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Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward

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Multiple Choice

• an equality of tax receipts and government expenditures.

• an excess of tax receipts over government expenditures.

• an excess of government expenditures over tax receipts.

• a reduction of subsidies and transfer payments and an increase in tax rates.

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Which of the following statements is correct?

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Multiple Choice

• Federal deficits were larger in the early 2000s than in the late 2000s.

• Deep tax cuts always expand tax revenues and reduce the public debt.

• The public debt has usually declined during wartime.

• There is a tendency for the public debt to grow during recessions.

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Which would tend to reduce the crowding-out effect that occurs when the federal government increases its borrowing to finance a deficit?

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Multiple Choice

• The economy is operating at full employment.

• The economy is operating at less than full employment.

• The expenditures fail to contribute to the development of human capital.

• The deficit financing reduces the profit expectations of business firms.

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If the economy is to have significant built-in stability, then when real GDP increases, the tax revenues should

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Multiple Choice

• fall proportionately more than the change in GDP.

• fall proportionately less than the change in GDP.

• rise proportionately more than the change in GDP.

• rise proportionately less than the change in GDP.

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The cyclically adjusted budget deficit in an economy is zero. If this economy goes into recession, then the actual government budget will be

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Multiple Choice

• balanced.

• in deficit.

• in surplus.

• expanding.

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Coins held in commercial bank vaults are

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Multiple Choice

• included in M1 but not in M2.

• included both in M1 and in M2.

• included in M2 but not in M1.

• not part of the nation's money supply.

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(Consider This) Credit cards are

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Multiple Choice

• the fastest-growing component of the M1 money supply.

• near monies that are part of the M2 money supply but not the M1 money supply.

• not money, as officially defined.

• also known as time deposits.

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Refer to the given list of assets.

1. Large-denominated ($100,000 and over) time deposits

2. Savings deposits

3. Currency (coins and paper money) in circulation

4. Small-denominated (under $100,000) time deposits

5. Stock certificates

6. Checkable deposits

7. Money market deposit accounts

8. Money market mutual fund balances held by individuals

9. Money market mutual fund balances held by businesses

10. Currency held in bank vaults

The M2 definition of money includes

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Multiple Choice

• items 2, 3, 4, 6, 7, 8, and 10.

• items 3, 4, 5, and 6.

• items 2, 3, 4, 6, 7, and 8.

• all of the items listed.

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In practice, during a financial crisis, the Fed and other central banks are under pressure to adopt an "extend and pretend" policy, in order to contain the wave bankruptcies. "Extend and pretend" refers to extending loans

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Multiple Choice

• only to financial firms that are solvent, as long as the firms could pledge enough assets.

• to financial firms, both solvent and insolvent, as long as the firms could pledge enough assets.

• to financial firms in need of liquidity, regardless of whether the firms pledge enough assets or not.

• to firms and then pretending that the loans are being repaid when they become due.

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The built-in stabilizers in the economy tend to

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Multiple Choice

• fully offset irregular swings in real GDP.

• magnify somewhat the irregular swings in real GDP.

• dampen the irregular swings in real GDP.

• overcompensate for the irregular swings in real GDP.

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The government bailout of large institutions creates the problem of moral hazard, which means that these large firms will

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Multiple Choice

• not be able to pay back the bailout money.

• have an incentive to make highly risky investments.

• now have to play it safer to reduce their risks.

• be limited in terms of the securities and services that they get involved in.

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A checking account entry is money because it

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Multiple Choice

• is ensured by the Federal Deposit Insurance Corporation.

• has been declared as such by the federal government.

• performs the functions of money.

• can be sold for currency.

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Which of the following statements is correct?

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Multiple Choice

• Built-in stability only partially offsets fluctuations in economic activity.

• Built-in stability works in halting inflation, but it cannot alleviate unemployment.

• Built-in stability can be relied on to eliminate completely any fluctuation in economic activity.

• Built-in stability has eliminated the need for discretionary fiscal policy.

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The accompanying table gives budget information for a hypothetical economy. Assume that all budget surpluses are used to pay down the public debt. The budget deficit in year 3 is

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Multiple Choice

• $175 billion.

