1. The Employment Act of 1946 states that
a.
the Fed should use monetary policy only to control the rate of inflation.
b.
the government should promote full employment and production.
c.
the government should periodically increase the minimum wage and unemployment insurance benefits.
d.
All of the above are correct.
2. The Employment Act of 1946
a.
implies that the government should avoid being a cause of economic fluctuations.
b.
implies that the government should respond to changes in the private economy to stabilize aggregate demand.
c.
reflected the ideas promoted in Keynes’s influential book, The General Theory of Employment, Interest, and
Money.
d.
All of the above are correct
3. Keynes argued that aggregate demand is
a.
stable, because the economy tends to return to its long-run equilibrium quickly after any disturbance to
aggregate demand.
b.
stable, because changes in consumption are mostly offset by changes in investment and vice versa.
c.
unstable, because waves of pessimism and optimism create fluctuations in aggregate demand.
d.
unstable, because of long and variable policy lags that worsen economic fluctuations.
4. Keynes argued that
a.
irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment.
b.
irrational waves of optimism cause decreases in aggregate demand and decreases in aggregate supply.
c.
changes in business and consumer expectations generally stabilize the economy.
d.
All of the above are correct.
5. Keynes used the term “animal spirits” to refer to
a.
policy makers harming the economy in the pursuit of self interest.
b.
arbitrary changes in attitudes of household and firms.
c.
mean-spirited economists who believed in the classical dichotomy.
d.
firms’ relentless efforts to maximize profits.
6. Who asserted that “the Federal Reserve’s job is to take away the punch bowl just as the party gets going?”
a.
president George W. Bush
b.
president John F. Kennedy
c.
economist John Maynard Keynes
d.
former chairman of the Federal Reserve System William McChesney Martin
7. Which U.S. president, when asked why he had proposed a tax cut, responded by saying “To stimulate the economy.
Don’t you remember your Economics 101?”
a.
Dwight D. Eisenhower
b.
John F. Kennedy
c.
Ronald Reagan
d.
Bill Clinton
8. In the early 1960s, the Kennedy administration made considerable use of
a.
fiscal policy to stimulate the economy.
b.
fiscal policy to slow down the economy.
c.
monetary policy to stimulate the economy.
d.
monetary policy to slow down the economy.
9. The Kennedy tax cut of 1964 was
a.
successful in stimulating the economy.
b.
designed to shift the aggregate demand curve to the right.
c.
designed to shift the aggregate supply curve to the right.
d.
All of the above are correct.
10. The Kennedy tax cut of 1964 included an investment tax credit that was designed to
a.
increase aggregate demand in the short run and aggregate supply in the long run.
b.
increase aggregate supply in the short run and aggregate demand in the long run.
c.
only increase aggregate supply in the long run.
d.
only increase aggregate demand in the short run.
11. In 1961, President John F. Kennedy, acting upon advice from his economists, proposed tax cuts. The advice he
received
a.
was opposed to the teaching of Keynes, who had taught that tax cuts were counterproductive.
b.
was opposed to the teaching of Keynes, who had taught that all attempts to stabilize the economy were futile.
c.
came from economists who had studied Keynes’s ideas when those ideas were only a few years old.
d.
came from economists who were unaware of Keynes’s ideas because those ideas had not yet been widely
disseminated at that time.
12. Monetary policy
a.
can be implemented quickly and most of its impact on aggregate demand occurs very soon after policy is
implemented.
b.
can be implemented quickly, but most of its impact on aggregate demand occurs months after policy is
implemented.
c.
cannot be implemented quickly, but once implemented most of its impact on aggregate demand occurs very
soon afterward.
d.
cannot be implemented quickly and most of its impact on aggregate demand occurs months after policy is
implemented.
13. If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price
level and real GDP by
a.
increasing the money supply, which raises interest rates.
b.
increasing the money supply, which lowers interest rates.
c.
decreasing the money supply, which raises interest rates.
d.
decreasing the money supply, which lowers interest rates.
14. Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize
output, the Federal Reserve could
a.
buy bonds to raise interest rates.
b.
buy bonds to lower interest rates.
c.
sell bonds to raise interest rates.
d.
sell bonds to lower interest rates.
15. Suppose there were a large decline in net exports. If the Fed wanted to stabilize output, it could
a.
buy bonds to raise interest rates.
b.
buy bonds to lower interest rates.
c.
sell bonds to raise interest rates.
d.
sell bonds to lower interest rates.
16. Suppose there was a large increase in net exports. If the Fed wanted to stabilize output, it could
a.
increase the money supply, which will reduce interest rates.
b.
decrease the money supply, which will reduce interest rates.
c.
increase the money supply, which will increase interest rates.
d.
decrease the money supply, which will increase interest rates.
17. Suppose there is an increase in government spending. To stabilize output, the Federal Reserve would
a.
increase government spending.
b.
increase the money supply.
c.
decrease government spending.
d.
decrease the money supply.
18. Suppose there is a tax increase. To stabilize output, the Federal Reserve will
a.
increase government spending.
b.
increase the money supply.
c.
decrease government spending.
d.
decrease the money supply.
19. Suppose an increase in interest rates causes rising unemployment and falling output. To counter this, the Federal
Reserve would
a.
increase government spending.
b.
increase the money supply.
c.
decrease government spending.
d.
decrease the money supply.
20. Suppose households attempt to increase their money holdings. To stabilize output by countering this increase in
money demand, the Federal Reserve would
a.
increase government spending.
b.
increase the money supply.
c.
decrease government spending.
d.
decrease the money supply.
