Exam 3

Question 1

If the government were to increase its spending, it would expect:

Answer 1

Aggregate demand to shift to the right

Question 2

If the government undertakes expansionary fiscal policy, it:

Answer 2

Must want to encourage economic activity

Question 3

If the government were to increase taxes, it would be enacting:

Answer 3

Contractionary fiscal policy

Question 4

Assuming the economy is represented by the graph shown, if the government were to enact an expansionary
Fiscal policy, it would be most likely to move from:

Answer 4

A to B

Question 5

One reason the government enacts fiscal policy instead of waiting for the economy to correct itself is:

Answer 5

The automatic adjustment can take a very long time

Question 6

The process of deciding on and passing fiscal policy legislation creates:

Answer 6

A formulation lag

Question 7

When an economy is in recession, discretionary fiscal policy would call for_____________ and the automatic stabilizers would______________

Answer 7

Lowering tax rates; lower tax revenues

Question 8

When the U.S. Economy hits a recession, fiscal policy:

Answer 8

Automatically becomes expansionary because average tax rates go down and spending on welfare programs goes up

Question 9

The idea that if governments cut taxes but not spending, people will not change their behavior, and expansionary policy will have little expansionary effect is known as:

Answer 9

Ricardian equivalence

Question 10

I the marginal propensity to consumer is .8 the government spending multiplier must be:

Answer 10

5

Question 11

If the MPC were to increase from .75 to .8 then the government spending multiplier would:

Answer 11

Increase from 4 to 5

Question 12

If the government wishes to increase GDP by $1,200b and the MPC is .75 it should:

Answer 12

Increase its spending by $300b

Question 13

If the MPC = .75 then the taxation multiplier must be:

Answer 13

-3

Question 14

A budget deficit is:

Answer 14

The amount of money a government spends beyond the net revenue it brings in

Question 15

A financial market is where people trade:

Answer 15

Futur claims on funds or goods

Question 16

A bank acts as _____________ between buyers and sellers

Answer 16

An intermediary

Question 17

The demand for low able funds comes from:

Answer 17

Investments

Question 18

The interest rate:

Answer 18

All of these are true

Question 19

If Howard takes out $400 loan for one year at 5 percent interest annually, he will pay back a total of:

Answer 19

$420

Question 20

When current economic conditions are bad, people are _________ inclined to save, and when they predict bad future economic conditions they are__________ inclined to save now

Answer 20

Less; more

Question 21

The reduction in private borrowing that is caused by an increase in government borrowing is called:

Answer 21

Crowding out effect

Question 22

A default happens when:

Answer 22

A borrower fails to pay back a loan according to the agreed- upon terms

Question 23

The risk- free rate is:

Answer 23

The interest rate at which one would lend if there were no risk of default

Question 24

Intermediation is the process of:

Answer 24

Bringing together buyers and sellers in a market

Question 25

If an asset is considered liquid, then it:

Answer 25

Can be sold quickly for cash without much loss of value

Question 26

Diversification is:

Answer 26

The process by which risks are shared among many different assets or people

Question 27

A dividend is:

Answer 27

A payment made periodically to all shareholders of a company

Question 28

Speculators in the financial market:

Answer 28

Buy and sell assets for financial gain

Question 29

In general, financial assets that have a _______ amount of risk have a __________ rate of return

Answer 29

Higher; higher

Question 30

Government decisions about the level of taxation and public spending are called:

Answer 30

Fiscal Policy