Question 1

If the government increases its spending or reduces its taxes in order to influence the level of economic activity,it is engaging in
A) regulatory policy
B) antitrust policy
C) monetary policy
D) fiscal policy
E) supply-management policy

Accepted Answer

Fiscal policy refers to the actions taken by the government to influence the level of economic activity by changing its spending or tax rates. Regulatory policy is focused on creating and enforcing rules and regulations to ensure certain outcomes, such as safety or environmental protection. Antitrust policy is aimed at preventing monopolies and promoting competition in markets. Monetary policy involves managing the supply of money and credit in the economy through actions such as setting interest rates or buying and selling securities. Supply-management policy involves regulating the production and distribution of certain goods or services.

Question 2

Which of the following is an implication of the classical model?
A) The supply of loanable funds curve is downward sloping.
B) The inflation rate is constantly rising.
C) Fiscal policy only changes the amount of consumption,investment and government spending,not the amount of output produced.
D) Monetary policy can change both the interest rate and real output.
E) The interest rate can only be changed by monetary policy,not by changes in government spending.

Accepted Answer

In the classical model, fiscal policy affects the allocation of resources but does not change the total output, as the economy is always at full employment.

Question 3

Crowding out refers to a(n)
A) decrease in the amount of goods produced after too many goods have crowded onto the market
B) business tactic used to steal a competitor's customers
C) increase in one sector's spending caused by an increase in another sector's spending
D) decrease in the price level after too many goods have crowded onto the market
E) decline in one sector's spending caused by an increase in another sector's spending

Accepted Answer

Crowding out refers to a situation where an increase in government spending causes a decrease in private sector spending, possibly due to higher interest rates or decreased availability of funds. This can occur because government borrowing may reduce the amount of funds available for private investment.

Question 4

Market clearing in the loanable funds market
A) violates Say's Law
B) guarantees that total spending will be just sufficient to purchase whatever output is produced
C) means that the interest rate never changes
D) guarantees that total spending will equal the quantity of loanable funds demanded
E) requires that the government run a budget deficit

Accepted Answer

Market clearing in the loanable funds market ensures that the supply of savings equals the demand for investment, which aligns with the idea that total spending will match the output produced, consistent with Say's Law.

Question 5

In the classical model,beginning from an equilibrium in which the government is running a budget surplus,
A) this will lower the wage rate
B) the demand for loanable funds will be horizontal
C) an increase in government spending will crowd out more than an equal amount of private spending
D) an increase in government spending will crowd out an equal amount of private spending
E) an increase in government spending will crowd out less than an equal amount of private spending

Accepted Answer

In the classical model, an increase in government spending will lead to an increase in demand for loanable funds, causing the interest rate to rise. This increase in interest rate will lead to a decrease in private investment, which will cause a decrease in aggregate demand (crowding out). As a result, an increase in government spending will crowd out an equal amount of private spending.

Question 6

According to the classical model,if the government wanted to increase employment,it could do so by increasing its own spending.That would lead firms to produce more output,for which they would need to hire more workers.

Accepted Answer

The classical model suggests that the economy is self-regulating and that markets always clear, meaning that any government intervention, such as increased spending, would not affect employment levels in the long run. Instead, employment is determined by factors like technology and preferences, not government spending.

Question 7

According to the classical model,if the government lowers its budget deficit,which of the following will occur?
A) The interest rate will rise,and consumption,investment and output will all decrease.
B) The interest rate will fall,consumption and investment will increase,but output will not change.
C) The interest rate will rise,and consumption,investment and output will all increase.
D) The interest rate will fall,and consumption,investment and output will all increase.
E) The interest rate will fall,consumption will not change,but investment and output will both increase.

Accepted Answer

According to the classical model, when the government lowers its budget deficit, it reduces the demand for loanable funds, leading to a decrease in the interest rate. The lower interest rate stimulates consumption and investment, but since output depends on the supply side factors of the economy, it does not change immediately. Therefore, the correct option is B - the interest rate will fall, consumption and investment will increase, but output will not change.