• $3,050 billion.

• $100 billion.

• $295 billion.

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Which of the following fiscal policy changes would be the most contractionary?

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Multiple Choice

• a $40 billion increase in taxes

• a $10 billion increase in taxes and a $30 billion cut in government spending

• a $20 billion increase in taxes and a $20 billion cut in government spending

• a $30 billion increase in taxes and a $10 billion cut in government spending

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Refer to the diagram. Discretionary fiscal policy designed to slow the economy is illustrated by

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Multiple Choice

• the shift of curve T1 to T2.

• the shift of curve T2 to T1.

• a movement from a to c along curve T2.

• a movement from d to b along curve T1.

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Consider This) Which of the following is not part of the M2 money supply?

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Multiple Choice

• currency in circulation

• credit card balances

• small-denominated time deposits of less than $100,000

• checkable deposits

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What does it mean when economists say that home buyers are "underwater" on their mortgages?

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Multiple Choice

• Buyers owe more on their mortgage than the properties are worth.

• Buyers are financially incapable of repaying their mortgages and bankruptcy is inevitable.

• Buyers are purchasing homes on flood plains and are highly susceptible to financial losses.

• Buyers are paying interest rates substantially higher than current market interest rates, creating interest payments that create financial hardship.

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The American Recovery and Reinvestment Act of 2009 was implemented primarily to

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Multiple Choice

• reduce inflationary pressure caused by oil price increases.

• curb the overspending by households that contributed to the Great Recession.

• bring the federal budget back into balance.

• stimulate aggregate demand and employment.

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As of March 2019, more than half of the money supply (M1) was in the form of

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Multiple Choice

• currency.

• checkable deposits.

• gold coins and bars.

• savings deposits.

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If the MPS in an economy is 0.25, government could shift the aggregate demand curve rightward by $88 billion by

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Multiple Choice

• increasing government spending by $22 billion.

• increasing government spending by $88 billion.

• decreasing taxes by $22 billion.

• increasing taxes by $22 billion.

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If the price index rises from 100 to 135, then the purchasing power of the dollar will fall by about

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Multiple Choice

• 26 percent.

• 16 percent.

• 20 percent.

• 35 percent.

• 100 percent.

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The accompanying table contains hypothetical data for an economy. The size of the M2 money supply is

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Multiple Choice

• $4,200 billion.

• $1,300 billion.

• $3,730 billion.

• $2,900 billion.

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If the MPS in an economy is 0.2, government could shift the aggregate demand curve leftward by $20 billion by

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Multiple Choice

• reducing government expenditures by $4 billion.

• reducing government expenditures by $100 billion.

• increasing taxes by $20 billion.

• increasing taxes by $200 billion.

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Refer to the table. Money supply M2 for this economy is

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Multiple Choice

• $500.

• $70.

• $80.

• $510.

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If the MPC in an economy is 0.9, government could shift the aggregate demand curve rightward by $90 billion by

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Multiple Choice

• decreasing taxes by $10 billion.

• increasing government spending by $10 billion.

• increasing government spending by $81 billion.

• decreasing taxes by $90 billion.

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The economy is in a recession. The government enacts a policy to increase spending by $6 billion. The MPS is 0.2. What would be the full increase in real GDP from the change in government spending, assuming that the aggregate supply curve is horizontal across the range of GDP being considered?

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Multiple Choice

• $30 billion

• $6 billion

• $36 billion

• $18 billion

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The accompanying table contains hypothetical data for an economy. The size of the M1 money supply is

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Multiple Choice

• $1,070 billion.

• $1,000 billion.

• $70 billion.

• $1,670 billion.

• $1,420 billion.

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Refer to the accompanying table. The size of the M1 money supply is

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Multiple Choice

• $1,166 billion.

• $535 billion.

• $631 billion.

• $1,984 billion.

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An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $36 billion to reduce inflationary pressure. The MPC is 0.6. By how much should the government raise taxes to achieve its objective?

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Multiple Choice

• $24 billion

• $6 billion

• $14 billion

• $90 billion

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