BAIB1003 Week 5 Seminar 2 Quiz 23/24

1. 1. According to the theory of liquidity preference, an economy’s interest rate adjusts

• a. to balance the supply and demand for loanable funds.

• b. to balance the supply and demand for money.

• c. one-for-one to changes in expected inflation.

• d. to equal the interest rate prevailing in world financial markets.

2. If the central bank wants to contract aggregate demand, it can _________ the money supply and thereby _________ the interest rate.

• a. increase; increase

• b. increase; decrease

• c. decrease; increase

• d. decrease; decrease

3. 3. The Fed’s target for the federal funds rate

• a. is an extra policy tool for the central bank, in addition to and independent of the money supply.

• b. commits the Fed to set a particular money supply so that it hits the announced target.

• c. is a goal that is rarely achieved because the Fed can determine only the money supply.

• d. matters to banks that borrow and lend federal funds but does not influence aggregate demand.

4. 4. If the government wants to expand aggregate demand, it can _________ government purchases or _________ taxes.

• a. increase; increase

• b. increase; decrease

• c. decrease; increase

• d. decrease; decrease

5. 5. What is the primary tool used by the Bank of England to implement monetary policy in the UK?

• a. Fiscal stimulus

• b. Interest rates

• c. Government spending

• d. Taxation

6. 6. During an economic downturn, which fiscal policy measure is typically used by the UK government to stimulate economic activity?

• a. Decreasing government spending

• b. Increasing taxes

• c. Implementing austerity measures

• d. Increasing government spending

7. Suppose a wave of negative “animal spirits” overruns the economy, and people become pessimistic about the future. to stabilise aggregate demand, the Fed could _________ its target for the federal funds rate or congress could _________ taxes.

• a. increase; increase

• b. increase; decrease

• c. decrease; increase

• d. decrease; decrease

8. Monetary policy affects the economy with a lag mainly because it takes a long time

• a. for central banks to make policy changes.

• b. to change the money supply after a policy decision has been made.

• c. for a change in the money supply to affect interest rates.

• d. for a change in interest rates to affect investment spending.

9. Which of the following is an example of an automatic stabiliser? When the economy goes into a recession,

• a. more people become eligible for unemployment insurance benefits.

• b. stock prices decline, particularly for firms in cyclical industries.

• c. congress begins hearings about a possible stimulus package.

• d. the Fed changes its target for the federal funds rate.

10. When the Bank of England lowers interest rates, it aims to:

• a. Reduce borrowing and investment

• b. Encourage borrowing and investment

• c. Stabilise exchange rates

• d. Control inflation