Question 8

When the government is running a budget surplus,
A) the demand for loanable funds includes only business investment spending
B) the supply of loanable funds includes only business investment spending
C) the loanable funds market cannot be in equilibrium
D) the supply of loanable funds includes only household saving
E) there will be an excess supply of loanable funds

Accepted Answer

The answer of When the government is running a budget...

Question 9

-Refer to Figure 8-6.Suppose that a $1 trillion increase in government spending shifted the demand for funds curve from D₁ to D₂.What would happen to the sum of investment and consumption spending? That sum would
A) remain unchanged
B) rise by $0.6 trillion
C) rise by $1 trillion
D) fall by $1 trillion
E) fall by $0.4 trillion

Accepted Answer

The answer of 
-Refer to Figure 8-6.Suppose that a $1...

Question 10

If political influences,independent of any economic forces,lead to a larger government budget deficit,what will be the effect on the loanable funds market?
A) The interest rate will rise and the amount of saving will increase.
B) The interest rate will fall and the amount of saving will increase.
C) The interest rate will rise and the amount of saving will decrease.
D) The interest rate will fall and the amount of saving will decrease.
E) The interest rate will rise but the change in saving will be ambiguous.

Accepted Answer

A larger government budget deficit increases the demand for loanable funds, leading to higher interest rates, which incentivizes more saving.

Question 11

Which of the following does not usually occur when there is an increase in government spending?
A) Government purchases crowd out private-sector spending.
B) Total spending decreases.
C) The interest rate increases.
D) Investment spending declines.
E) Household saving increases.

Accepted Answer

An increase in government spending usually leads to an increase in total spending as the government injects more money into the economy. The other options are all potential consequences of an increase in government spending, such as crowding out private-sector spending or putting upward pressure on interest rates. However, it is not typical for total spending to decrease in this scenario.

Question 12

The classical model is based on the assumption that
A) all markets clear
B) all demand curves are horizontal
C) all supply curves are vertical
D) the government's budget is always balanced
E) the quantity of loanable funds demanded is independent of the interest rate

Accepted Answer

The classical model assumes that all markets clear, meaning that prices and quantities adjust to ensure that supply equals demand in every market. This assumption allows for the efficient allocation of resources and maximizes overall economic welfare.

Question 13

Changes in government spending or taxes designed to stimulate the economy are examples of
A) fiscal policy
B) monetary policy
C) supply management policy
D) classical policy
E) regulatory policy

Accepted Answer

Fiscal policy refers to the government's use of taxation and spending to influence the economy. Changes in government spending or taxes are examples of fiscal policy. Monetary policy involves changes in the money supply and interest rates, while supply management policy refers to the regulation of the supply of goods and services. Classical policy is an economic theory that advocates for minimal government intervention in the economy, and regulatory policy refers to the government's use of regulation to achieve its goals.

Question 14

A decrease in government spending would cause all but one of the following to happen.Which is the exception?
A) The government's budget deficit would shrink.
B) The interest rate would decrease.
C) Consumption spending would increase.
D) Investment spending would increase.
E) Total output would decrease.

Accepted Answer

The answer of A decrease in government spending would cause...

Question 15

In the classical model,beginning from an equilibrium in which the government is running a budget surplus
A) the supply of loanable funds will be horizontal
B) an increase in government spending will cause the interest rate to rise
C) the supply of loanable funds will be vertical
D) an increase in government spending will crowd out less than an equal amount of private spending
E) a decrease in government spending will crowd out less than an equal amount of private spending

Accepted Answer

According to the classical model, an increase in government spending will cause a decrease in the supply of loanable funds, leading to an increase in the interest rate. This is because the government will need to borrow more money to finance its spending, thus increasing the demand for loanable funds and driving up the interest rate. Choice A is incorrect because in the classical model, the supply of loanable funds is upward sloping. Choices C, D, and E are also incorrect as they do not accurately reflect the effects of changes in government spending in the classical model.

