1. To reduce the possibility of inflation in the U.S.

1. To reduce the possibility of inflation in the U.S. economy, the Fed should:

A. lowers the reserve requirement and buy securities on the open market.

B. raises the discount rate and buy securities on the open market.

C. lowers the discount rate and sell securities on the open market.

D. raise the reserve requirement and sell securities on the open market.

E. raise the reserve requirement and lower the discount rate.

2. The classical model may have contributed to the severity of the Great Depression of the 1930s because:

A. it prescribed no fiscal response by the government.

B. it suggested that the Fed should increase taxes to avoid a deficit.

C. it failed to recognize the severity of the decrease in the money supply resulting from bank failure.

D. it failed to recognize that price levels can change when aggregate demand shifts.

E. it suggested that a contractionary fiscal policy could reduce government budget problems.

3. Expansionary fiscal policy conducted in an economy at full employment will have which combination of effects in the short run?

A. An increase in real output and a smaller increase in nominal output

B. An increase in real output, but a decrease in nominal output

C. A decrease in real output, but an increase in nominal output

D. An increase in real output and a larger increase in nominal output

E. An increase in output, but no decrease in unemployment

4. If the U.S. government conducts contractionary fiscal policy at the same time the Fed conducts expansionary monetary policy, what will be the most likely effects?

A. An increase in interest rates and a decrease in unemployment

B. A decrease in interest rates and an indeterminate change in output

C. An increase in the price level and a decrease in interest rates

D. An increase in the value of the dollar in foreign exchange markets and an increase in U.S. imports

E. An increase in interest rates, an increase in the value of the dollar, and an indeterminate change in unemployment

5. Which of the following will be an effect of unexpectedly low inflation?

A. Lenders will benefit at the expense of borrowers.

B. Workers with long-term wage contracts will suffer a decrease in real income.

C. The real money supply will increase, and the value of the currency will decrease.

D. Worker productivity will rise.

E. None of the above

6. According to the Keynesian model, expansionary fiscal policy will have what effect?

A. An increase in output and price levels

B. A decrease in unemployment and inflation

C. An increase in output and a decrease in the price level

D. No change in the price level and an increase in output

E. No change in output and an increase in the price level

7. Which of the following is an important criticism of the consumer price index?

A. It fails to recognize that consumers change their behavior in response to changes in the relative prices of goods and, as a result, generates an inflation rate that is too high.

B. It calculates the cost of a basket of goods purchased by an average consumer, an individual who doesn ’t really exist.

C. It fails to recognize that consumers change their behavior in response to changes in the relative prices of goods and, as a result, generates an inflation rate that is too low.

D. Because it does not include all goods produced in an economy, it will result in real interest rate calculations that are too high.

E. Because it includes only consumer goods, it fails to capture what is actually happening in the economy.

8. Which statement correctly describes the relationship between policy actions, interest rates, and bond prices?

A. If the Fed conducts expansionary monetary policy, the supply of bonds will increase, their price will decrease, and interest rates will decrease.

B. If the government conducts contractionary fiscal policy, the supply of bonds will increase, their price will decrease, and interest rates will increase.

C. If the government conducts expansionary fiscal policy, the supply of bonds will increase, their price will decrease, and interest rates will decrease.

D. If the Fed conducts contractionary monetary policy, the supply of bonds will increase, their price will decrease, and interest rates will decrease.

E. If the Fed conducts expansionary monetary policy, the demand for bonds will increase, their price will increase, and interest rates will decrease.

9. An increase in autonomous expenditures will have which of the following effects?

A. An increase in GDP, but no increase in the price level if the economy is in the Keynesian portion of the aggregate supply curve

B. An increase in both GDP and the price level regardless of the level of unemployment

C. A small increase in GDP and a relatively large increase in the price level if the economy is in the Keynesian portion of the aggregate supply curve

D. An increase in GDP, but no increase in the price level if the assumptions of the classical model are correct

E. An increase in unemployment and a decrease in the price level if the economy is operating in a region where the assumptions of the classical model are satisfied

10. Why is stagflation inconsistent with the idea of a Phillips curve?

A. Along a Phillips curve, growth is highest when inflation is low.

B. The Phillips curve suggests a tradeoff between inflation and unemployment.

C. Stagflation forces economists to accept the fact that the Phillips curve is upward rather than downward sloping.

D. Stagflation is a result of demand shocks rather than supply shocks.

E. Stagflation is inconsistent with the classical model of the economy.