Macro Unit 4 Test - Practice

With a constant money supply, if the demand for money decreases, the equilibrium interest rate and quantity of money will change in which of the following ways?

• Increase, Decrease

• Increase, Not change

• Decrease, Decrease

• Decrease, Increase

• Decrease, Not change

If an economy is operating with significant unemployment, an increase in which of the following will most likely cause employment to increase and the interest rate to decrease?

• Purchases of government bonds by the central bank

• Transfer payments

• Reserve requirements

• Government expenditures

• Investment in basic infrastructure

An appropriate fiscal policy to combat a recession would be to increase which of the following?

• Interest rates

• The money supply

• Taxes

• Government spending

• The sales of government bonds

Which of the following is most likely to occur if the Federal Reserve engages in open market operations to reduce inflation?

• A decrease in interest rates

• A increase in the sale of securities

• A decrease in the government deficit

• An increase in the money supply

• An increase in exports

Which Federal Reserve action can shift the aggregate demand curve to the left?

• Lowering the federal funds rate

• Lowering income taxes

• Lowering reserve requirements

• Raising the discount rate

• Raising government spending on national defense

Which of the following policy choices represents a combination of fiscal and monetary policies designed to bring the economy out of a recession?

• Decreasing both taxes and the money supply

• Increasing both taxes and the money supply

• Increasing government spending and decreasing the administered interest rates

• Increasing both taxes and the discount rate

• Engaging in deficit spending and government bond sales

Assume that the economy is at full employment. Policymakers wish to maintain the price level but want to encourage greater investment. Which of the following combinations of monetary and fiscal policies would best achieve this goal?

• No change, Contractionary

• Expansionary, No change

• Expansionary, Contractionary

• Expansionary, Expansionary

• Contractionary, Expansionary

In a limited reserves system the Federal Reserve decreases the federal funds rate by

• increasing the reserve requirement

• decreasing government spending

• increasing the discount rate

• selling government bonds on the open market

• buying government bonds on the open market

What is the relationship between the price of previously issued bonds and the prevailing market interest rate?

• The price of previously issued bonds is directly related to the prevailing market interest rate.

• The price of previously issued bonds is unrelated to the prevailing market interest rate.

• The price of previously issued bonds is inversely related to the prevailing market interest rate.

• The price of previously issued bonds is equal to the prevailing market interest rate.

• The price of previously issued bonds is less than the prevailing market interest rate.

Open market operations take place when the

• central bank buys or sells stocks

• central bank buys or sells government bonds

• central bank increases or decreases the discount rate to monitor the money supply

• central bank increases or decreases reserve requirements for depository institutions

• commercial banks borrow reserves from the central bank