Question

1. If the Fed conducts open-market sales, which of the following quantities increase?
a. interest rates, prices, and investment spending
b. interest rates and prices, but not investment spending
c. interest rates and investment, but not prices
d. interest rates, but not investment or prices

2. A tax cut shifts aggregate demand
a. by more than the amount of the tax cut
b. by the same amount as the tax cut
c. by less than the tax cut
d. None of the above is necessarily correct.

3. A reduction in US net exports would shift US aggregate demand
a. rightward. In an attempt to stabilize the economy, the government could increase expenditures.
b. rightward. In an attempt to stabilize the economy, the government could decrease expenditures.
c. leftward. In an attempt to stabilize the economy, the government could increase expenditures.
d. leftward. In an attempt to stabilize the economy, the government could decrease expenditures

4. Critics of stabilization policy argue that
a. “animal spirits” must be offset by active monetary policy.
b. active monetary policy is necessary for steady economic growth.
c. the lag problem ends up being a cause of economic fluctuations.
d. active fiscal policy is required for steady economic growth.

5. If people anticipate higher inflation, but inflation remains the same then
a. the short-run Phillips curve would shift right and unemployment would rise.
b. the short-run Phillips curve would shift right and unemployment would fall.
c. the short-run Phillips curve would shift left and unemployment would rise.
d. the short-run Phillips curve would shift left and unemployment would fall.

6. If a central bank increases the money supply in response to an adverse supply shock, then which of the following quantities moves closer to its pre-shock value as a result?
a. both the price level and output
b. the price level but not output
c. output but not the price level
d. neither output nor the price level

7. Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created by these continuing deficits is
a. sustainable, but the future burden on your children cannot be offset.
b. sustainable, and the future burden on your children can be offset if you save for them.
c. not sustainable, and the future burden on your children cannot be offset.
d. not sustainable, but the future burden on your children can be offset if you save for them.

8. Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?
a. Avoid unexpected changes in the inflation rate.
b. Rewrite the tax laws so that nominal gains were taxed instead of real gains.
c. Make policy that would discourage firms from issuing indexed bonds.
d. All of the above are correct.

9. Real interest rates
a. cannot be negative.
b. can be negative only if inflation is negative.
c. can be negative only if inflation is zero.
d. can be negative only if inflation is greater than zero.

Answer 1

Question 1

Option D is correct - interest rates, but not investment or prices

When the Federal conducts open market sales in the market it leads to decrease in the money supply in the economy. This decrease in money supply leads to increase in the interest rates (as interest rates are the price at which money is borrowed). With fall in money supply there will be a fall in consumer spending and so with lesser aggregate demand, the prices level also falls. Decrease in money supply will decrease in the investment spending too. This is becuase the interest rates are high and it will be costly for the borrowers to lend money.

Question 2

Option A is correct - by more than the amount of tax cuts

Tax cuts leads to shift in the aggregate demand curve to the right. This is because tax cuts leads to increase in the disposable income which leads to increase in the conusmption spending which increases the aggregate demand curve to the right by increasing the aggregate demand. Now, this increase will be more than the tax cut because of the multiplier effect. Because of the multiplier effect, the effect of tax cut will be more on the aggregate demand than the amount of the tax cut.

Question 3

Option C is correct - leftward. In an attempt to stabilize the economy, the government could increase expenditure

We know that net exports is a component of aggregate demand. Thus, a decrease in the net exports will lead to decrease in the aggregate demand and will shift it to the left. To stabilize this effect, the government will use the expansionary fiscal policy that will increase government spendings and that leads to increase in the expenditure in the economy.

Question 4

Option C is correct - the lag problem ends up being a cause of economic fluctuations

There is a lag problmen which reduces the effectiveness of stabilization policies of government and central bank like fiscal and monetary policy. This is because the policies take time to implement and show results as it is applied in the whole economy. And by the time it happens, the situation worsens and the policy becomes ineffective.