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The crowding-out effect refers to the possibility that an

increase in gov't borrowing will result in higher interest rate, which will crowd out private investment and consumption

The new classical model states that a

budget deficit will have no impact on real interest rate

if the crowding out effect is strong, how will the potency of discretionary fiscal policy be affected?

it will make fiscal policy less potent

"Expansionary fiscal policy will tend to substantially increase current real output." Which of the following models would tend to support such a statement?

the Keynesian model, but not the crowding-out and new classical models

The modern synthesis view of fiscal policy stresses

the difficulties involved in timing fiscal policy changes so they will exert a stabilizing impact on the economy.

The crowding-out effect suggests that

a reduction in private spending that results from higher interest rates caused by a budget deficit will largely offset the expansionary effects of the deficit.

The modern consensus view of fiscal policy stresses

that both b and c are true.

Keynesians and non-Keynesians would largely agree on which one of the following statements?

Proper timing of discretionary fiscal policy is difficult to achieve.

In the new classical model, a $100 billion increase in government purchases financed by borrowing will

leave the interest rate, aggregate demand, and real output unchanged.

Which of the following is a potential drawback of an expansion of government spending projects during a recession?

Those benefiting from spending projects will lobby for a continuation of these projects long after the economy has recovered.

The new classical model implies that substitution of debt for tax financing

leaves wealth, and therefore aggregate demand, unchanged because the debt will require higher future tax rates.

A substantial decrease in marginal tax rates will encourage individuals to

increase their earnings and work effort.

Susan sells life insurance and is considering buying a $50,000 Mercedes for business purposes (thus, the expense reduces her taxable income). If Susan is in the 40 percent marginal tax bracket, how much after-tax income will she have to give up in order to enjoy the Mercedes?


Which of the following would be most likely to maintain that spending increases and larger budget deficits would help promote recovery from the recession of 2008-2009?

Keynesian economists

The supply-side effects of a reduction in taxes are the result of

increased attractiveness of productive activity relative to leisure and tax avoidance.

Which of the following groups would be least likely to support a balanced budget amendment to the U.S. Constitution?


According to the Keynesian view, government spending will have its greatest impact during a severe recession because

underemployed resources will be widespread and the crowding out of private spending will be minimal.

Other things being constant, countries with higher rates of saving

will have higher rates of investment and growth.

The persistence of budget deficits during the last several decades is not surprising because politicians will find

budget deficits more attractive than budget surpluses.

A supply-side economist would stress which of the following attributes of fiscal policy?

the impact of marginal tax rates on the supply and productivity of resources

A major advantage of built-in or automatic stabilizers is that they

require no Congressional action to be effective.

The Great Depression provided support for Keynes' view that

prolonged periods of unemployment would be present when demand is deficient.

Keynesian analysis stresses that a tax cut that increases the government's budget deficit (or reduces its budget surplus)

will stimulate aggregate demand and, thereby, promote employment.

If the MPC is 3/4, the simple expenditure multiplier is


Keynesian countercyclical budget policy suggests that

a budget deficit is needed if the economy is operating at less than full employment.

If fiscal policy is going to exert a stabilizing impact on the economy, it must be

timed correctly.

Which of the following would a Keynesian economist be most likely to stress?

Businesses will not produce goods and services if they do not think people will buy them.

If an economy were experiencing a high rate of unemployment as the result of weak aggregate demand, a Keynesian economist would be most likely to recommend

a reduction in taxes, without any offsetting reduction in government expenditures.

According to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate?

an increase in government expenditures and/or a reduction in taxes

Rather than seeking to balance the budget, Keynesian economists argue that the government's tax and spending policies should be determined by the

level of aggregate demand required to achieve full employment of resources

According to the Keynesian view, an unanticipated reduction in spending will

raise business inventories and lead to a decline in output.

When the economy enters a recession, automatic stabilizers create

larger budget deficits.

When the spending of consumers, businesses, government, and foreigners (net exports) is less than the current level of output, Keynesian analysis indicates that

the economy's output will fall short of its potential.

Which of the following is a problem with discretionary fiscal policy as an economic stabilization tool?

It is difficult to properly time discretionary changes in fiscal policy

The Keynesian macroeconomic model was highly popular for several decades following World War II because it provided an explanation for

the prolonged unemployment of the 1930s.

Which of the following is the best example of an automatic stabilizer?

unemployment compensation program

If the federal government is running a budget deficit,

the U.S. Treasury will finance the deficit by issuing additional bonds.

If the economy is in a recession, and the government raises taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to

prolong the recession and increase its severity.

If the federal government runs a budget deficit in order to finance an increase in spending, where do the funds to finance the spending come from?

additional bonds issued by the U.S. Treasury

Within the Keynesian model, if the output of an economy is less than the full-employment level, then

output will tend to remain below full-employment capacity unless aggregate expenditures increase.

What restricts the Fed's ability to write checks and purchase U.S. securities?

Nothing; the Fed can create money simply by writing a check on itself.

Ordinary commercial banks can expand the supply of money by

using a portion of their deposits to extend additional loans.

Which of the following compose the reserves of a commercial bank?

vault cash and deposits of the bank with the Federal Reserve

Why did the monetary base increase rapidly during the economic crisis of 2008?

The Fed purchased more assets and extended more loans.

Which of the following is not a component of the M1 money supply?

outstanding balances on credit cards

If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply, it could

increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans.

Which of the following actions of the Fed would increase the money supply?

all of the above are correct.

If a number of people suddenly deposit into their checking accounts a great deal of cash previously kept in their pockets or at home, other things constant, their actions will

create excess reserves and place banks in a position to extend additional loans, which will expand the money supply.

Reserves that banks are required by law to keep on hand to back up their deposits are called:

required reserves.

When the Federal Reserve sells government bonds to the public, it directly

reduces the M1 money supply and decreases the reserves of the commercial banking system.

he three basic functions of money are

a medium of exchange, a store of value, and a unit of account.

Money is

whatever is generally accepted in exchange for goods and services.

The federal funds rate is the interest rate

banks pay when they borrow money from each other for short periods of time.

Why did the monetary base increase rapidly during the economic crisis of 2008?

The Fed increased both its purchase of assets and quantity of loans extended.

Which of the following tends to reduce bank failures as the result of bank runs by depositors?

the Federal Deposit Insurance Corporation

Suppose the Fed purchases $100 million of U.S. securities from the public. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a

$500 million increase in the money supply.

A reserve requirement of 20 percent implies a potential money deposit multiplier of


The difference between the total reserves that a bank holds and the amount that is required by law are called

excess reserves.

Suppose all banks are subject to a uniform reserve requirement of 20 percent and that the First Guarantee Bank has no excess reserves. If a new customer deposits $50,000, the bank could extend new loans up to a maximum of:


If the Fed wanted to use all four of its major monetary control tools to decrease the money supply, it would

sell bonds, increase the discount rate, increase reserve requirements, and increase the interest rate paid on excess reserves.

Refer to Figure 14-9. If the Fed unexpectedly increases the money supply, the short-run impact of this policy will be a movement to

P2 and Y3.

When the Fed unexpectedly decreases the money supply,

real interest rates will rise and the foreign exchange value of the dollar will appreciate.

When the Fed unexpectedly increases the money supply, it will cause an increase in aggregate demand because

all of the above are correct.

Persistently expansionary monetary policy that stimulates aggregate demand and leads to inflation will

fail to increase real output once decision makers fully anticipate the inflation.

A shift to a more expansionary monetary policy will

exert a stabilizing impact on the economy if the effects of the policy are felt during an economic downturn.

During the nine months following July 2008, the Fed doubled the monetary base and generated huge excess reserves within the commercial banking system. This policy increases the danger of

rapid future growth of the money supply and inflation.

Which of the following makes it more difficult for monetary policy makers to time policy changes correctly?

The primary effects of the policy change will not be felt for 6 to 15 months into the future.

During 2001-2004, the Fed injected additional reserves into the banking system, which reduced the federal funds rate and other short-term interest rates. Other things constant, what is the most likely short-run impact of this policy?

an increase in aggregate demand and real GDP

According to monetarists, which of the following would most likely eliminate inflation?

a steady expansion in the money supply at a rate no greater than the long-run growth of real output

If the growth rate of real GDP is 3 percent, velocity is constant, and the money supply grows at 9 percent, the rate of inflation will be approximately

6 percent.

Refer to Figure 14-9. If the Fed unexpectedly increases the money supply, in the long run, the impact of the unanticipated expansionary policy will be a movement to

P3 and Y2.

Given the strict quantity theory of money, if the quantity of money doubled, prices would


The most likely short-run impact of an unanticipated decrease in the money supply is a(n)

increase in the real interest rate, which in turn reduces investment and real GDP.

Classical economists, who adhered to the quantity theory of money, believed that an increase in the money supply would cause

a proportional change in prices.

If the Federal Reserve unexpectedly increases the money supply, which of the following will most likely happen in the short run?

real GDP will rise.

Suppose the economy is experiencing full employment. An unanticipated increase in the money supply will

raise real GDP and the price level in the short run, but in the long run will cause no change in real GDP and only a higher price level.

Which of the following will make it difficult for the Fed to institute shifts in monetary policy in a manner that will promote economic stability?

the long and variable time lags between shifts in monetary policy and impact on output and employment

The cost of holding money balances increases when

the money interest rate increases.

The velocity of money is

the average number of times one dollar is used to buy final goods and services during a year.

Which of the following is a true statement?

All of the above are true.

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