, the Fed should conduct monetary policy to interest rates and shift aggregate demand to the. A. expansionary; decrease; left B. contractionary; increase; left C. contractionary; decrease; right D. expansionary; decrease; right E. expansionary; increase; right

4 25. Use the Monetary Policy I Figure If the money market is initially at E 1 and the central bank chooses to buy bonds, then: A. AD 2 will shift to the right, creating an inflationary gap. B. AD 2 may shift to AD 1, creating a recessionary gap. C. AD 1 may shift to AD 2, closing an existing recessionary gap. D. AD 1 will shift to the left, increasing an existing recessionary gap. E. AD 2 will shift to the right, increasing an existing recessionary gap. Figure 31-6: Monetary Policy II 26. Use the Monetary Policy II Figure Starting from short-run equilibrium at Y 2, sound central bank policy would be: A. contractionary monetary policy to fight high inflation. B. expansionary monetary policy to fight high unemployment. C. neutral to increase LRAS. D. balanced to fight high inflation. E. contractionary monetary policy to fight high unemployment. Figure 31-7: Monetary Policy III

5 29. Use the Monetary Policy and the AD SRAS Model Figure If the economy is in a recessionary gap at point f, it could move to point g due to: A. a decrease in government spending. B. raising the discount rate. C. a decrease in the money supply. D. buying government securities in the open market. E. raising the reserve requirement Use the Monetary Policy III Figure The economy is in short-run equilibrium. Sound monetary policy will lead to an equilibrium GDP of: A. Y 1. B. Y 2. C. Y 3. D. Y 4. E. P 1. Figure 31-8: Monetary Policy and the AD SRAS Model 28. Use the Monetary Policy and the AD SRAS Model Figure The economy is likely to move from point i to point h due to: A. an increase in the money supply. B. raising the discount rate. C. a decrease in the money supply. D. selling government securities in the open market. E. raising the reserve requirement. 30. Use the Monetary Policy and the AD SRAS Model Figure If the economy is experiencing an inflationary gap at point h, it can move to point i due to: A. an increase in the money supply. B. lowering the discount rate. C. a decrease in the money supply. D. buying government securities in the open market. E. An increase in government spending. 31. Consider an economy that is currently facing a recessionary gap. The Federal Reserve decides to use expansionary monetary policy to close that gap. As a result of this policy, in the short run: A. the money supply will decrease, the interest rate will fall, investment and consumption spending will decrease, and GDP will increase via the multiplier. B. the money supply will increase, the interest rate will increase, investment and consumption spending will decrease, and GDP will decrease via the multiplier. C. the money supply will decrease, the interest rate will increase, investment and consumption spending will decrease, and GDP will decrease via the multiplier. D. the money supply will increase, the interest rate will fall, investment and consumption spending will increase, and GDP will increase via the multiplier. E. the money supply will increase, the interest rate will fall, investment and consumption spending will decrease, and GDP will increase via the multiplier.

6 Figure 31-9: Output Gap contractionary monetary policy. 34. The Federal Open Market Committee wishes to decrease the federal funds target rate. It does this by: A. performing an open market purchase. B. performing an open market sale. C. increasing the demand for money. D. offering tax breaks to specific businesses. E. increasing taxes on specific businesses. 32. Use the Output Gap Figure Consider the figure provided. If the economy is producing Y 1, then it has: A. an inflationary gap, as actual real GDP exceeds potential real GDP and the Fed should use contractionary monetary policy. B. a recessionary gap, as potential real GDP expansionary monetary policy. C. an inflationary gap, as potential real GDP contractionary fiscal policy. D. a recessionary gap, as actual real GDP exceeds potential real GDP and the Fed should use expansionary fiscal policy. E. an inflationary gap, as potential real GDP expansionary fiscal policy. 33. Use the Output Gap Figure Consider the figure provided. If the economy is currently producing Y 2, then it has: A. a recessionary gap, as actual real GDP exceeds potential real GDP and the Fed should use expansionary fiscal policy. B. a recessionary gap, as potential real GDP expansionary monetary policy. C. an inflationary gap, as actual real GDP exceeds potential real GDP and the Fed should use contractionary monetary policy. D. an inflationary gap, as potential real GDP contractionary fiscal policy. E. a recessionary gap, as potential real GDP 35. If the Federal Reserve conducts an open market purchase, one can expect: A. interest rates in the money market to fall. B. real GDP to decrease. C. interest rates in the money market to rise. D. the money supply to decrease. E. the unemployment rate to rise. 36. If the Federal Reserve uses expansionary monetary policy, then: A. there is a negative short-run effect on real GDP but prices remain unchanged in the long run. B. there is a positive short-run effect on real GDP but GDP remains equal to potential GDP in the long run. C. there is a positive long-run effect on real GDP but GDP remains unchanged at its potential level in the short run. D. there is a positive short-run effect on the price level but the aggregate price level remains unchanged in the long run. E. there is a negative short-run effect on the price level but the aggregate price level remains unchanged in the long run. 37. In the long run, changes in the money supply: A. affect both the aggregate price level and aggregate output. B. affect only the price level but they do not change aggregate output. C. affect only aggregate output but not the aggregate price level. D. have no impact on either the aggregate price level or aggregate output. E. affect only the unemployment rate, but not the aggregate price level.

