AP Macro Unit 5/6 AP Classroom

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

Assume that the government implements a deficit-reduction policy that results in changes in aggregate income and output. Then the Federal Reserve engages in monetary policy actions that reverse the changes in income and output caused by fiscal policy action. Which of the following sets of changes in taxes, government spending, and administered interest rates is most consistent with these policies?

• Taxes Increase, Government Spending Increase, Administered Interest Rates Decrease

• Taxes Increase, Government Spending Decrease, Administered Rates Decrease

• Taxes Increase, Government Spending Decrease, Administered Interest Rates Increase

• Taxes Decrease, Government Spending Increase, Administered Interest Rates No change

• Taxes Decrease, Government Spending Decrease, Administered Interest Rates Decrease

A stimulative fiscal policy combined with a restrictive monetary policy will necessarily cause

• gross domestic product to increase

• gross domestic product to decrease

• interest rates to fall

• interest rates to rise

• the federal budget deficit to decrease

If investors feel that business conditions will deteriorate in the future, the demand for loans and real interest rate in the loanable funds market will change in which of the following ways in the short run?

• Demand for Loans Increase, Real Interest Rate Increase

• Demand for Loans Increase, Real Interest Rate Decrease

• Demand for Loans Decrease, Real Interest Rate Increase

• Demand for Loans Decrease, Real Interest Rate Decrease

• Demand for Loans Decrease, Real Interest Rate Not change

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

• There is a decrease in investment spending.

• here 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.

If both contractionary monetary policy and contractionary fiscal policy are carried out, what will most likely happen to interest rates and real gross domestic product (GDP) in the short run?

• Both interest rates and real GDP will increase.

• Both interest rates and real GDP will decrease.

• Interest rates will decrease, and real GDP will stay the same.

• Interest rates will increase, and real GDP will decrease.

• Real GDP will decrease, and the change in interest rates will be indeterminate.

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

• Interest Rates Increase, Unemployment Indeterminate

• Interest Rates Increase, Unemployment Decrease

• Interest Rates Decrease, Unemployment Decrease

• Interest Rates Indeterminate, Unemployment Decrease

• Interest Rates Indeterminate, Unemployment Increase

If the Federal Reserve wishes to use monetary policy to reinforce Congress' fiscal policy changes, it should

• decrease its administered interest rates when government spending is increased

• decrease its administered interest rates when government spending is decreased

• increase its administered interest rates when government spending is increased

• increase its administered interest rates when income taxes are decreased

• decrease its administered interest rates when income taxes are increased

Suppose that the Federal Reserve is committed to keeping the nominal interest rate fixed. To maintain the interest rate target in the face of an expansionary fiscal policy, the Federal Reserve can do which of the following?

• Increase the prime rate

• Increase the discount rate

• Increase the federal funds rate

• Decrease its administered interest rates

• Decrease income tax rates

Which of the following policy combinations is most likely to cure a severe recession?

• Monetary Policy Action - Decrease interest on reserves, Taxes - Increase, Government Spending - Decrease

• Monetary Policy Action - Decrease interest on reserves, Taxes - Decrease, Government Spending - Increase

• Monetary Policy Action - Decrease interest on reserves, Taxes - Decrease, Government Spending - Decrease

• Monetary Policy Action - Increase interest on reserves, Taxes - Decrease, Government Spending - Decrease

• Monetary Policy Action - Increase interest on reserves, Taxes - Increase, Government Spending - Increase