Fiscal Policy, Monetary Policy and Correcting the Economy Test

Matching

Identifying Key Terms
Match each term with the correct statement below.
a.	Treasury bill	d.	fiscal policy	
b.	crowding-out effect	e.	multiplier effect	
c.	federal budget	

	1.	when the level of federal borrowing makes it more difficult for private businesses to borrow

	2.	a written document indicating the amount of money the government expects to receive for a certain year and authorizing the amount of money the government can spend that year

	3.	the idea that every one dollar change in fiscal policy creates a greater than one dollar change in the national income

	4.	federal government’s use of taxing and spending to keep the economy stable

	5.	a type of short-term bond that must be repaid within a year or less

Multiple Choice
Identify the choice that best completes the statement or answers the question.

	6.	The federal budget is put together
a.	every other year.	
b.	by Congress and the White House.	
c.	to report to Congress on the preceding year’s expenditures.	
d.	in order to reimburse state governments for costs of federally funded programs.	

	7.	An example of expansionary fiscal policy would be
a.	cutting taxes.	
b.	cutting government spending.	
c.	cutting production of consumer goods.	
d.	cutting prices of consumer goods.	

	8.	In contrast with classical economics, Keynesian economics
a.	reduces the role of government.	
b.	takes a broader view of the economy.	
c.	relies more heavily on the laws of supply and demand.	
d.	more strongly emphasizes the importance of individual businesses to the overall health of the economy.	

	9.	When revenues exceed expenditures,
a.	there is a budget surplus.	
b.	there is a budget deficit.	
c.	the government must create more money.	
d.	the government is forced to issue more bonds to raise money.	

	10.	When you buy a United States Savings Bond, you
a.	loan money to the government.	
b.	borrow money from a savings and loan association.	
c.	donate money for special government projects.	
d.	pay for your child’s college education.	

	11.	An example of contractionary fiscal policy would be
a.	cutting taxes.	
b.	decreasing government spending.	
c.	increasing production of consumer goods.	
d.	expanding the government’s role in regulating private industry.	

	12.	The purpose of expansionary fiscal policy is to
a.	increase GDP (output).	
b.	prevent hyperinflation.	
c.	slow the growth of the GDP.	
d.	increase the separation between government and private industry.	

	13.	Supporters of supply-side economics believe that
a.	government should be used as a tool to increase demand for goods.	
b.	demand for goods increases when prices rise.	
c.	taxes have a strong negative influence on economic output.	
d.	tax cuts have little impact on worker productivity.	

	14.	What leads directly to the crowding-out-effect?
a.	a big federal budget deficit	
b.	increased government spending	
c.	a federal budget surplus	
d.	cuts in federal spending	

	15.	Which of these is a contractionary fiscal policy?
a.	The federal government builds a new medical research center at a prestigious state university.	
b.	The President and Congress pass a new two-cent-per-gallon gasoline tax.	
c.	The federal government sends taxpayers up to $300 each in the form of an income tax rebate.	
d.	The sales tax on clothing is lifted for one week before the school year begins.	

	16.	Why does the Federal Reserve alter monetary policy?
a.	to regulate the banking industry	
b.	to provide services to member banks	
c.	to enable banks to clear checks	
d.	to lessen the effect of natural business cycles that cause problems in the economy	

	17.	How could the Federal Reserve encourage banks to lend out more of their reserves?
a.	reduce the discount rate	
b.	raise the required amount of reserve	
c.	increase the prime rate	
d.	reduce the money supply	

	18.	How many Federal Reserve Districts are there?
a.	6	
b.	9	
c.	12	
d.	20	

	19.	Why does a bank sometimes hold reserves?
a.	to be sure they can meet their customers’ demands	
b.	to protect against high prices	
c.	to make check clearing easier	
d.	to keep from lending too much money	

	20.	What is the role of the Federal Open Market Committee?
a.	It collects information about each Federal Reserve District and reports on economic conditions to the Board of Governors.	
b.	Composed of seven members appointed by the President, it oversees the Federal Reserve System.	
c.	It redraws the map of the twelve Federal Reserve Districts every ten years in response to economic changes.	
d.	It makes key decisions about policies. interest rates and the growth of the United States money supply.	

