PRACTICE QUIZ QUESTIONS FOR HEYNE CHAPTER 15

1) When interest rates are free from central bank manipulation, and fall due to an increase in household savings, this

A) provides an incentive for government to create a budget surplus.

B) sends a "green light" signal for businesses to increase investment.

C) has little impact on the macroeconomy.

D) creates a "cluster of errors" and an inevitable recession.

2) In the economic way of thinking, the costs of a recession are predominantly

A) the costs of using money.

B) the excessive costs of advertising in the face of persistent, falling demand.

C) the costs of disappointed expectations and discoordination of plans.

D) the costs associated with high nominal interest rates.

3) To describe recessions as a "cluster of errors" in the economy means

A) markets never clear, even in the best of times.

B) something has caused people to systematically misread the signals provided by the market process.

C) the laws of supply and demand have failed to work.

D) monopolies force people out of work.

4) What leads thousands of profit seeking entrepreneurs to misread the signals of the market-price system?

A) Poor budget policy on behalf of government officials

B) The globalization of the world economy

C) An artificial lowering of interest rates

D) A poor knowledge of the basic principles of supply and demand

5) Why was so much of the "boom" of the 2000s concentrated in the housing and real estate sectors?

A) The Fed attempted to engineer an increase not only in real GDP, but in particular further the expansion of those sectors.

B) The Community Reinvestment Act (CRA) called for banks to offer subprime loans to at-risk customers.

C) People were encouraged to "flip" houses because the low interest and rate and easy lending practices made it appear profitable to do so.

D) For all of the above reasons.

6) Which is an example of expansionary fiscal policy?

A) An increase in tax rates

B) An increase in government spending

C) An increase in the discount rate

D) An increase in the federal funds rate

E) All of the above.

7) Which combination of monetary and fiscal policies might policymakers elect to ward off potential inflation?

A) Fed purchase of bonds combined with tax rate increases

B) Fed purchase of bonds combined with tax rate decreases

C) Fed sale of bonds combined with tax rate increases

D) Fed sale of bonds combined with tax rate decreases

8) The time lags, which must be either reduced or known with some precision if fiscal policy is to be an effective stabilizing technique, are the lags between

A) the beginning of a cyclical movement and its recognition.

B) the decision that compensatory action should be taken and the enactment of tax or expenditure changes.

C) the increase or decrease in net government receipts and their final effects on total spending.

D) all of the above, because a significant miscalculation with respect to any of these lags could increase aggregate instability.

9) Does fiscal policy affect monetary policy?

A) No, because real output and income can and sometimes do move in the opposite direction from nominal money output and income.

B) Yes, because the Fed and the Treasury naturally tend to pursue similar goals.

C) Yes, because government deficits or surpluses affect the total demand for credit.

D) Yes, because the government usually prints new money to finance deficits and retires that money when it runs a surplus.

10) The relative quickness with which the Open Market Committee can respond to changes in economic indicators leads the Fed to

A) control precisely the growth rate of the money stock.

B) control precisely the growth rate of total spending.

C) make more frequent mistakes in monetary policy than Congress makes in executing fiscal policy.

D) use the discount rate to control bank lending and hence aggregate demand.

11) The stabilization policies of government are most likely to promote

A) high employment.

B) price stability.

C) reduced aggregate fluctuations.

D) the interests of those who plan and execute them.

E) the interests of the majority of voters.

12) According to the economic theory of government, policies in a democracy will favor

A) the interests of many small minorities.

B) the public interest.

C) the real interests of the majority.

D) whatever the majority thinks it wants even when this is not in the majority's real long run interest.

13) According to the economic way of thinking, government officials tend to vote on legislation that

A) concentrates benefits on a well-organized group.

B) disperses costs throughout a great number of politically unorganized people.

C) generates short-term benefits and postpones the costs.

D) does all of the above.

14) The democratic political process operating at the national level tends to result in

A) balanced budgets.

B) deficits.

C) surpluses.

D) surpluses alternating with deficits in a countercyclical manner.

15) Your textbook asserts that the federal government's $787 billion stimulus plan, launched in 2009,

A) failed to stimulate the economy out of the Great Recession.

B) was followed by growing unemployment.

C) stifled the corrective process of the previous cluster of errors during the housing bubble.

D) favored well-organized interests.

E) led to all of the above.