1.The government wishes to move the economy closer to Potential GDP by increasing national income by $1 trillion. They can increase their spending relative to taxes, or they can reduce taxes relative to their spending. Which strategy will create a larger budget deficit?

A. Increasing spending relative to taxes will create a larger deficit because the simple multiplier is smaller than the tax multiplier

B. The deficit is the same whether spending is increased or whether taxes are lowered

C. Lowering taxes relative to spending will create a large deficit because the tax multiplier is smaller than the simple multiplier

2.Which of the following are the three powers of the Federal Reserve Bank? (Indicate all that apply.)

A. Regulate the stock and bond markets

B. Set the Required Reserve Ratio

C. Set the Federal Funds Overnight Rate and the Prime Rate

D. Set the Discount Rate

E. Conduct Open Market Operations

3.In which phase of the business cycle should the government reduce its spending in order to reduce inflation?

A. During a recession

B. Early in an upturn

C. Close to the Peak

4.If the stock market is rising by a lot, so that the wealth of the economy is increasing, how will this change equilibrium GDP and the general price level?

A. The government taxes incomes earned on stocks (dividends), so taxation will increase; aggregate demand will shift to the left; GDP and the general price level will both go down

B. Consumption and Investment will increase due to increased confidence; aggregate demand will shift to the right; GDP and the general price level will go up

C. The stock market is a measure of aggregate supply so aggregate supply will shift to the right; GDP and the general price level will both go up

D. Stock market equities are a component of aggregate demand, so aggregate demand automatically shifts to the right; GDP and the general price level will both go up

5.If the government wishes toincrease national incomesto avoid a recession using only fiscal policy, which set of strategies below can they use?

A. To increase national incomes, the government should run a budget surplus either by decreasing their spending or by raising tax rates

B. To increase national incomes, the government should run a budget deficit either by increasing their spending or by lowering tax rates

C. To increase national incomes, the government should eliminate any business regulations that increase the cost of production

6.Which of the following events would cause the supply of loanable funds to shift to the right, and how would that affect thenominalinterest rate?

A. A Federal Reserve monetary expansion would shift supply to the right andlowerinterest rates

B. A reduction in personal and business savings would shift supply to the right andraise

interest rates

C. A government budget deficit would shift supply to the right andlower

interest rates

D. An increase in personal and business savings would shift supply to the right andraise

interest rates

7.Who is hurt by inflation? (Indicate all that apply.)

A. A bank that has loaned $200,000 over 30 years to a household for a home mortgage

Students who have borrowed money for college

B. A senior citizen living on a fixed pension

C. A household that is saving money to make a down-payment on purchase of a home

D. A household that has borrowed $200,000 over 30 years for a home mortgage

8.Most economists today would agree about the cause of inflation. What does current mainstream theory say about the cause of inflation?

A. Inflation is caused by households attempting to spend more than they have earned

B. Inflation is caused by the existence of unions because union contracts drive up wages and prices

C. Inflation is caused by executive salaries that are too high given the productivity and performance of the executives

D. Inflation is caused by the rate of growth in money supply being greater than the rate of growth in real goods and services

9.When the federal government increases deficit spending, national incomes rise by more than the increase in spending.

A. True

B. False

10.What is the difference between nominal GDP and Real GDP?

A. Real GDP has illegal transactions added back in

B. Real GDP is measured at prices that prevailed during an earlier 'base' year

C. Real GDP has Capital Consumption Allowance deducted

D. Real GDP is measured at current year prices

11.Who is on the supply side and the demand side in the Market for Loanable Funds?

A. The Federal Reserve Bank is on the supply side providing liquidity to banks; banks are on the demand side using cash from the Fed to fund their loans

B. The government is on the supply side providing incomes to the economy during recessions; consumers and investors are on the demand side borrowing money from the government

C. The Federal Reserve Bank is on the supply side providing cash to the federal government; the government is on the demand side using increases in the money supply to fund deficits

D. Banks are on the supply side lending money; consumers, investors, and government are on the demand side borrowing money

12.Which two of the following changes in the US economy would cause US currency todepreciate? (Indicate both that apply.)

A. Interest rates are higher in the US faster than in our trading partners (monetary contraction)

B. Inflation is higher in the US than it is in our trading partners

C. The "Change in US Reserve Assets" Account is negative

D. Productivity is higher in the US that it is in our trading partners

13.What is the "newspaper definition" of a recession?

A. Any one quarter in which unemployment and the general price level are both going up at the same time.

B. A negative change in real GDP worse than negative 10% in any single quarter

C. Two successive quarters of negativenominalgrowth in GDP

D. Two successive quarters of negativerealgrowth in GDP

14.How does the government obtain money when it needs to run a deficit budget?

A. The government issues bonds which are sold in the credit markets. This constitutes borrowing by the government.

B. The government has the power to print money; it simply prints enough money to cover the deficit. This constitutes an increase in the money supply done by the government.

C. The government can only borrow money from other governments, so deficits are financed by borrowing from other governments that are running a budget surplus that same year

D. The government has a special money supply that can only be used by the government, and they simply use that supply of funds to finance deficits

15.If advances in technology increase worker productivity so that Potential GDP increases, what will happen to the equilibrium level of GDP and the general price level?

A. Improvements in technology cause the Aggregate Supply curve to shift to the right,increasingGDP andraisingthe general price level

B. Improvements in technology cause the Aggregate Demand curve to shift to the right,increasingGDP andloweringthe general price level

C. Improvements in technology cause the Aggregate Demand curve to shift to the right,increasingGDP andraisingthe general price level

D. Improvements in technology cause the Aggregate Supply curve to shift to the right,increasingGDP andloweringthe general price level

16.How do bank liquidity (excess reserves) and the velocity of money change when the economy enters a recession?

A. Both bank liquidity and velocity of money go up when we enter a recession

B. Bank liquidity goes up and the velocity of money goes down when we enter a recession

C. Both bank liquidity and velocity of money go down when we enter a recession

D. Bank liquidity goes down and the velocity of money goes up when we enter a recession