Question 1

In a normal IS-LM framework, if government purchases and taxes are both increased by the same amount, the level of output

Accepted Answer

A)  will increase by exactly that amount
B)  will remain the same but its composition will change
C)  will not change and neither will the composition of output
D)  will increase as will the interest rate
E)  will increase but only if this fiscal policy is accommodated by expansionary monetary policy

Question 2

Assume the government cuts the level of government purchases and the Fed responds by increasing money supply.Which of the following is the most likely result?

Accepted Answer

A)  lower interest rates and a higher budget surplus
B)  a large decrease in the interest rate and output
C)  a decrease in investment and the budget deficit
D)  an increase in consumption and lower tax revenues
E)  a decrease in consumption and investment

Question 3

Fiscal policy is weakest and monetary policy is strongest when

Accepted Answer

A)  we are in the liquidity trap
B)  money demand is very interest elastic
C)  investment is very interest inelastic
D)  we are in the classical case
E)  the IS-curve is very steep and the LM-curve is very flat

Question 4

A change in which of the following will NOT shift the IS-curve?

Accepted Answer

A)  autonomous investment
B)  autonomous money demand
C)  autonomous consumption
D)  autonomous net exports
E)  autonomous saving

Question 5

In an IS-LM framework, fiscal expansion generally leads to income expansion

Accepted Answer

A)  only if it is combined with monetary expansion
B)  except if we are in the liquidity trap
C)  but interest rates will increase, leading to a lower level of saving
D)  but the composition of output will change
E)  but most consumption spending will be crowded out

Question 6

If the Fed undertakes open market sales, then

Accepted Answer

A)  the LM-curve will shift to the right
B)  the LM-curve will shift to the left
C)  interest rates will decrease and income will increase
D)  bond prices will increase
E)  both A and C

Question 7

Monetary policy is said to be accommodating when

Accepted Answer

A)  the central bank undertakes open market sales to fight inflation
B)  the central bank responds to a tax increase by increasing money supply
C)  the central bank responds to fiscal expansion by undertaking open market sales
D)  in the course of fiscal expansion, the central bank increases money supply to prevent interest rates from rising
E)  the central bank does not interfere in any way when the government undertakes fiscal policy

Question 8

The re-unification of Germany required a large increase in government spending, but the Bundesbank refused to accommodate the expansionary fiscal policy due to concerns about rising inflation.What was the outcome?

Accepted Answer

A)  rising real interest rates
B)  a deficit in the current account of the balance of payments
C)  an increase in the budget deficit
D)  a change in the composition of Germany's GDP
E)  all of the above

Question 9

Given a normal IS-LM model, which of the following is FALSE?

Accepted Answer

A)  expansionary monetary policy will increase the level of investment and consumption
B)  lower income tax rates will raise the level of consumption but lower the level of investment
C)  a cut in government transfer payments will reduce consumption and interest rates
D)  an investment subsidy will increase the level of investment but not the level of consumption
E)  restrictive monetary policy will lower consumption, investment, and the budget surplus

Question 10

If short-term interest rates hit the lower zero bound and the Fed buys a large quantity of long-term assets to reduce long-term interest rates directly, the Fed is employing

Accepted Answer

A)  a zero lower bound policy
B)  a federal funds policy
C)  a policy of monetary transmission
D)  a policy of quantitative easing
E)  anticipatory monetary policy

Exam 12: Monetary and fiscal policy

Fiscal policy is weakest and monetary policy is strongest when

Correct Answer
verified

Given a normal IS-LM model, which of the following is FALSE?

Correct Answer
verified

In a normal IS-LM framework, if government purchases and taxes are both increased by the same amount, the level of output

Correct Answer
verified

Assume the government cuts the level of government purchases and the Fed responds by increasing money supply.Which of the following is the most likely result?

Correct Answer
verified

Monetary policy is said to be accommodating when

Correct Answer
verified

If the Fed undertakes open market sales, then

Correct Answer
verified

If short-term interest rates hit the lower zero bound and the Fed buys a large quantity of long-term assets to reduce long-term interest rates directly, the Fed is employing

Correct Answer
verified

In an IS-LM framework, fiscal expansion generally leads to income expansion

Correct Answer
verified

The re-unification of Germany required a large increase in government spending, but the Bundesbank refused to accommodate the expansionary fiscal policy due to concerns about rising inflation.What was the outcome?

Correct Answer
verified

A change in which of the following will NOT shift the IS-curve?

Correct Answer
verified

Exam 12: Monetary and fiscal policy

Fiscal policy is weakest and monetary policy is strongest when

Correct AnswerverifiedShow Answer

Given a normal IS-LM model, which of the following is FALSE?

Correct AnswerverifiedShow Answer

In a normal IS-LM framework, if government purchases and taxes are both increased by the same amount, the level of output

Correct AnswerverifiedShow Answer

Assume the government cuts the level of government purchases and the Fed responds by increasing money supply.Which of the following is the most likely result?

Correct AnswerverifiedShow Answer

Monetary policy is said to be accommodating when

Correct AnswerverifiedShow Answer

If the Fed undertakes open market sales, then

Correct AnswerverifiedShow Answer

If short-term interest rates hit the lower zero bound and the Fed buys a large quantity of long-term assets to reduce long-term interest rates directly, the Fed is employing

Correct AnswerverifiedShow Answer

In an IS-LM framework, fiscal expansion generally leads to income expansion

Correct AnswerverifiedShow Answer

The re-unification of Germany required a large increase in government spending, but the Bundesbank refused to accommodate the expansionary fiscal policy due to concerns about rising inflation.What was the outcome?

Correct AnswerverifiedShow Answer

A change in which of the following will NOT shift the IS-curve?

Correct AnswerverifiedShow Answer

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