21. Suppose households attempt to decrease their money holdings. To counter this decrease in money demand and
stabilize output, the Federal Reserve will
a.
increase government spending.
b.
increase the money supply.
c.
decrease government spending.
d.
decrease the money supply.
22. A reduction in U.S net exports would shift U.S. aggregate demand
a.
rightward. In an attempt to stabilize the economy, the government could increase expenditures.
b.
rightward. In an attempt to stabilize the economy, the government could decrease expenditures.
c.
leftward. In an attempt to stabilize the economy, the government could increase expenditures.
d.
leftward. In an attempt to stabilize the economy, the government could decrease expenditures.
23. What actions could be taken to stabilize output in response to a large decrease in U.S. net exports?
a.
increase taxes or increase the money supply
b.
increase taxes or decrease the money supply
c.
decrease taxes or increase the money supply
d.
decrease taxes or decrease the money supply
24. The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do?
a.
increase government expenditures or increase the money supply
b.
increase government expenditures or decrease the money supply
c.
decrease government expenditures or increase the money supply
d.
decrease government expenditures or decrease the money supply
25. Suppose aggregate demand shifts to the left and policymakers want to stabilize output. What can they do?
a.
repeal an investment tax credit or increase the money supply
b.
repeal an investment tax credit or decrease the money supply
c.
institute an investment tax credit or increase the money supply
d.
institute an investment tax credit or decrease the money supply
26. Which of the following policy alternatives would be an appropriate response to a sharp increase in investment
spending, assuming policymakers want to stabilize output?
a.
increase taxes
b.
increase the money supply
c.
increase government expenditures
d.
All of the above are correct.
27. Which of the following policies would be advocated by someone who wants the government to follow an active
stabilization policy when the economy is experiencing severe unemployment?
a.
decrease the money supply
b.
increase government expenditures
c.
increase taxes
d.
All of the above are correct.
28. Which of the following policies would Keynes’s followers support when an increase in business optimism shifts the
aggregate demand curve away from long-run equilibrium?
a.
increase taxes
b.
increase government expenditures
c.
increase the money supply
d.
All of the above are correct.
29. Which of the following policies would be advocated by proponents of stabilization policy when the economy is
experiencing severe unemployment?
a.
a decrease in the money supply
b.
an increase in tax rates
c.
an increase in government purchases
d.
an increase in interest rates.
30. A policy that results in slow and steady growth of the money supply is an example of
a.
an “easy” monetary policy.
b.
a “passive” monetary policy.
c.
a “practical” monetary policy.
d.
an “active” monetary policy.
For the following questions, use the diagram below:
Figure 34–7.
31. Refer to Figure 34-7. The aggregate-demand curve could shift from AD1 to AD2 as a result of
a.
an increase in government purchases.
b.
a decrease in net exports.
c.
households saving a smaller fraction of their income.
d.
a decrease in the price level.
32. Refer to Figure 34-7. If the economy is at point b, a policy to restore full employment would be
a.
an increase in the money supply.
b.
a decrease in government purchases.
c.
an increase in taxes.
d.
All of the above are correct.
33. Refer to Figure 34-7. Which of the following is correct?
a.
A wave of optimism could move the economy from point a to point b.
b.
If aggregate demand moves from AD1 to AD2, the economy will stay at point b in both the short run and long
run.
c.
It is possible that either fiscal or monetary policy might have caused the shift from AD1 to AD2.
d.
All of the above are correct.
34. Refer to Figure 34-7. Which of the following is correct?
a.
Unemployment rises as the economy moves from point a to point b.
b.
Either fiscal or monetary policy could be used to move the economy from point b to point a.
c.
If the economy is left alone, then as the economy moves from point b to long-run equilibrium, the price level
will fall farther.
d.
All of the above are correct.
Figure 34-9
35. Refer to Figure 34–9. Suppose the economy is currently at point A. To restore full employment, the Federal Reserve
should
a.
purchase government bonds, which will increase the money supply.
b.
purchase government bonds, which will reduce the money supply.
c.
sell government bonds, which will increase the money supply.
d.
sell government bonds, which will reduce the money supply.
36. Refer to Figure 34–9. Suppose the economy is currently at point A. To restore full employment, the appropriate fiscal
response
a.
requires the central bank to purchase government bonds, which will increase the money supply.
b.
is a reduction in government purchases.
c.
is a reduction in taxes.
d.
requires the central bank to sell government bonds, which will reduce the money supply.
37. Some economists argue that
a.
monetary policy should actively be used to stabilize the economy.
b.
fiscal policy should actively be used to stabilize the economy.
c.
fiscal policy can be used to shift the AD curve.
d.
All of the above are correct.
38. Which of the following statements generates the greatest amount of disagreement among economists?
a.
Increases in the money supply shift aggregate demand to the right.
b.
In the long run, increases in the money supply increase prices, but not output.
c.
Recessions are associated with decreases in consumption, investment, and employment.
d.
Government should use fiscal policy to try to stabilize the economy.
39. Critics of stabilization policy argue that
a.
there is a lag between the time policy is passed and the time policy has an impact on the economy.
b.
the impact of policy may last longer than the problem it was designed to offset.
c.
policy can be a source of, instead of a cure for, economic fluctuations.
d.
All of the above are correct.
40. Critics of stabilization policy argue that
a.
policy affects aggregate demand quickly, but the effects on aggregate demand are long-lived.
b.
policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived.
c.
policy affects aggregate demand with a lag, but the effects are short-lived.
d.
policy does not affect aggregate demand.