Question

If the government wants to follow an active stabilization policy when the economy is experiencing an excessively high rate of inflation then the government should increase the money supply and decrease taxes.           

Select one:

True

False

If the Fed conducts open-market purchases, the money supply increases, interest rates decrease and aggregate demand shifts to the left.

Select one:

True

False

According to supply-side economists, a reduction in the tax rate provides an incentive for people to work more and the increased work effort causes production to increase.

Select one:

True

False

If the Fed targets the interest rate, then it must buy bonds and increase the money supply if the actual interest rate is below its target interest rate.

Select one:

True

False

Open market operations by the Fed are automatic stabilizers because the FOMC automatically responds to inflationary pressures in the economy by decreasing the money supply.

Select one:

True

False

Answer 1

1. The statement is false

If the government want to follow active stabilization policy when eocnomy is experiencing as high rate of inflation then Government must follow contractionary fiscal policy.

2. The statement is False.

when fed conduts open marekt purchases , it increases the reserves with banking system , leading to higher money supply. fall in interest rate, and aggregated demand shifts to the right due to increase in borrowing at lower rate.

3.The statement is True.

Supply side economist believe that government intervention should be minimum and government should lower tax rate to increase production in long run.

4.The statement is False

IF the interest rate is below the fed target range, then it must sell bonds to banks and move excess reserves out of banking system leading to less money supply within the banking system and rise in interest rates.

5.The statement is False

The automatic stabilizers are used in fiscal side.The fed conducts active role with open market operations whenever it feels it is necessary to change money supply.