Download Module 4 Practice Exam V14 Answer Key 1. C: Point A is during a

Module 4 Practice Exam V14 Answer Key
1. C: Point A is during a contractionary period, economic decline continues.
2. A: Setting a price below equilibrium price will create a shortage. More people will want potatoes
than what sellers are willing to provide.
3. B: Examples of natural monopolies would be an electric company or water company. It makes
more sense to have one set of pipes for water in a city than multiple providers and multiple sets
of pipes, etc. This one company can provide water more efficiently than multiple providers.
4. C: Government regulations make sure that consumers are safe – for example, hot dog providers
are regulated by the government to make sure that meat is used that is not rotten or from
animals such as horses
5. C: The Federal Open Market Committee determines if adjustment of the money supply is
needed based on economic outlook. They determine the use of buying and selling of bonds in
open market operations, setting the reserve requirement, and setting the discount rate.
6. B: Raising the reserve requirement would mean banks need to hold on to more of their money
and cannot loan out funds. By not being able to loan funds, they hope to slow the inflation rate.
7. A: During an economic downturn, lending slows and inflation slows. Therefore, prices will
stagnate.
8. B: Increasing government spending puts more money into the economy. As there is more
money in government programs, etc., businesses will hire more workers to increase production.
9. C: Making initial development private saves the government from funding ALL of the research,
thus saving money to only partially fund research.
10. C: Remember that the Federal Reserve is the monetary policy and their tools are discount rate,
reserve requirement and open market operations. The Federal Reserve will want to slow the
money down in the economy to help fight inflation. By increase the discount rate which is the
interest rate banks are charged to loan out money less businesses and people will be willing to
get loans if they have to pay back more money to the bank.
11. B: expansionary fiscal policy. Remember that Congress is in control of fiscal policy. During the
trough, Congress will decrease taxes and increase spending to help promote economic growth in
the economy.
12. C: To help promote Economic growth the Federal Reserve will decrease reserve requirement to
allow more banks to loan out money. They will decrease the discount rate which encourages
businesses and people to get loans from the bank. They will buy back government securities.
Remember that the Federal Reserve is in control of monetary policy.
13. A: When inflation and GDP increase and unemployment decreases, a country is experience an
expansion phase because the economy is growing and expanding.
14. Rationale: D: If a time of economic growth is needed, the government would need to decrease
taxing, while increasing spending so that more money is circulating in the economy.
15. D: When a person or country spends less than they are bringing in, it results in extra money,
which would be classified as surplus.
16. B Taxing is a tool Congress used under the Fiscal Policy. By offering first time home buyers a tax
rebate, it will encourage them to purchase homes versus renting, therefore, increasing bank
loans for mortgages, ultimately leading to an increase in the money supply
17. C: The Federal Reserve controls the monetary policy. The 3 tools of the monetary policy include
the discount rate, open market operations, and reserve requirement. Since the GDP is rising, we
need to control the inflation level by reducing the money supply in the market. By increasing
the discount rate, we are discouraging banks to borrow money from the central bank as well as
discouraging consumers to take out loans.
18. C: Interstate highways are paid with Federal Tax money. A deficit is the overspending in one
fiscal year. By deferring the construction, the National Government will be able to save 3 trillion
dollars; therefore, spending equals the amount of revenue generated through taxes.
19. B: As they buy government securities, they take the bond and in turn pay out funds. These funds
will enter the economy and hopefully boost economic activity.
20. A: Increasing taxes and lowering spending will slow down (contract) the economy during high
inflationary periods.
21. A: A price ceiling means you cannot charge greater than that amount for a good, service, or rent.
A Price Floor means that they cannot charge less than that amount, usually set above the
equilibrium to protect the producer.
22. (A): During a contraction, the unemployment rate is increasing while the rate of inflation is
decreasing. We call a period of falling prices "deflation." See Lesson of 4.01
23. (B): One example of “a price control is when the government sets the price below the
equilibrium price. This means that buyers and sellers can exchange a good at prices less than the
maximum price, but not greater. The primary goal of such regulation is to keep the price of a
good low and thus more affordable for consumers. Rent control laws, for example, dictate how
much a landlord can charge for rent in a specific area.” See page 2 of Lesson 4.02
24. (B): “Decreasing the discount rate is expansionary policy because it costs banks less to borrow
from the Fed. This action increases the money supply because it encourages banks to grant
more loans.” See page 3 of Lesson 4.04
25. C – In this situation, an expansionary measure is the best choice because unemployment is
rising. The Federal Reserve uses monetary policy to influence the economy, so you must choose
from the tools of monetary policy – the discount rate, the reserve requirement, and the
discount rate. The tools of fiscal policy are taxing and spending, so those answers would not
apply here.
26. A – Point B represents the peak of the business cycle. At the peak in the business cycle, inflation
will be rising, so a contractionary policy will be used here. Because the question asks what the
government would do here, you must also choose fiscal, rather than monetary, policy.
27. C – Point B is below the equilibrium, and this price point will result in a shortage of gasoline.
28. B: There would be a shortage in rent control due to the increase in need for housing.
29. C: The Open Market Committee controls monetary policy.
30. B: The action would take place in contraction due to the increase in unemployment and rising
recessional effects.
31. B: Price floors usually benefit the seller of a product. The government may intervene when a
product on the market sells too low to provide needed income. It is in these situations for which
the government may create a price floor. Agricultural products are the best example here as we
may see a minimum price set so Farmers may have income to live off of. The problem with any
price floor occurs when there is a surplus of product thus farmers have goods that do not sell.
32. C: A natural monopoly is allowed because it is safer and more efficient for the system, business
or good to be under government regulation rather than the market. US Currency, Highway
construction and the Police force are all managed or provided for by the government. There are
many computer sellers in the market and thus would be considered a monopolistic competition.
33. D: When Congress is running a deficit they are spending more than they are bringing in through
taxes. When the Federal Reserve is buying bonds they are trying to push currency out to
consumers to spend. This means we are in an expansionary period-Point D. **After the recent
recession this is exactly where our economy is-expanding.