7 38. Monetary neutrality implies that in the long run: A. monetary policy does not affect the level of economic activity. B. aggregate supply is independent from monetary policy. C. changing the money supply does not have any effect on the aggregate price level. D. aggregate demand is independent from monetary policy. E. monetary policy is effective at increasing long-run aggregate supply. 39. Money is neutral: A. in the short run since it cannot alter the real aggregate output. B. in both the short and long run since it cannot alter price levels. C. in the long run since it cannot alter the real aggregate output. D. in the short run since it cannot alter the price levels. E. in the long run since it cannot alter the real interest rate. 40. If the monetary authorities decide to increase the nominal money supply by 10% when the economy is at its full employment level of output, in the long run the aggregate price level increases by and real GDP. A. 10%; increases by 10% B. 5%; increases by 5% C. 10%; returns to the potential level of output D. 5%; increases by 20% E. 0%; returns to the potential level of output 41. In economies that are experiencing persistently high inflation, an increase in the money supply: A. will translate into a proportional increase in the aggregate price level much quicker than usual. B. will translate into a proportional increase in aggregate output but will not affect the price level in the long run. C. will not affect either the aggregate price level or the aggregate output. D. will translate into a proportional increase in the aggregate output much quicker than usual. E. will translate into a less than proportional increase in the aggregate price level in the long run. 42. Use the AD AS Figure Refer to the AD AS diagram. Suppose the economy is initially at E 1, and then moves to E 2 where AD 2 intersects SRAS 1. Now, suppose that the SRAS 1 shifts to SRAS 2, because: A. real wages rise in the long run. B. nominal wages rise in the long run. C. the real money supply rises in the long run. D. aggregate real output rises in the long run. E. nominal wages fall in the long run. Figure 32-3: AD AS 43. Use the AD AS Figure Refer to the AD AS diagram. Suppose the economy is initially at E 1, and then moves to E 2 where AD 2 intersects SRAS 1. Finally the economy moves to E 3. The classical model of price level: A. assumes that the economy moves from E 1 to E 3 and ignores E 2; thus, only inflation increases but real GDP remains the same. B. assumes that the economy moves from E 2 to E 3 and ignores E 1; thus, only real GDP increases but inflation remains the same. C. assumes that the economy moves from E 2 to E 3; thus, only inflation decreases but real GDP remains the same. D. assumes that the economy moves from E 1 to E 2 and ignores E 3; thus, both inflation and real GDP remain the same. E. assumes that the economy moves from E 1 to E 3 and ignores E 2; thus, only real GDP increases but inflation remains the same.

8 Figure 32-4: Monetary Policy and the AD SRAS Model 44. Use the Monetary Policy and the AD SRAS Model Figure An increase in the money supply is most likely to cause a short-run shift: A. from SRAS to SRAS'. B. from AD to AD'. C. from SRAS' to SRAS. D. from AD' to AD. E. of LRAS to the right of Y p. 45. Use the Monetary Policy and the AD SRAS Model Figure The economy is likely to move from point g to point f due to: A. an increase in the money supply. B. lowering the discount rate. C. a decrease in the money supply. D. buying government securities in the open market. E. lowering the reserve requirement.

4. (Figure: Monetary Policy 1) If the money market is initially at E 2 and the central bank chooses

4. (Figure: Monetary Policy 1) If the money market is initially at E 2 and the central bank chooses Name: Date: Use the following to answer questions 1-6. Figure: Monetary Policy 1 1. (Figure: Monetary Policy 1) If the money market is initially at E 1 and the central bank chooses to sell bonds, then: