1. To stimulate economic activity during a severe recession, the strongest appropriate fiscal policy is:
a. an increase in taxes and/or an increase in government spending
b. an increase in taxes and/or a decrease in government spending
c. a decrease in taxes and/or an increase in government spending
d. a decrease in government purchases and/or a decrease in transfer payments
e. a decrease in taxes and/or a decrease in government spending

2. An increase in income tax rates:
a. makes the aggregate expenditures function steeper, and raises the size of the
b. makes the aggregate expenditures function steeper, and lowers the size of the multiplier multiplier
c. makes the aggregate expenditures function flatter, and raises the size of the multiplier
d. makes the aggregate expenditures function flatter, and lowers the size of the multiplier
e. lowers aggregate expenditures, but has no effect on the size of the multiplier

3. An illustration of the term "automatic stabilizer" is provided by:
a. the tendency of tax collections to rise as the economy moves into a recession
b. the tendency of tax collections to fall as the economy moves into a recession
c. increases in tax rates as the economy moves into a recession
d. decreases in tax rates as the economy moves into a recession
e. public works designed to get the economy out of a depression

4. The full-employment budget will be in:
a. deficit, if the economy is below full employment and the actual budget is balanced
b. surplus, if the economy is below full employment and the actual budget is balanced
c. deficit, whenever the economy is below full employment
d. surplus, whenever the economy is below full employment
e. we don't have enough information; any one of the above statements may be correct

5. The deposit expansion multiplier the maximum amount by which the banking system actual may increase deposits as a result of represents an initial increase in bank reserves. In practice, the increase is likely to be less than shown by this multiplier, since:
a. a single bank can increase deposits by less than can the banking system as a whole
b. a single bank can increase deposits by more than can the banking system as a whole
c. as the banks expand their loans, the public will decide to deposit more currency in their bank accounts
d. banks may hold less than the required reserve ratio; with a smaller actual reserve ratio, the expansion of deposits is likewise smaller
e. banks may hold excess reserves, and the public may decide to hold more currency as the quantity of money increases

6. Which of the following will lead to an increase in the money supply?
a. A reduction in the discount rate
b. An open market sale of government securities
c. An increase in the reserve requirement ratio
d. An increase in the amount of money printed and held at the Federal Reserve Bank

7. Which sequence is most likely:
a. money supply increases, interest rate falls, investment falls, GNP falls
b. money supply increases, interest rate falls, investment increases, GNP increases
c. money supply increases, interest rate increases, investment increases, GNP falls
d. money supply increases, interest rate increases, investment falls, GNP falls
e. money supply increases, interest rate increases, investment falls, GNP increases

8. The quantity theory of money is best described as the proposition that:
a. M is a stable multiple of the monetary base
b. the required reserve ratio should be kept stable
c. the central bank should try to stabilize interest rates
d. Q is stable
e. V is stable

9. Keynes believed that an expansive monetary policy might not be a very effective as a way 1 stimulate the economy out of a depression. Monetary policy was most likely to be ineffective if
a. V were stable
b. the investment demand curve were flat
c. the demand curve for money were steep
d. interest rates were already very high
e. interest rates were already very low

10. The "crowding out" effect of fiscal policy applies to which of the following ideas?
a. an increase in G leads to an increase in interest rates, which leads to an increase in I*
b. an increase in G leads to a decrease in interest rates, which leads to an increase in I*
c. an increase in G leads to an increase in interest rates, which leads to a decline in I*
d. an increase in G leads to an increase in I*, which leads to an increase in interest rates
e. an increase in G leads to an increase in I*. which leads to a decrease in interest rates

1. To stimulate economic activity during a severe recession, the st...