University of Illinois Department of Economics
Econ 103 – Fall 2014
Exercise 4
TA: Zheng Zhang
1. Fiscal policy refers to
A) the techniques used by a business firm to reduce its tax liability.
B) the behavior of the nation's central bank, the Federal Reserve, regarding the nation's
money supply.
C) the spending and taxing policies used by the government to influence the economy.
D) the government's ability to regulate a firm's behavior in the financial markets.
2 If the government wants to reduce unemployment, government purchases should be
________ and/or taxes should be ________.
A) increased; increased
B) decreased; decreased
C) decreased; increased
D) increased; decreased
3 The spending or government purchase multiplier is
A) the difference between the old equilibrium level of output and the new equilibrium level
of output.
B) the ratio of the change in government purchases to the change in the equilibrium level of
output.
C) the ratio of the change in the equilibrium level of output to a change in government
purchases.
D) the difference between the new and old levels of government purchases.
4. Suppose an economy is at full-employment equilibrium at a GDP of $25
billion and investment declines by $4 billion. According to Keynes, this economy
will:
A)
Quickly self adjust back to full employment.
B)
Reach a new equilibrium at $21 billion.
C)
Eventually reach a new equilibrium at an output level significantly
less than $21 billion.
D)
Reach a new equilibrium at a level of output between $21 billion and
$25 billion.
5 Which of the following about recessionary gap is true?
A)
The amount by which aggregate expenditure falls short of the level
needed to generate full employment output without inflation.
B)
The difference between full employment output and equilibrium
output.
C)
When a recessionary gap exists, government may decrease its
spending and/or increase taxes.
D)
Recessionary gap may be caused by a fall in the planned investment in
private sectors.
6
If MPC=0.8 , recessionary gap is 30 billion, how much is the gap between
equilibrium GDP and full employment GDP.
A)
100 billion
University of Illinois Department of Economics
B)
150 billion
C)
200 billion
D)
250 billion
7 In Open Market Operation, purchases of securities by the Fed would
A)
increase money demand
B)
decrease money demand
C)
increase money supply
D)
decrease money supply
8 Which of the following is not an example of monetary policy?
A)
the Fed reduces its discount rate from 5% to 3%
B)
the Fed raises required reserve ratio from 5% to 10%
C)
the Fed made 30 billion dollars sales of treasury bills.
D)
The Fed supervises the operation and acquisition of commercial
banks
9
If the economy is in recession, which of the policies conducted by the
government or the Fed is appropriate?
A) The government raises the income tax rate
B) The government cut its budget on highway construction
C) The Fed sells 10 billion dollars of treasury bonds to the public.
D) The Fed reduces its required reserve ratio
10 If the economy is in a period of inflation, which of the policies conducted by
the government or the Fed is appropriate?
A) The Fed reduces its discount rate at which commercial banks borrow
funds
B) The Fed purchases 50 billion dollars of treasury bills from Chase and Citi
Bank.
C)
The government decreases its expenses on disability pension
D)
The government set up a new research program on breast cancer and
spends 10 million dollars on it.
Answer Key:
1. C 2. D 3. C 4. C 5. A 6. B 7. C 8. D 9. D 10. C