Practice Test

The budget balance is equal to

• total spending by the government.

• taxes minus transfer payments.

• taxes minus government spending and transfer payments.

• the sum of deficits and surpluses over time.

• total tax revenues collected.

The cyclically adjusted budget deficit adjusts the actual budget deficit for the effect of

• discretionary fiscal policy.

• discretionary monetary policy.

• inflation.

• transfer payments.

• the business cycle.

The public debt increases when

• the government collects more in taxes than it spends.

• the government runs a budget deficit.

• taxes exceed transfer payments.

• the budget balance is positive.

• individual borrow for goods like houses and cats.

Which of the following is a potential problem with persistent increases in government debt?

• Government borrowing may crowd out private investment.

• Government debt is caused by budget deficits, which are always bad for the economy.

• It will always lead the government to default.

• It creates inflation because the government has to print money to pay it off.

• It causes automatic stabilizers to raise taxes in the future.

The Federal Open Market Committee sets a target for which of the following?

• the income tax rate

• the federal funds rate

• the money supply

• the prime interest rate

• the unemployment rate

Which of the following will occur if the Federal Reserve buys Treasury bills?

• The money supply will increase.

• The money supply curve will shift to the left.

• The money demand curve will shift to the right.

• Interest rates will rise.

• Aggregate demand will decrease.

Which of the following actions would the Federal Reserve use to address inflation?

• make an open-market sale of Treasury bills

• increase the money supply

• lower the discount rate

• decrease money demand

• raise taxes

The Taylor rule sets the target federal funds rate based on which of the following?

• the inflation rate only

• the unemployment rate only

• the output gap only

• both the inflation rate and the unemployment rate

• both the output gap and the inflation rate

An increase in the money supply will generate which of the following?

• a negative short-run effect on real GDP

• an increase in real GDP in the long run

• a decrease in real GDP in the long run

• a decrease in the aggregate price level in the long run

• an increase in the aggregate price level in the short run and the long run

According to the concept of money neutrality, changes in the money supply will affect which of the following?

• only real values

• the aggregate price level

• employment

• aggregate output

• aggregate demand