Test Your Prior Knowledge of Macroeconomics!

The basic economic problem of all countries is the existence of

• tax increases and budget deficits

• limited resources and unlimited wants

• unemployment and inflation

• government and private industry

• unions and monopoly firms

To counteract a recession, the Federal Reserve should

• raise the reserve requirement and the discount rate

• sell securities on the open market and raise the discount rate

• sell securities on the open market and lower the discount rate

• buy securities on the open market and raise the discount rate

• buy securities on the open market and lower the discount rate

Which argument is typically associated with classical economists?

• A market economy is self-correcting and thus will not remain in a recession indefinitely

• A market economy has stable prices and thus is usually free from inflation

• A market economy requires a strong government to ensure the market meets the needs of the people.

• A market economy needs only moderate assistance from the government to avoid an extended recession

• A market economy eventually results in monopolies in both the input and output markets

In the Keynesian model, an expansionary monetary policy will lead to

• lower real interest rates and more investment

• lower real interest rates and lower prices

• higher real interest rates and lower prices

• higher real interest rates and higher real income

• higher nominal interest rates and more investment

Under which of the following conditions would a restrictive monetary policy be most appropriate?

• high inflation

• high unemployment

• full employment with stable prices

• lower interest rates

• a budget deficit

According to the monetarists, which of the following statements is true of expansionary fiscal policy?

• It will cause interest rates to rise and crowd out private investment spending

• It should not be used so long as there is a national debt

• It should only be used when some resources are unemployed and inflation is low.

• It will decrease aggregate income

• It will increase aggregate income as long as the money supply is decreased at a slow, steady rate.

If the federal government simultaneously engages in expansionary monetary and fiscal policies, which of the following is likely to be the effect on interest rates/unemployment?

• increase/indeterminate

• increase/decrease

• decrease/decrease

• indeterminate/decrease

• indeterminate/increase

An increase in government spending with no change in taxes leads to a

• lower income level

• lower price level

• smaller money supply

• higher interest rate

• higher bond price

The federal government redistributes income primarily by

• setting up planning commissions to set wage rates

• taxing different income levels at different rates

• guaranteeing every person a minimum income through minimum-wage laws

• providing the same goods and services to all citizens

• relocating and retraining structurally unemployed people.

An increase in which of the following will increase aggregate demand?

• taxes

• government spending

• the federal funds rate

• reserve requirements

• the discount rate