Question

1. , during the economic downturn of 2008-2009, the Federal Reserve
A. explicitly set its target rate of inflation at zero.
B. explicitly set its target rate of inflation well above zero.
C. took the unusual step of using open-market operations to purchase mortgages and corporate debt.
D. used open-market operations to purchase mortgages and corporate debt, just as it frequently does even when the economy is functioning normally.
E. reduced taxes to stimulate business and consumer spending.

2. which of the following statements is (are) correct?
A. Fiscal policy refers to changes in aggregate demand caused by changes in government spending or taxes
B. An example of fiscal policy is an act of Congress that raises the minimum wage.
C. A purchase of bonds by the Fed is an example of an expansionary fiscal policy because it is an increase in government purchases of goods and services.
D. All of the above are correct.
E. A and B, only

Which of the following statements is (are) correct?
(x) If households view a tax cut as being temporary, the tax cut has more of an effect on aggregate demand than if households view it as permanent.
(y) A decrease in taxes is an example of an expansionary fiscal policy and that policy will probably cause the aggregate demand curve to shift to the right.
(z) An increase in government purchases coupled with a decrease in taxes is an expansionary fiscal policy that will increase the budget deficit.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only.
E. (x) only

Answer 1

Answer: 1: C. took the unusual step of using open-market operations to purchase mortgages and corporate debt.

During the recession of 2008-09 the federal reserve used open-market operations in order to increase the money supply in the economy

Answer: 2: A. Fiscal policy refers to changes in aggregate demand caused by changes in government spending or taxes

Government adopts fiscal policy (expansionary and contractionary policy) to control the economic fluctuations and maintain the aggregate demand by changing government spending and tax rates

Minimum wage is decided by government in order to provide a minimum subsistence living to the labor class not related to government spending as wage is given by the employer

Sale and purchase of government bonds comes under government securities not under goods and services

Answer: 3: D. (y) and (z) only.

Expansionary fiscal policy means increase in spending and decrease in taxes by the government. The increase in spending and decrease in taxes leads to increase in the money with people which rises aggregate demand in the economy and the demand curve shifts to the right but this increased spending by government increases their expenditures while reduction in tax rates decreases government revenue which leads to budget deficit.

Budget deficit means government expenditures are higher than the revenue of the government

The permanent tax cut affects household demand more than the temporary tax cut