Economic Concepts Quiz

If the Federal Reserve institutes a policy to reduce inflation, which of the following is most likely to increase?

• Tax rates

• Investment

• Government spending

• Interest rates

• Gross domestic product

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

Country H’s current domestic output is lower than its potential domestic output. Assume that the central bank now decreases its administered interest rates. What will be the short-run effects of the central bank’s action on cyclical unemployment and real income?

• Cyclical unemployment will increase, and real income will increase.

• Cyclical unemployment will increase, and real income will decrease.

• Cyclical unemployment will increase, and real income will decrease.

• Cyclical unemployment will remain the same, and real income will increase.

• Cyclical unemployment will decrease, and real income will increase.

The federal funds rate is the interest rate that

• the Federal Reserve charges the federal government on its loans

• banks charge one another for short-term loans

• banks charge their best customers

• equalizes the yield on government bonds and corporate bonds

• is equal to the inflation rate

Assuming a banking system with limited reserves, when the central bank buys government securities on the open market, which of the following will decrease in the short run?

• Interest rates

• Taxes

• Investment

• The amount of money loaned by banks

• The money supply

Which of the following would lead to an increase in nominal interest rates?

• An expansionary monetary policy accompanied by an increase in the demand for money

• An expansionary monetary policy accompanied by a decrease in the demand for money

• An expansionary monetary policy conducted without any change in the demand for money

• A contractionary monetary policy accompanied by an increase in the demand for money

• A contractionary monetary policy accompanied by a decrease in the demand for money

An increase in the demand for loanable funds could be best explained by which of the following?

• There is a decrease in investment spending.

• There is an increase in the government’s budget surplus.

• Firms are optimistic about the future performance of the country’s economy.

• Domestic investors seek higher returns by investing in foreign financial assets.

• The economy is facing political instability.

During a mild recession, if policymakers want to reduce unemployment by increasing investment, which of the following policies would be most appropriate?

• Equal increases in government expenditure and taxes

• An increase in government expenditure only

• An increase in transfer payments

• An increase in the reserve requirement

• A decrease in administered interest rates

If the Federal Reserve pursues a contractionary monetary policy, output and the price level will change in which of the following ways in the short run?

• Output; increase Price Level; decreases

• Output; Increase Price Level; No change

• Output; Increase Price Level; Decrease

• Output; Decrease Price Level; Decrease

• Output; Decrease Price Level; Decrease

Changes in which of the following will change the money supply?

• number of banks in operation

• velocity of money

• price level

• prime rate

• open market operations