ECO 205 - Quiz 09

1.How does expansionary monetary policy affect interest rates?

• A. Increases interest rates

• B. Decreases interest rates

• C. Has no effect

• D. Only affects inflation

2.What is the difference between monetary policy and fiscal policy?

• A. Monetary policy deals with taxes, while fiscal policy controls the money supply

• B. Fiscal policy is set by the central bank, while monetary policy is set by Congress

• C. Monetary policy is conducted by the central bank through controlling money supply, while fiscal policy is controlled by the government through taxation and spending

• D. They are the same thing

3.What is the crowding-out effect of fiscal policy?

• A. When Increased government spending reduces private investment due to higher interest rate

• B. When the central bank prints more money

• C. When inflation rises too quickly

• D. When unemployment increases

4.If a government wants to reduce unemployment, which fiscal policy should it adopt?

• A. Increase taxes

• B. Decrease government spending

• C. Implement expansionary fiscal policy

• D. Increase interest rates

5.When the government cuts its spending, the aggregate demand and output will ________. To offset this event, the Fed should ________the money supply to ________the interest rate to increase the aggregate demand.

• A. increase, fall, reduce

• B. rise, increase, reduce

• C. fall, decrease, increase

• D. fall, increase, reduce

6.A contractionary monetary policy is used when the economy is ________. This policy helps the economy reduce ________, but the economy may face to a rise in ________.

• A. overheated, inflation, unemployment

• B. overheated, unemployment, inflation

• C. sluggish, unemployment, inflation

• D. sluggish, inflation, unemployment

7.When the price level.........., money demand .........., leading to lower interest rate. As a result, a fall in interest rate .......... investment and the quantity of goods and services demanded.

• A. rises, decreases, increases

• B. rises, increases, decreases

• C. falls, decreases, increases

• D. falls, increases, decreases

8.If MPC = 0.5, ∆G = $20 billion, and there is no crowding-out effect, then ∆Y will be

• A. $10 billion

• B. $20 billion

• C. $30 billion

• D. $40 billion

9.Assume the MPC is 0.5. Assume there is a multiplier effect and that the total crowding-out effect is $10 billion. An increase in government purchases of $40 billion will shift aggregate demand curve to

• A. the right by $70 billion

• B. the right by $80 billion

• C. the left by $30 billion

• D. the left by $10 billion

10.Why might monetary policy be more effective in controlling inflation than fiscal policy?

• A. Fiscal policy does not require legislative approval

• B. Monetary policy has a faster implementation process

• C. Fiscal policy acts immediately

• D. Monetary policy affects only taxation