Name __________________________________________________
Government and the Economy: Budget, Fiscal & Monetary Policy Unit Test Review
Multiple Choice & Free Response/Graphing –__________________________________
FORMAT:
Test will cover all lectures, handouts, current events. This test will have many graphs on both sections of the test
Free Response Format: You will have 2 economic problems to solve using either fiscal or monetary policy
You will have to draw 1 or 2 graphs to solve the economic problem depending on the nature of your policy.
-Monetary Policy- requires 2 graphs to solve a policy (money market & Aggregate demand/supply)
-Fiscal Policy-
requires only 1 graph to solve policy (aggregate demand/supply)
You will need to analyze the affect of your policy over the short and long run and state the opportunity costs/benefits of your approach!
See practice test on website to check your understanding!
1) Identify and define the 4-types of unemployment
_______________---_______________________________
_____________---_____________________________________
_______________---_______________________________
_____________---_____________________________________
Which 2 can the U.S. Gov’t influence most? Why?_________________________________________________________________________
__________________________________________________________________________________________________________________
2) List & Define the 3-types of inflation.

Explain what causes each one?
_________________________
---
______________________________________________________________________
_________________________
---
______________________________________________________________________
_________________________
---
______________________________________________________________________
3) Explain what full employment means to an economist.


What economic problem can occur when the unemployment rate falls below this level?
Where on the AS curve symbolizes full employment?
______________________________________________________________________________________________________________
______________________________________________________________________________________________________________
______________________________________________________________________________________________________________
4) Identify & define the 3 general categories of taxes (i.e. progressive, etc.):
progressive
---
______________________________________________________________________
_________________________
---
______________________________________________________________________
_________________________
---
______________________________________________________________________
5) How would a Classical Economist respond different to a recession than a Keynesian Economist? Why?
______________________________________________________________________________________________________________
______________________________________________________________________________________________________________
______________________________________________________________________________________________________________
6) What was the total amount that the U.S. government spent in the most recent year we have figures for? $______________________
How much tax revenue did the U.S. government collect in the most recent year we have figures for?
$______________________
What was the budget deficit in the most recent year we have figures for?
$______________________
7)
What is meant by an “entitlement” program? ______________________________________________________________________
___________________________________________________________________________________________________________
8) Identify/define the 3 main entitlement programs, and the dollar amount and the percentage of the overall budget each one makes up.
Entitlement Program
9)
Description of Program
$ Amount Spent in the most
recent year we have figures for
% of Overall
Federal Budget
Explain why entitlement spending will be increasing so rapidly in the future.
10) Identify/define the two largest single non-entitlement components of the federal budget, and the dollar amount and the percentage of
the overall budget each one makes up.
% of Overall Federal Budget
Program
$ Amount Spent in the most recent year we have figures for
11) How is the federal debt related to federal deficits? What is the dollar amount of the current federal debt?
______________________________________________________________________________________________________________
______________________________________________________________________________________________________________
______________________________________________________________________________________________________________
12) Explain very precisely how the Federal Government raises money to cover deficit spending when it chooses not to raise taxes or cut
government spending:
_____________________________________________________________________________________________________________
_____________________________________________________________________________________________________________
13) What is the theory of “crowding out”? Why is crowding out a potential risk of excessive expansionary fiscal policy?
_______________________________________________________________________________________________
_______________________________________________________________________________________________
_______________________________________________________________________________________________
_______________________________________________________________________________________________
14) What are the 2-Types of FISCAL Policy and the goal of each?
Type 1: _________________________________________ Goal: _________________________________________
Type 2: _________________________________________ Goal: _________________________________________
15) What are the 2 Tools of FISCAL Policy?
Tool 1: ______________________________________
Tool 2: ___________________________________________
16)
AD/AS MODEL:
a. Draw an aggregate demand (AD) curve and an aggregate supply (AS) curve illustrating an economy that has strong (but not too strong) GDP
growth and moderate inflation.
b.
Label the axes
17) List the 2-Types of MONETARY Policy and the goal of each.
Type 1: _________________________________________ Goal: _________________________________________
Type 2: _________________________________________ Goal: _________________________________________
18) Identify and describe the 2-Tools of MONETARY Policy (one main tool and one minor tool)?
Minor Tool: ______________________---_________________________________________________________________
Major Tool: __________________________---________________________________________________________________________
By what specific means/mechanism does the Fed wield the above major tool? ___________________________________________
19) Explain precisely why lower interest rates will normally cause Aggregate Demand to shift to the right? For what reason would the
Federal Reserve lower interest rates (that is, the Federal Funds Rate)?
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
20) First, draw the MONEY MARKET GRAPH: Demand for Money and Supply of Money. Label the axes.
Second, draw an aggregate demand (AD) curve and an aggregate supply (AS) curve illustrating an economy with high demandpull inflation where the circular flow is moving too fast. Again, label the axes.
 Explain why the Money Supply curve is a vertical line._______________________________________________________
 What specifically would the Fed do (buy or sell Treasury bonds) to address this situation? __________________________
 Would the above policy be an example of loose or tight monetary policy? _____________________________________
 Which way would Money Supply shift during monetary policy? ___________________________
 On the graphs below, show graphically what effect such policy would have on the federal funds rate and what effect it
would have on Aggregate Demand:
MONEY MARKET GRAPH
AD/AS GRAPH
21)
Explain the economic logic of a progressive income tax system
a. Explain one potential problem if an income tax system becomes too progressive. (think about GDP growth!)
______________________________________________________________________________________________________________
______________________________________________________________________________________________________________
______________________________________________________________________________________________________________
22) Identify five specific taxes that some level of government collects to raise money for its various functions, then identify what level of
government imposes those taxes (national, state, local) , and identify if each tax is progressive, proportional, or regressive.
Specific tax
Example: Social Security tax
1.
Level of Gov’t that collects the tax (national,
state, and/or local government
National government
Type of tax: progressive, proportional, or
regressive
Proportional/flat
2.
3.
4.
5.
23) Describe the structure of the Federal Reserve System
How many Governors are there on the Federal Reserve Board of Governors? _________
How long are their terms of office? __________________
How is the Federal Open Market Committee (FOMC) related to the Board of Governors and what is its main power?
________________________________________________________________________________________________________
How many Federal Reserve District Banks are there? _________________
24) What are the two primary goals/responsibilities of the Federal Reserve/monetary policy?
________________________________________________ and __________________________________________________
25) Explain exactly what the Federal Funds rate is.
______________________________________________________________________________________________________________
______________________________________________________________________________________________________________
______________________________________________________________________________________________________________
26) For an economy that has an 11% unemployment rate and a -6.5% GDP growth rate



