Understanding Fiscal and Monetary Policy

What are the three possible states of the economy according to macroeconomics?

• Boom, bust, recovery

• Growth, stagnation, decline

• Expansion, contraction, stability

• Recession, full employment, inflationary gap

Which of the following is a tool of fiscal policy to combat a recession?

• Increasing the reserve requirement

• Selling bonds

• Cutting taxes

• Decreasing government spending

How does increasing the money supply affect interest rates during a recession?

• It decreases interest rates

• It has no effect on interest rates

• It stabilizes interest rates

• It increases interest rates

What happens to aggregate supply if no policy action is taken during inflation?

• It fluctuates randomly

• It shifts to the right

• It remains unchanged

• It shifts to the left

Which action would the central bank take to decrease the money supply during inflation?

• Increasing the discount rate

• Buying bonds

• Decreasing taxes

• Lowering the reserve requirement