1. (TCO 5) Rising business investment and consumption will (Points: 5)
increase aggregate demand
increase aggregate supply

not change aggregate demand

None of the above

2. (TCO 6, 10) The “crowding-out effect” will result in (Points: 5)
an increase in private business investment.
a decrease in private business investment.
an increase in consumers’ consumption.
a decrease in federal debts

3. (TCO 6, 10) The effectiveness of discretionary fiscal policy will be reduced if: (Points: 5)
borrowing increases interest rates and crowds out private investment
the dollar depreciates because of an increased outflow of currency
the price level falls
stock prices rise

4. (TCO 6, 10) The ‘crowding-out effect’ of borrowing to finance an increase in government expenditures: (Points: 5)
reduces current spending for private investment.
increases the income inequality in the U.S.
reduces the economic burden on future generations.
decreases the need for U.S. securities.

5. (TCO 6, 10) An increase in taxes and cut in government spending would be appropriate to curb (Points: 5)
demand-pull inflation
rising interest rates
fiscal deficits

6. (TCO 6, 10) The primary benefit of using budget surpluses to pay down the public debt is: (Points: 5)
a lower interest rate, leading to higher investment spending
an improved balance of trade
lower tax rates in the future
a higher international value of the dollar

7. (TCO 5, 6) Suppose the equilibrium level of income exceeds the full employment level of income and there is high inflation. Hence, the government decides to implement a fiscal policy that will act to reduce national output and prices. This can be accomplished by (Points: 5)
increasing government spending such that aggregate expenditures are increased.
raising taxes and government spending by the same amount such that aggregate supply is decreased and aggregate demand is increased.
decreasing government spending such that aggregate demand is reduced.
lowering average tax rates such that aggregate supply is increased.
increasing transfer payments such that aggregate expenditures decline.

8. (TCO 6, 10) Which statement is true about fiscal policy? (Points: 5)
Government must manipulate its spending and taxes.
Fiscal policy is legally vested in the President; Congressional interference prevented it from being effective.
Although fiscal policy hasn’t always been right, it is quickly formulated and put into effect very fast.
None of these is true

9. (TCO 7, 10) U.S. Federal Reserve’s Monetary policy would not include (Points: 5)
increasing interest rates to control the money supply
a policy directed toward controlling credit
reducing the money supply in an effort to control inflation
increasing tax rates in an effort to control inflation

10. (TCO 7, 10) The Federal Reserve decides to pursue an ‘expansionary monetary policy.’ Which set of actions by the Fed would be most consistent with this policy? (Points: 5)
buying government securities and raising the reserve ratio
selling government securities and raising the reserve ratio
buying government securities and lowering the reserve ratio
a decrease in commercial bank loans selling government securities and lowering the reserve ratio