Unit 6 Learning Target 2 Practice Quiz

"Changes in the money supply in order to achieve full-employment & full efficiency" best defines which of the following?

• Fiscal Policy

• Monetary Policy

• Supply-Side Fiscal Policy

• Federal Reserve

Answer explanation

"Changes in the money supply" refers to actions taken by a central bank to influence economic activity, which is the essence of Monetary Policy. It aims to achieve full employment and efficiency through managing the money supply.

Which of the following are responsible for making fiscal policy decision? 

• The President and Congress

• The Federal Reserve System

• The National Council of Economic Advisors

• The commerce Department

Answer explanation

The President and Congress are responsible for making fiscal policy decisions, as they control government spending and taxation. The Federal Reserve focuses on monetary policy, while the other options do not have this authority.

If the Federal Reserve and the Federal Government are attempting to encourage growth and stimulate the economy, which actions would each take?

• Increase the money supply / Decrease government spending

• Decrease the money supply / Increase taxes

• Decrease the money supply / Increase government spending

• Increase the money supply / Increase government spending

Answer explanation

To stimulate the economy, the Federal Reserve would increase the money supply, making more funds available for lending. Simultaneously, the Federal Government would increase spending to boost demand and create jobs, leading to economic growth.

Changing the money supply through _____ will cause _______ to shift.

• fiscal policy; AS

• monetary policy; AS

• fiscal policy; AD

• monetary policy; AD

Answer explanation

Changing the money supply is a function of monetary policy, which directly affects aggregate demand (AD) by influencing interest rates and spending. Thus, the correct choice is 'monetary policy; AD'.

________ should NOT be used to attempt to solve Stagflation.

• Monetary Policy

• Fiscal Policy

Answer explanation

Monetary Policy should NOT be used to solve Stagflation because it can exacerbate inflation without addressing unemployment. Fiscal Policy, on the other hand, can stimulate demand and help mitigate the effects of Stagflation.

Which of the following combinations of monetary and fiscal policy actions should be used to solve the economic inefficiency shown in the given image?

• Increase Taxes & Increase the Money Supply

• Increase Government Spending & Decrease the Money Supply

• Decrease Taxes & Increase the Money Supply

• Decrease Government Spending & Decrease the Money Supply

Answer explanation

To address economic inefficiency, decreasing government spending and the money supply can help reduce inflationary pressures and stabilize the economy, making this the correct choice.

Based on the change shown in the image given, what will happen to Price Level (PL); Real GDP & Unemployment?

• PL - Increases; Real GDP - Decreases; Unemployment - Increases

• PL -Decreases; Real GDP - Increases; Unemployment - Increases

• PL - Increases; Real GDP - Increases; Unemployment - Decreases

• PL - Decreases; Real GDP - Decreases; Unemployment - Increases

Answer explanation

The decrease in Price Level (PL) indicates deflation, leading to lower Real GDP as businesses cut back on production. Consequently, unemployment rises as firms reduce their workforce in response to decreased demand.

If the Federal Reserve decreases the money supply to combat an inflationary gap, what might be a negative outcome?

• Unemployment rates would rise

• Price Level will rise

• Real GDP (Output) will rise

• international trade would stop

Answer explanation

If the Federal Reserve decreases the money supply, it can lead to higher unemployment rates as businesses may cut back on hiring due to reduced consumer spending and investment, thus worsening the economic situation.