$$\frac{1}{1 - MPC} \times \text{Initial Spending Boost}$$

$$\text{Tax Multiplier} = \frac{\Delta \text{Equilibrium GDP}}{\Delta \text{Taxes}}$$

Question 1

Which of the following best describes the primary goal of monetary policy as outlined in the study materials?

Accepted Answer

To ensure price stability, high employment, and stability of financial markets

Question 2

According to the Theory of Liquidity Preference, what is the 'price' of money in the money market?

Accepted Answer

The interest rate

Question 3

If the Federal Reserve wants to lower interest rates to stimulate the economy, which open market operation should it use?

Accepted Answer

Purchase Treasury bills

Question 4

What effect does an increase in the general price level have on the demand for money?

Accepted Answer

People demand more money

Question 5

Which equation represents the multiplier effect of government spending on GDP?

Accepted Answer

$$\frac{1}{1 - MPC} 	imes 	ext{Initial Spending Boost}$$

Question 6

Which of the following is a criticism of fiscal policy effectiveness?

Accepted Answer

Recognition and operational lags can delay its impact

Question 7

What is the effect of contractionary monetary policy on real GDP and inflation?

Accepted Answer

It decreases real GDP and inflation

Question 8

Which of the following best describes an automatic stabilizer?

Accepted Answer

Spending and taxes that change automatically with the business cycle

Question 9

If the marginal propensity to consume (MPC) is 0.8, what is the government spending multiplier?

Accepted Answer

$$\frac{1}{1 - 0.8} = 5$$

Question 10

Which of the following is NOT a goal of monetary policy?

Accepted Answer

Maximizing exports

Question 11

What happens to the money supply when the Fed sells Treasury bills?

Accepted Answer

Money supply decreases

Question 12

Which of the following best describes the crowding out effect?

Accepted Answer

Increased government spending leads to higher interest rates and lower investment

Question 13

Which formula represents the tax multiplier?

Accepted Answer

$$	ext{Tax Multiplier} = \frac{\Delta 	ext{Equilibrium GDP}}{\Delta 	ext{Taxes}}$$

Question 14

Which of the following shifts the Long Run Aggregate Supply (LRAS) curve to the right?

Accepted Answer

An increase in physical capital

Question 15

If the economy is experiencing cyclical unemployment and low investment, which policy should be used?

Accepted Answer

Expansionary monetary or fiscal policy

Question 16

What is the effect of a decrease in taxes on aggregate demand?

Accepted Answer

Aggregate demand increases

Question 17

Which of the following is true about the supply curve for money?

Accepted Answer

It is vertical because the central bank controls the money supply

Question 18

Which of the following is a plausible reason why temporary tax cuts may not increase consumption?

Accepted Answer

Households may increase savings instead of consumption

Question 19

Which of the following is NOT a component of aggregate demand?

Accepted Answer

Interest rate (i)

Question 20

If the US interest rate falls, what happens to the value of the dollar and net exports?

Accepted Answer

Dollar value falls, net exports increase

Countercyclical Macroeconomic Policy: Monetary and Fiscal Policy

Study Guide - Practice Questions