Question

1. Which of the following would result in the largest increase in aggregate demand?

• A. A R30 billion tax decrease and a R30 billion open market sale of government securities.
• B. A R30 billion increase in social security payments and a R30 billion open market sale of government securities.
• C. A R30 billion increase in military expenditure and a R30 billion open market purchase of government securities.
• D. A R30 billion tax increase and a R30 billion open market purchase of government securities.
• E. A R30 billion increase in military expenditure and a R30 billion open market sale of government securities

2.Suppose that the economy is operating at full employment. If the government wants to discourage consumption spending and stimulate investment spending, which of the following combinations of monetary and fiscal policy would most likely achieve these goals, assuming that consumption does not depend on the interest rate?

• A. Monetary Policy-decrease money supply and Fiscal Policy-decrease personal income taxes
• B. Monetary Policy- Increase money supply and Fiscal Policy- Increase personal income taxes
• C. Monetary Policy- decrease money supply and Fiscal Policy- Increase personal income taxes
• D. Monetary Policy- decrease money supply and Fiscal Policy-Increase government spending
• E. Monetary Policy- Increase money supply and Fiscal Policy- decrease personal income taxes

3.To counteract a recession, the SARB could:

• A. Raise the required reserve ratio and lower the repo rate.
• B. Buy government securities on the open market and raise the required reserve ratio.
• C. Sell government securities on the open market and raise the repo rate.
• D. Buy government securities on the open market and lower the required reserve ratio.
• E. Buy government securities on the open market and raise the repo rate.

4.Which of the following will lower inflationary expectations?

• A. An increase in consumer and business optimism.
• B. An increase in the money supply.
• C. The SARB announcement that it will steadily raise the repo rate.
• D. The government's announcement that it will increase spending on infrastructure.
• E. An increase in the value of stocks.

5. Which of the following statements describes the effect of the South African Reserve Bank selling government bonds? (i) The money supply decreases and the interest rate increases. (ii) The money supply increases and the interest rate decreases. (iii) There is a decrease in equilibrium output in response to increase in interest rate. (iv) There is an increase in equilibrium output in response to decrease in interest rate.

• A. (ii) and (iv) only.
• B. (i) and (iii) only.
• C. (ii) only.
• D. (i) and (iv) only.
• E. (iv) only.

Answer 1

1.

Correct Answer:

C.

Alternative C shows both of expansionary fiscal policy as well as expansionary monetary policy, that will help maximum increase in AD.

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2.

Correct Answer:

B

As per the alternative B, when government increases personal income tax, then it decreases the consumption spending. At the same time, when money supply increases with decrease in interest rate, then it does not affect consumers, put make positive impact upon the firms and investment spending increases.

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3.

Correct Answer:

D

Buying securities as the part of open market operations and lowering required reserve ratio, is the part of expansionary monetary policy that lead to fight against recession.

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4.

Correct Answer:

C

Steadily raising the repo rates, means the interest rate is going to rise slowly. It will discourage consumption and inflation will lower.

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5.

Correct Answer:

B

Statement i and iii are correct when interest rate increases and government securities are sold in the market.