Question 1

Which of the following correctly explains how expansionary monetary policy works?

Accepted Answer

Expansions in the money supply (M↑) lead to a decrease in interest rates (i↓), which then leads to an increase in investment (I↑) and aggregate demand (Y↑).

Question 2

All of the following make the use of fiscal policy less attractive except

Accepted Answer

Fiscal policy can still be effective without being accompanied by expansionary monetary policy, although the two can complement each other. The other options (B, C, D) are all drawbacks that make fiscal policy less attractive.

Question 3

Expansionary monetary policy involves an increase in the money supply and a fall in interest rates,leading to a positive expansion in income.

Accepted Answer

Expansionary monetary policy involves increasing the money supply, which lowers interest rates and stimulates greater borrowing and spending. This leads to an increase in aggregate demand, and ultimately to higher output and employment levels.

Question 4

Explain how exchange rate policies affected economies during the Great Depression.

Accepted Answer

The answer of Explain how exchange rate policies affected economies...

Question 5

When a central bank sells bonds,cash reserves throughout the financial system increase,interest rates fall,and investment spending increases.

Accepted Answer

When a central bank sells bonds, cash reserves throughout the financial system decrease, not increase. As a result, interest rates tend to rise due to a decrease in the supply of money, which can lead to a decrease in investment spending.

Question 6

Which of the following correctly explains how expansionary fiscal policy works?

Accepted Answer

Expansionary fiscal policy refers to increasing government spending or reducing taxes to stimulate economic growth. Option A correctly explains the chain of events that occur when government spending (G) is increased, which leads to an increase in consumption (C) and eventually an increase in national income (Y).

Question 7

Contractionary fiscal policy attempts to shift aggregate demand to the right.

Accepted Answer

Contractionary fiscal policy attempts to shift aggregate demand to the left by decreasing government spending, increasing taxes, or both. This policy is used when the economy is growing too quickly and there is a risk of inflation. Shifting aggregate demand to the left slows down economic growth and reduces inflationary pressures.

Question 8

Fiscal policy can be implemented more quickly than monetary policy.

Accepted Answer

Monetary policy can typically be implemented more quickly than fiscal policy because it does not require legislative approval, whereas fiscal policy changes often need to be passed by a government's legislative body, which can be a time-consuming process.

Question 9

Starting from a balanced budget,which of the following would NOT cause a government budget deficit?

Accepted Answer

A 50 percent increase in spending accompanied by a 50 percent increase in taxes would keep the budget balanced as the increase in spending would be offset by the increase in taxes. However, options A, B, and C would cause a budget deficit as they all involve either a decrease in revenue (taxes) or an increase in expenditure (spending on goods and services or transfer payments).

Question 10

Describe some of the potential problems with using expansionary fiscal policy.

Accepted Answer

The answer of Describe some of the potential problems with...

Question 11

All of the following took place during the Great Depression except

Accepted Answer

The Great Depression was characterized by a decrease in real GDP, a significant increase in unemployment, and a sharp fall in the money supply. The government did not increase taxes during this period but rather reduced them to help stimulate economic growth. Inflation did not rise during the early 1930s but rather fell due to a decrease in demand for goods and services.

Question 12

An example of expansionary fiscal policy would be

Accepted Answer

Expansionary fiscal policy involves increasing government spending and/or decreasing taxes in order to stimulate economic growth. Option D is an example of increasing government spending on infrastructure to create jobs and improve the economy, which is a form of expansionary fiscal policy. Options A and B describe contractionary fiscal policy, as they involve reducing government spending or increasing taxes to reduce budget deficits. Option C describes monetary policy, as it involves the Federal Reserve reducing interest rates to stimulate borrowing and spending by businesses and consumers.

Question 13

Which of the following is NOT a reason why the effects of tax cuts on government spending dissipate and each additional change in consumption and income becomes smaller and smaller?

Accepted Answer

This statement is not a reason why the effects of tax cuts on government spending dissipate and each additional change in consumption and income becomes smaller and smaller. Instead, business investment can lead to further economic growth and job creation, which can have positive long-term effects on the economy.

Question 14

The gold standard was helpful in stabilizing economies during the Great Depression.

Accepted Answer

The gold standard was actually a contributing factor to the severity of the Great Depression. By tying a country's currency to the value of gold, it limited the ability of governments to increase the money supply and stimulate economic growth. This made it difficult for countries to address the deflationary spiral that was leading to high unemployment and low economic activity. Eventually, many countries abandoned the gold standard in order to pursue more flexible monetary policies.

Question 15

Which of the following is an advantage of monetary policy?

Accepted Answer

Monetary policy can be implemented relatively quickly compared to fiscal policy, which often requires legislative action. This allows for a more timely response to changes in the economy.

Question 16

Which of the following may NOT serve as a possible chain reaction for either fiscal or monetary policy?

Accepted Answer

The chain reaction presented in option C suggests that an increase in the money supply (M↑) would lead to a decrease in interest rates (i↓), which would then result in a decrease in investment (I↓), a decrease in output (Y↓) and finally a decrease in consumption (C↓). However, this chain reaction does not align with the conventional economic theory and contradicts the usual inverse relationship between interest rates and investment.

Question 17

Which of the following is an example of expansionary monetary policy?

Accepted Answer

Open market purchases of bonds by the central bank increase the money supply, which is an expansionary monetary policy. Decrease in government spending (B) and increase in interest rates (D) are contractionary monetary policies. A decrease in taxes (C) is a fiscal policy, not a monetary policy.

Question 18

The recent trend internationally has been for the executive and legislative branches of elected governments to get more control over monetary policy,as has been the case in countries such as the United States.

Accepted Answer

The statement is not true. The recent trend internationally has been for central banks to have more independence and control over monetary policy, not for elected governments to have more control. This is known as central bank independence.

Question 19

Fiscal policy is

Accepted Answer

Fiscal policy refers to the government's use of taxation and spending to influence the economy. This policy is designed to stabilize and improve the economy by controlling inflation, promoting economic growth, and reducing unemployment. Fiscal policy can be expansionary, which involves increasing government spending and cutting taxes to stimulate economic growth, or contractionary, which involves decreasing government spending and increasing taxes to combat inflation. The selling of government bonds by the Treasury (A) is a monetary policy tool used by the Federal Reserve, while the deliberate manipulation of the money supply to affect the interest rate (B) is also a monetary policy tool. Selling foreign exchange reserves to change the exchange rate (D) is a policy used to manage currency values and is not directly related to the domestic economy.

Question 20

If aggregate supply meets aggregate demand in the vertical part of the AS curve,which of the following is a true statement about expansionary policies?

Accepted Answer

If aggregate supply meets aggregate demand in the vertical part of the AS curve, it means that the economy has reached full employment, and there is no excess capacity. Therefore, any expansionary policies, either fiscal or monetary, will only cause prices to increase, and not output. This is known as the phenomenon of demand-pull inflation. Thus, option D is the correct answer.

Quiz 11: An Introduction to Open Economy Macroeconomics