Monetary Policy

1. 12-a-24 E
A reduction in inflation can best be achieved by which of the following
combinations of fiscal and monetary policy?
Fiscal Policy Monetary Policy
(A) Increase taxes Sell government bonds
(B) Decrease taxes Buy government bonds
(C) Decrease taxes Lower margin requirements
(D) Decrease government Lower discount rate spending
(E) Increase government Raise discount rate spending

2. 12-a-49 I
Which of the following occurs as investment becomes more responsive to
changes in the interest rate?
(A) Monetary policy becomes more effective at changing real gross domestic
product.
(B) Fiscal policy becomes more effective at changing real gross domestic product.
(C) Monetary policy becomes more effective at changing interest rates.
(D) Fiscal policy becomes more effective at changing interest rates.
(E) There is no change in the effectiveness of either monetary or fiscal policy.

3. 12-a-59 I
Advocates of a monetary rule recommend increasing the money supply at a rate
that is equal to the rate of increase in which of the following?
(A) Price level
(B) Unemployment rate
(C) Level of exports
(D) Level of imports
(E) Long-run real gross domestic product

4. 13-a-10 E
A discretionary fiscal policy action to reduce inflation in the short run would be
to
(A)Increase transfer payments to those fixed incomes
(B) Increase taxes or decrease government spending
(C)Decrease taxes or increase government spending
(D) Increase taxes and the money supply
(E) Decrease taxes and interest rates

5. 13-a-22 E
Expansionary monetary policy will most likely cause interest rates and
investment to change in which of the following ways in the short run?
Interest rates Investment
 (A)Increase increase
(B) Increase Decrease
(C)Decrease Increase
(D) Decrease Decrease
(E) No change Increase

6. 14-a-35 I
If a contractionary fiscal policy is followed by an expansionary monetary policy,
nominal interest rate and employment would most likely be affected in which of
the following ways in the short run?
Nominal Interest Rate Employment
(A) Increase Increase
(B) Increase Decrease
(C) Decrease Decrease
(D) Decrease Indeterminate
(E) Indeterminate Decrease

7. 14-a-58 I
If wages and prices are perfectly flexible and inflation is correctly anticipated,
then an expansionary monetary policy will affect the real output and price level
in which of the following ways?
Real Output Price Level
(A) Increase Increase
(B) Increase Decrease
(C) Increase Not change
(D) Not change Increase
(E) Not change Not change

8. 15-a-21 I
If fiscal policy is used to correct a recessionary gap, which of the following would
most likely occur in the absence of crowding out in the short run?
Real Output Unemployment
(A) Increase Decrease
(B) Increase Increase
(C) Decrease Decrease
(D) Decrease Increase
(E) Decrease No change

9. 16-a-12 H
The implementation of an expansionary monetary policy by the Canadian central
bank will result in which of the following changes in the short run?
Interest Rate Canadian Dollar
(A) Increase Appreciate
(B) Increase Depreciate
 (C) Decrease Depreciate
(D) No change Depreciate
(E) Decrease Appreciate

10. 16-a-14 E
Which of the following is a monetary policy that can be used to counteract a
recession?
(A) Buying bonds in the open market
(B) Increasing the discount rate
(C) Increasing the required reserve ratio
(D) Lowering tax rates
(E) Increasing government spending

11. 16-a-46 I
Which of the following mixes of fiscal and monetary policy would reduce
inflation?
Fiscal Policy Monetary Policy
(A) Decrease spending Buy bonds
(B) Decrease taxes Buy bonds
(C) Increase taxes Sell bonds
(D) Increase spending Buy bonds
(E) Increase spending Sell bonds

12. 16-a-50 E
Supply-side economists are most likely to favor which of the following short-run
policies?
(A) Increasing government spending on social welfare
(B) Increasing government spending to help promote the country’s business
abroad
(C) Cutting marginal tax rates to promote savings, investment, and work
(D) Financing government spending on infrastructure by increasing sales tax
rather than increasing income tax
(E) Increasing corporate profit tax rates

13. 16-a-52 I
If the government implements an expansionary fiscal policy, what action can the
central bank take to maintain a stable interest rate?
(A) Increase the required reserve ratio
(B) Increase personal income tax rates
(C) Decrease personal income tax rates
(D) Sell government bonds
(E) Buy government bonds

14. 17-a-14 I
 Which of the following combinations of fiscal and monetary policy will reduce
the price level?
Fiscal Policy Monetary Policy
(A) Increasing government spending Buying government bonds
(B) Increasing government spending Selling government bonds
(C) Decreasing government spending Buying government bonds
(D) Decreasing government spending Selling government spending
(E) Decreasing taxes Decreasing the discount rate

15. 17-a-47 I
In the short run, a tight monetary policy tends to cause
(A) A decrease in the interest rate and a decrease in prices
(B) A decrease in the interest rate and an increase in private investment
(C) A decrease in prices and an increase in private investment
(D) An increase in the interest
(E) An increase in interest rate and a decrease in private investment

16. 18-a-8 I
Which of the following combinations of fiscal and monetary policies will correct a
severe recession?
(A) Increasing income tax rates and decreasing the money supply
(B) Increasing both the income tax rates and the money supply
(C) Decreasing both the income tax rates and the money supply
(D) Decreasing income tax rates and increasing the money supply
(E) Decreasing income tax rates and increasing the federal funds rate

17. 18-a-28 I
Which of the following is a monetary policy aimed at increasing the equilibrium
interest rate in the money market?
(A) Raising taxes
(B) Lowering the discount rate
(C) Lowering the federal funds rate
(D) Selling bonds on the open market
(E) Lowering the required reserve ratio

Answer: 1 A, 2 A, 3 E, 4 B, 5 C, 6 D, 7 D, 8 A, 9 C, 10 A, 11 C, 12 C, 13 E, 14 D, 15 E, 16
D, 17 D