Question

1) In the Great Recession of 2008 -2009, the Federal Reserve resorted to quantitative easing because...

Select the correct answer below:

a) because it has better results than slashing the federal funds rate

b) the interest rates were already down to 0% and the economy was still in deep recession.

c) increasing the interest rates did not help the economy

d) the unemployment rate was finally starting to decline in 2009

2) Suppose that the economy is producing above the potential levels of GDP. Contractionary monetary policy by the Fed will _____.

Select the correct answer below:

a) raise the price level and raise the equilibrium GDP

b) lower the price level and raise the equilibrium GDP

c) lower the price level and lower the equilibrium GDP

d) raise the price level and lower the equilibrium GDP

3) If the budget is balanced and not allowed to fluctuate each and every year, this means that

Select the correct answer below:

a) the government is being prudent in managing the budget

b) the economy will stabilize

c) recessions will be prevented

d) automatic stabilizer cannot do their job of stabilizing the economy

4) Which of the following best defines the term budget deficit?

Select the correct answer below:

a) A budget deficit is more likely during an economic boom when tax revenues increase due to increased economic activity.

b) A budget deficit is a financial situation in which the government receives more money in taxes than it spends in a year.

c) A budget deficit is a financial situation in which the federal government spends more money than it receives in taxes in a given year.

d) A budget deficit decreases the level of aggregate demand.

5) Suppose that the Fed reduces the required reserves for all banks. What will happen as a result?

Select the correct answer below:

a) money supply will fall

b) money supply will increase

c) banks will choose to hold fewer extra reserves

d) banks will choose to hold more extra reserves

6) A reduction in loanable funds which raises the interest rate is caused by

Select the correct answer below:

a) expansionary monetary policy

b) lower required reserves

c) contractionary monetary policy

d) lower discount rate

Answer 1

1) a) because it has better results than slashing the federal funds rate
(Quantitative easing is used to increase the money supply in the economy so it has better results than slashing the federal funds rate)

2) d) raise the price level and lower the equilibrium GDP
(Contractionary monetary policy will decrease AD which will raise the price level and lower the equilibrium GDP)

3) d) automatic stabilizer cannot do their job of stabilizing the economy
(As budget is balanced so automatic stabilizers will not be able to their job as government will use discretionary policies.)

4) c) A budget deficit is a financial situation in which the federal government spends more money than it receives in taxes in a given year.
(Budget deficit means spending > revenues.)

5) b) money supply will increase
(As required reserve ratio is lowered, money supply increases in the economy.)

6) c) contractionary monetary policy
(Contractionary monetary policy reduces money supply which reduces loanable funds and raises interest rate.)