	21.	The Required Reserve Ratio is 10 percent. The money multiplier is
a.	.1.	
b.	1.	
c.	.9.	
d.	10.	

	22.	As commercial banks keep more excess reserves, money creation
a.	increases.	
b.	decreases.	
c.	remains the same.	
d.	could either increase or decrease.	

	23.	Which of the following instruments is NOT used by the Federal Reserve to change the money supply?
a.	the discount rate	
b.	the required reserve ratio	
c.	the federal tax code	
d.	open market operations	

	24.	The most-used instrument for controlling week-to-week changes in the money supply is
a.	the required reserve ratio.	
b.	the money multiplier.	
c.	open market operations.	
d.	the discount rate.	

	25.	What effect would an increase in the discount rate have on the money supply?
a.	It would cause the money supply to contract.	
b.	It would increase the money multiplier.	
c.	It would cause the money supply to expand.	
d.	It would have no effect on the money supply.	

	26.	 Suppose the required reserve ratio is 20 percent. $5 million in excess reserves allows commercial banks to create as much as:
a.	$25 million.	
b.	$10 million.	
c.	$5 million.	
d.	$1 million.	

	27.	How many members can serve on the Board of Governors of the Federal Reserve System? 
a.	7	
b.	9	
c.	12	
d.	14	

	28.	The functions of money are to serve as a: 
a.	Resource allocator, method for accounting, and means of income distribution	
b.	Unit of account, store of value, and medium of exchange	
c.	Determinant of consumption, investment, and government spending	
d.	 Factor of production, exchange, and aggregate supply	

	29.	A commercial bank has checkable deposits of $500,000, and the required reserve ratio is 20%. The required reserves of the bank are: 
a.	$10,000	
b.	$100,000	
c.	$1,000	
d.	$1,000,000	

	30.	The closest Federal Reserve Bank to Tallahassee is located in

a.	New York	
b.	Atlanta	
c.	San Fransisco	
d.	Chicago	

	31.	Which of the following is NOT a component of a bond?
a.	Coupon Rate	
b.	Dividend	
c.	Maturity	
d.	Per Value	

	32.	Which of the following bonds comes with the highest risk?
a.	Savings Bond	
b.	Treasury Bond	
c.	Municipal Bond	
d.	Junk Bond	

	33.	When you purchase a stock, you are purchasing:
a.	A piece of ownership in a company	
b.	A loan to be repaid by the company in the future	
c.	The capital gains experienced by a company	
d.	The dividends experienced by a company	

	34.	If you sell your stock for a higher price than you purchased it, you experience:
a.	Utility	
b.	Capital Gains	
c.	Dividends	
d.	A Default	

	35.	When the stock market experiences a steady increase in growth over time, we call this a(n):
a.	Economic Boom	
b.	Bull Market	
c.	Bear Market	
d.	Surplus Market	

Essay

Choose one of the following answer the question on the back of your scantron.  Be sure to include specific examples and details from our discussions.

	36.	Making Comparisons  How does supply-side economics differ from Keynesian economics?

	37.	Analyzing Information  Explain how government spending can trigger a chain of events that helps to improve the economy.

