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Which of the following combinations of policies is designed to decrease inflation?
(A)An increase in taxes and a decrease in the reserve requirement
(B)An increase in taxes and an open-market purchase of government securities
(C)A decrease in taxes and an open-market purchase of government securities
(D)An increase in government spending and a decrease in the discount rate
(E)A decrease in government spending and an open-market sale of government securities
If the economy is in a severe recession, which of the following policy actions is most appropriate?
(A)Keeping the money supply constant and reducing budget deficits
(B)Decreasing government spending and taxes by the same amount
(C)Increasing both the money supply and government spending
(D)Increasing both the federal funds rate and taxes
(E)Decreasing the money supply and increasing taxes
Which of the following policies, if appropriately sized, would provide expansion during a recession with the smallest
change in interest rates?
(A)An open-market purchase of government securities by the central bank and a decrease in the federal funds rate
(B)An open-market sale of government securities by the central bank and an increase in the federal funds rate
(C)A decrease in taxes and an open-market purchase of government securities by the central bank
(D)An increase in government spending and an open-market sale of government securities by the central bank
(E)An increase in taxes and an increase in the federal funds rate
If a contractionary fiscal policy is followed by an expansionary monetary policy, nominal interest rate and employment
would most likely be affected in which of the following ways in the short run?
(A)Nominal Interest Rate = Increase ; Employment = Increase
(B)Nominal Interest Rate = Increase ; Employment = Decrease
(C)Nominal Interest Rate = Decrease ; Employment = Decrease
(D)Nominal Interest Rate = Decrease ; Employment = Indeterminate
(E)Nominal Interest Rate = Indeterminate ; Employment = Decrease
Which of the following combinations of economic policies would be most effective to correct a severe recession?
(A)Taxes = Increase ; Money Supply = Increase
(B)Taxes = Increase ; Money Supply = Decrease
(C)Taxes = Increase ; Money Supply = No change
(D)Taxes = Decrease ; Money Supply = Increase
(E)Taxes = Decrease ; Money Supply = Decrease
Which of the following policy combinations could reduce a government deficit without changing aggregate demand?
(A)An increase in taxes and a decrease in the money supply
(B)An increase in taxes and an increase in the money supply
(C)A decrease in taxes and a decrease in the money supply
(D)A decrease in government spending and a decrease in the money supply
(E)An increase in government spending and a decrease in the money supply
A reduction in inflation can best be achieved by which of the following combinations of fiscal and monetary policy?
(A)Fiscal Policy = Increase taxes ; Monetary Policy = Sell government bonds
(B)Fiscal Policy = Decrease taxes ; Monetary Policy = Buy government bonds
(C)Fiscal Policy = Decrease taxes ; Monetary Policy = Lower margin requirements
(D)Fiscal Policy = Decrease government spending ; Monetary Policy = Lower discount rate
(E)Fiscal Policy = Increase government spending ; Monetary Policy = Raise discount rate
Which of the following occurs as investment becomes more responsive to changes in the interest rate?
(A)Monetary policy becomes more effective at changing real gross domestic product.
(B)Fiscal policy becomes more effective at changing real gross domestic product.
(C)Monetary policy becomes more effective at changing interest rates.
(D)Fiscal policy becomes more effective at changing interest rates.
(E)There is no change in the effectiveness of either monetary or fiscal policy.
Which of the following is true about changes in tax rates, changes in the level of government expenditures, and changes
in the money supply?
(A)They are automatic stabilizers.
(B)They are tools of discretionary fiscal policy.
(C)They have different lag times between implementation of a policy and its effects on aggregate demand.
(D)They are favored equally by both Classical and Keynesian economists to fine-tune the economy.
(E)All are controlled by the Federal Reserve system.
Which of the following policy choices represents a combination of fiscal and monetary policies designed to bring the
economy out of a recession?
(A)Decreasing both taxes and the money supply
(B)Increasing both taxes and the money supply
(C)Increasing government spending and decreasing the federal funds rate
(D)Increasing both taxes and the discount rate
(E)Engaging in deficit spending and government bond sales
Assume that the economy is at full employment. Policymakers wish to maintain the price level but want to encourage
greater investment. Which of the following combinations of monetary and fiscal policies would best achieve this goal?
(A)Monetary Policy = No change ; Fiscal Policy = Contractionary
(B)Monetary Policy = Expansionary ; Fiscal Policy = No Change
(C)Monetary Policy = Expansionary ; Fiscal Policy = Contractionary
(D)Monetary Policy = Expansionary ; Fiscal Policy = Expansionary
(E)Monetary Policy = Contractionary ; Fiscal Policy = Expansionary
Suppose that the government decreases taxes and at the same time the central bank decreases the discount rate. The
combined actions will result in
(A)an increase in unemployment and a decrease in the interest rate
(B)an increase in unemployment and an increase in the interest rate
(C)an increase in the real gross domestic product and a decrease in the interest rate
(D)an increase in the real gross domestic product and an increase in the interest rate
(E)an increase in the real gross domestic product and an indeterminate change in the interest rate
When an economy is at full employment, which of the following will most likely create demand-pull inflation in the short
run?
(A)An increase in the discount rate
(B)An increase in personal income taxes
(C)A decrease in the real rate of interest
(D)A decrease in government spending
(E)A decrease in the money supply
Assume that the government implements a deficit-reduction policy that results in changes in aggregate income and
output. Then the Federal Reserve engages in monetary policy actions that reverse the changes in income and output
caused by fiscal policy action. Which of the following sets of changes in taxes, government spending, the required
reserve ratio, and the discount rate is most consistent with these policies?
(A)Taxes = Increase ; Government Spending = Increase ; Required Reserve Ratio = Decrease ; Discount Rate = Increase
(B)Taxes = Increase ; Government Spending = Decrease ; Required Reserve Ratio = Decrease ; Discount Rate = No change
(C)Taxes = Increase ; Government Spending = Decrease ; Required Reserve Ratio = Increase ; Discount Rate = Decrease
(D)Taxes = Decrease ; Government Spending = Increase ; Required Reserve Ratio = No change ; Discount Rate = Increase
(E)Taxes = Decrease ; Government Spending = Decrease ; Required Reserve Ratio = Decrease ; Discount Rate = Increase
To stimulate investment in new plant and equipment without increasing the level of real output, the best policy mix is to
(A)decrease the money supply and increase government spending
(B)increase the money supply and decrease government spending
(C)decrease the money supply and increase income taxes
(D)increase the money supply and decrease income taxes
(E)decrease income taxes and increase government spending
Policymakers concerned about fostering long-run growth in an economy that is currently in a recession would most
likely recommend which of the following combinations of monetary and fiscal policy actions?
(A)Monetary Policy = Sell bonds ; Fiscal Policy = Reduce taxes
(B)Monetary Policy = Sell bonds ; Fiscal Policy = Raise taxes
(C)Monetary Policy = No change ; Fiscal Policy = Raise taxes
(D)Monetary Policy = Buy bonds ; Fiscal Policy = Reduce spending
(E)Monetary Policy = Buy bonds ; Fiscal Policy = No change
Compared to expansionary monetary policies adopted to counteract a recession, expansionary fiscal policies tend to
result in
(A)less public spending
(B)higher interest rates
(C)lower prices
(D)a high rate of economic growth
(E)decreased investment by foreign countries