Question 1. Which of the following is an example of discretionary fiscal policy?

an increase in unemployment insurance payments during a recession

an increase in income tax receipts with rising income during an expansion

the tax cuts passed by Congress in 2001 to combat the recession

a decrease in food stamps issued during an expansion or boom

Question 2. The majority of dollars spent by government prior to the Great Depression was spending at the ________ level. In the post World War II period, two-thirds to three quarters of all dollars spent by government in the United States are spent at the ________ level federal; state and local

state and local; federal

state and local; state

local; state

Question 3. The fastest growing category of government expenditure is

grants to state and local governments.

defense spending.

transfer payments.

government purchases.

4. Year Potential Real GDP Real GDP Price Level 2013 $14.0 trillion $14.0 trillion 150 2014 14.5 trillion 14.8 trillion 154 Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy. If the Congress and the president want to keep real GDP at its potential level in 2014, they should buy Treasury securities.

conduct expansionary fiscal policy.

decrease government purchases.

decrease the discount rate.

5. A permanent tax cut would likely ________ consumption spending ________ than would a tax rebate like the one issued in 2008. 

increase; more

increase; less

decrease; more

decrease; less

6. if government spending and the price level increase, then 

the interest rate increases, consumption declines, and investment spending declines.

the interest rate decreases, consumption declines, and investment spending declines.

the interest rate increases, consumption increases, and investment spending increases.

the interest rate decreases, consumption increases, and investment spending increases.

7. During recessions, government expenditure automatically

falls because of programs such as unemployment insurance and Medicaid.

rises because of programs such as unemployment insurance and Medicaid.

falls because of the progressive income tax system.

rises because of the progressive income tax system.

8. According to the short-run Phillips curve, the unemployment rate and the inflation rate are

unrelated.

positively related.

negatively related.

unaffected by monetary policy.

9. What is the natural rate of unemployment?

the unemployment rate that exists when the economy is at potential GDP

the unemployment rate that exists when the economy is at a trough in a business cycle

an unemployment rate of 0%

any unemployment rate that is above the inflation rate

10. What impact does monetary policy have on the long-run Phillips curve?

Monetary policy can only shift the long-run Phillips curve to the left.

Monetary policy shifts the long-run Phillips curve to the right or left, depending on whether monetary policy is expansionary or contractionary.

Monetary policy can only shift the long-run Phillips curve to the right.

Monetary policy has no impact on the long-run Phillips curve.

11. In the long run, the Federal Reserve can control which of the following?

the inflation rate

the unemployment rate

the growth rate of real GDP in the economy

the natural rate of unemployment

12. Contractionary monetary policy will result in

higher interest rates.

increased rates of inflation.

an upward shift in the short-run Phillips curve.

a leftward shift in the long-run Phillips curve.

13. If the Federal Reserve announces that its TARGET for the federal funds rate is rising from 4 percent to 4.25 percent, how do you expect workers and firms to react?

As long as the Fed's announcement is credible, workers and firms will increase their consumption and investment spending, which will increase aggregate demand and inflation.

As long as the Fed's announcement is credible, workers and firms will reduce their consumption and investment spending, which will reduce aggregate demand and reduce inflation.

If the Fed's announcement is not credible, workers and firms will not expect inflation to fall so they will reduce their consumption and investment spending, which will increase aggregate demand and reduce inflation.

Workers and firms will incorporate the increase in interest rates into their expectations of inflation, and they will expect inflation to rise as a result of Fed's policy announcement.

14. If the Fed decided to reverse its policy actions implemented during the heart of the last recession, the Fed would be acting to try to prevent

a decrease in unemployment.

an increase in unemployment.

an increase in deflation.

an increase in inflation.

15. If foreign holdings of U.S. dollars increase, holding all else constant,

If foreign holdings of U.S. dollars increase, holding all else constant,

the balance on the U.S. current account will increase.

the balance on the U.S. capital account will increase.

the U.S. balance of trade will increase.

16. The balance of trade includes trade in

goods only.

services only.

both goods and services.

neither goods not services.

17. Currency traders expect the value of the dollar to fall. What effect will this have on the demand for dollars and the supply of dollars in the FOREIGN EXCHANGE market?

Demand for dollars will increase, and supply of dollars will decrease.

Demand for dollars will increase, and supply of dollars will increase.

Demand for dollars will decrease, and supply of dollars will increase.

Demand for dollars will decrease, and supply of dollars will decrease.

18. What impact might an increase in the budget deficit have on interest rates and exchange rates?

Interest rates and exchange rates increase.

Interest rates increase and exchange rates decrease.

Interest rates decrease and exchange rates increase.

Interest rates and exchange rates decrease.