	38.	Comparing Concepts  What is the difference between national debt and budget deficit?

Fiscal Policy, Monetary Policy and Correcting the Economy Test
Answer Section

MATCHING

	1.	ANS:	B	PTS:	1	DIF:	Easy	REF:	396
OBJ:	6.15.2.1	TOP:	productive capacity	

	2.	ANS:	C	PTS:	1	DIF:	Easy	REF:	387
OBJ:	6.15.1.2	TOP:	federal budget		

	3.	ANS:	E	PTS:	1	DIF:	Easy	REF:	397
OBJ:	6.15.2.2	TOP:	multiplier effect	

	4.	ANS:	D	PTS:	1	DIF:	Easy	REF:	387
OBJ:	6.15.1.1	TOP:	fiscal policy

	5.	ANS:	A	PTS:	1	DIF:	Easy	REF:	405
OBJ:	6.15.3.2	TOP:	treasury bill

	6.	ANS:	B	PTS:	1	DIF:	Medium	REF:	387-388
OBJ:	6.15.1.2	TOP:	federal budget		

	7.	ANS:	A	PTS:	1	DIF:	Medium	REF:	389
OBJ:	6.15.1.3	TOP:	expansionary fiscal policy

	8.	ANS:	B	PTS:	1	DIF:	Medium	REF:	396-397
OBJ:	6.15.2.1	TOP:	classical economics | keynesian economics	

	9.	ANS:	A	PTS:	1	DIF:	Medium	REF:	403
OBJ:	6.15.3.1	TOP:	budget surplus		

	10.	ANS:	A	PTS:	1	DIF:	Medium	REF:	404-405
OBJ:	6.15.3.2	TOP:	savings bonds		

	11.	ANS:	B	PTS:	1	DIF:	Medium	REF:	389
OBJ:	6.15.1.3	TOP:	contractionary fiscal policy

	12.	ANS:	A	PTS:	1	DIF:	Medium	REF:	389
OBJ:	6.15.1.3	TOP:	expansionary fiscal policy

	13.	ANS:	C	PTS:	1	DIF:	Medium	REF:	399-400
OBJ:	6.15.2.2	TOP:	supply-side economics

	14.	ANS:	A	PTS:	1	DIF:	Easy	REF:	396
OBJ:	6.15.3.3	TOP:	crowding-out effect	

	15.	ANS:	B	PTS:	1	DIF:	Medium	REF:	390
OBJ:	6.15.1.3	TOP:	contractionary fiscal policy

	16.	ANS:	D	PTS:	1	DIF:	Medium	REF:	416-417
OBJ:	6.16.4.1	TOP:	monetary policy	

	17.	ANS:	A	PTS:	1	DIF:	Medium	REF:	428
OBJ:	6.16.3.2	TOP:	discount rate

	18.	ANS:	C	PTS:	1	DIF:	Medium	REF:	417
OBJ:	6.16.1.1	TOP:	federal reserve district

	19.	ANS:	A	PTS:	1	DIF:	Medium	REF:	427
OBJ:	6.16.3.2	TOP:	excess reserves	

	20.	ANS:	D	PTS:	1	DIF:	Easy	REF:	418
OBJ:	6.16.1.3	TOP:	federal open market committee

	21.	ANS:	D	PTS:	1	DIF:	Medium	REF:	426
OBJ:	6.16.3.1	TOP:	money multiplier | required reserve ratio	

	22.	ANS:	B	PTS:	1	DIF:	Easy	REF:	427
OBJ:	6.16.3.1	TOP:	excess reserves	

	23.	ANS:	C	PTS:	1	DIF:	Medium	REF:	427 | 428
OBJ:	6.16.3.2	TOP:	federal reserve		

	24.	ANS:	C	PTS:	1	DIF:	Medium	REF:	429
OBJ:	6.16.3.3	TOP:	open market operations

	25.	ANS:	A	PTS:	1	DIF:	Easy	REF:	428
OBJ:	6.16.3.2	TOP:	discount rate

	26.	ANS:	A	PTS:	1	DIF:	Hard	REF:	426
OBJ:	6.16.3.1	TOP:	money multiplier | required reserve ratio	

	27.	ANS:	A	PTS:	1

	28.	ANS:	B	PTS:	1

	29.	ANS:	B	PTS:	1

	30.	ANS:	B	PTS:	1

ESSAY

	36.	ANS:	
Supply-side economics tries to increase economic growth by increasing aggregate supply, while Keynesian economics uses government to change aggregate demand. Supply-side economics stresses the idea that taxation influences supply, using tax cuts to increase supply and higher tax rates to decrease supply.

PTS:	1	DIF:	Hard	REF:	386-400	OBJ:	6.15.2.1
TOP:	supply-side economics | keynesian economics

	37.	ANS:	
If the federal government increases its spending or buys more goods and services, it increases demand, which causes prices to rise. Higher prices encourage suppliers of goods and services to produce more. To do this, they must hire more workers. This leads to lower unemployment and an increase in output.

PTS:	1	DIF:	Hard	REF:	396-399	OBJ:	6.15.1.3
TOP:	multiplier effect	

	38.	ANS:	
Deficit stems from lack of revenue; debt stems from borrowing

PTS:	1

	31.	ANS:	B	PTS:	1

	32.	ANS:	D	PTS:	1

	33.	ANS:	A	PTS:	1

	34.	ANS:	B	PTS:	1

	35.	ANS:	B	PTS:	1