Monetary and Fiscal Policy

1. Suppose that the government increases its spending on goods and services. What will happen to equilibrium income and the market rate of interest (assuming nothing else changes)?

A. equilibrium income will rise, the rate of interest will fall.

B. equilibrium income will fall, the rate of interest will fall.

C. equilibrium income will rise, the rate of interest will rise.

D. equilibrium income will fall, the rate of interest will rise.

E. equilibrium income will rise but it is impossible to predict what will happen to the rate of interest.

2. Which of the following would be incompatible with supply-side economic policies?

A. curring personal and corporate marginal tax rates.

B. allowing businesses larger tax allowances for depreciation.

C. allowing businesses higher investment tax credits.

D. increasing government spending.

E. providing tax incentives for savers.

3. Increases in AD:

A. lead to increases in real interest and unemployment rates.

B. result in price inflation when resources are full employed.

C. may be caused by increases in the reserve requirement.

D. may be caused by an increase in taxes.

E. raise inflation unemployment.

4. The Phillips curve hypothesis posits a tradeoff between:

A. economic stability and growth.

B. consumption today vs. consumption tomorrow.

C. unemployment and inflation.

D. low interest rates and low taxes.

E. interest rates and the money supply.

5. Rational expectations theory:

A. is fully supported by most Keynesians.

B. suggests that even short run policy goals cannot be achieved unless the policies are complete suprises to the public.

C. suggests that if individuals are fooled by expansionary fiscal or monetary policy, the outcome will be permanent increases in output.

D. suggests that if individuals are fooled by recessionary fiscal or monetary policy, the outcome will be permanent increases in output.

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