Draw an aggregate demand (AD) curve and an aggregate supply (AS) curve illustrating this economy (label your axes)
Demonstrate how the AD curve would shift if you used “expansionary” fiscal policy?
What two specific fiscal policy actions would Congress take in this situation? __________________________ and
_________________________________
27.GDP growth has been +5.5% & +6.0% the last 2 quarters. Unemployment is at 2%, consumer confidence is at a 10-year high.
The inflation rate is 5.8%
As a member of CONGRESS, formulate a policy that will address this problem.
A. Draw the Aggregate Demand Curve and the Aggregate Supply Curve that reflects the state of this economy.
B. Label each axis of your graph.
C. Explain in words what specific policy tools you will use. Be sure to explain the specific effects you expect from the actions you propose.
D. Illustrate the change Graphically [Label any new curves AD2 or AS2]
28. GDP growth has been -1.5% & -2.0% the last 2 quarters.
Unemployment is at 8%, consumer confidence is at a 10-year low, Auto and home sales are declining. The inflation rate is -0.4%.
As a MEMBER OF THE FEDERAL RESERVE, what policy would you implement in this economy?
A. Draw the Aggregate Demand Curve/Aggregate Supply Curve that reflects the state of this economy.

Label each axis of your graph.
B. Use Monetary Policy ONLY to solve this economic problem.

Explain your Monetary Policy plan in writing

Explain in writing the specific actions the Fed needs to take to implement this policy
C. Illustrate the change graphically with 2-graphs (Money Market Graph + AD/AD Graph)
MONEY MARKET GRAPH
AD/AS GRAPH
__________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________
29. What is a country’s debt-to-GDP ratio?
_________________________________________________________________________________
30. For context, what is the European Union’s debt-to-GDP limit? ______________________________
What is the U.S.’s debt-to-GDP ratio? ______________ France’s ____________
Greece’s _____________ Japan’s _____________
31. What exactly is meant by “austerity measures?” ________________________________________________________________________
__________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________
32. Why has Greece been forced to impose austerity measures? _______________________________________________________________
__________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________
33. How are short-term interest rates (the Federal Funds Rate) different from long-term interest rates? What factor most strongly affects short
term rates and what factor most strongly affects long term rates? ______________________________________________________________
__________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________
34. To avoid eventual bankruptcy, what are five specific austerity measures to which the U.S. could/may have to resort?
a. _________________________________
b. __________________________________
c. __________________________________
d. ___________________________________
e. ___________________________________
35. Why should one expect a time lag when the government uses fiscal or monetary policy?
__________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________
36. What is the difference between “discretionary spending” and “mandatory spending?”
__________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________
37. What is the difference between a “structural” deficit and a “cyclical” deficit? Which of these is the U.S. confronting currently?
__________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________