Question 16

According to Say's Law,
A) demand creates its own supply
B) interest rates never change
C) there is never too much or too little spending
D) prices never change
E) the market for loanable funds is always in equilibrium

Accepted Answer

Say's Law suggests that supply creates its own demand, implying that there is never too much or too little spending in the economy.

Question 17

Fiscal policy is a change in either government purchases or the money supply designed to change total spending in the economy,thereby influencing the levels of employment and output.

Accepted Answer

Fiscal policy involves changes in government spending and taxation, not the money supply, which is controlled by monetary policy.

Question 18

In the classical model,if government tries to increase employment and output by increasing its own purchases,
A) it will achieve its goal and economic conditions will improve
B) it will not attain its objective unless it also decreases taxes
C) its actions will cause the interest rate to rise,which will choke off investment spending
D) firms will be motivated to increase their output,thereby creating even more jobs
E) saving will also increase,as more people are employed

Accepted Answer

According to the classical model, an increase in government purchases without any corresponding decrease in taxes will cause interest rates to rise. This increase in interest rates will crowd out private investment spending and ultimately fail to increase employment and output in the economy.

Question 19

In the classical model,beginning from an equilibrium in which the government is running a budget surplus,an increase in government spending will
A) lower the wage rate
B) increase the supply of loanable funds
C) cause total spending to decline
D) cause total spending to increase
E) leave total spending unchanged

Accepted Answer

In the classical model, an increase in government spending will be offset by a decrease in private investment due to the increase in interest rates. As a result, total spending will remain unchanged. This is known as the crowding-out effect. Furthermore, a budget surplus implies that the government is saving or reducing its debt, so the increase in spending will be financed by reducing the surplus or increasing the deficit.

Question 20

According to the classical model,an increase in government purchases will
A) lead to a change in the interest rate that encourages consumers to spend more
B) lead to a change in the interest rate that encourages private businesses to invest more
C) discourage private spending by increasing the price level
D) be partially offset by a decline in consumption and investment spending
E) leave total spending and output unchanged

Accepted Answer

In the classical model, the economy is always at full employment, so an increase in government purchases will not change total spending and output, as any increase in government spending will be offset by a decrease in private spending.

Quiz 8:The Classical Long run Model

If the government increases its spending or reduces its taxes in order to influence the level of economic activity,it is engaging in

Which of the following is an implication of the classical model?

Crowding out refers to a(n)

Market clearing in the loanable funds market

In the classical model,beginning from an equilibrium in which the government is running a budget surplus,

According to the classical model,if the government wanted to increase employment,it could do so by increasing its own spending.That would lead firms to produce more output,for which they would need to hire more workers.

According to the classical model,if the government lowers its budget deficit,which of the following will occur?

When the government is running a budget surplus,

-Refer to Figure 8-6.Suppose that a $1 trillion increase in government spending shifted the demand for funds curve from D₁ to D₂.What would happen to the sum of investment and consumption spending? That sum would

If political influences,independent of any economic forces,lead to a larger government budget deficit,what will be the effect on the loanable funds market?

Which of the following does not usually occur when there is an increase in government spending?

The classical model is based on the assumption that

Changes in government spending or taxes designed to stimulate the economy are examples of

A decrease in government spending would cause all but one of the following to happen.Which is the exception?

In the classical model,beginning from an equilibrium in which the government is running a budget surplus

According to Say's Law,

Fiscal policy is a change in either government purchases or the money supply designed to change total spending in the economy,thereby influencing the levels of employment and output.

In the classical model,if government tries to increase employment and output by increasing its own purchases,

In the classical model,beginning from an equilibrium in which the government is running a budget surplus,an increase in government spending will

According to the classical model,an increase in government purchases will