MCQ FOR FISCAL POLICY AND MONETARY POLICY CHAPTER

rr = 20%, er = 0, D = $10000
1. Assume that the reserve requirement is 20 percent. If a bank initially has no excess reserves
and $10,000 cash is deposited in the bank, the maximum amount by which this bank may increase
its loans is RR = rr.D = 0.2 x 10000 = 2000
(A) $2,000
ER (available loan) = D - RR = 10000 - 2000 = 8000
(B) $8,000
(C) $10,000
(D) $20,000
(E) $50,000

2. Assume that the marginal propensity to consume is 0.8. If the government increases its
purchases of goods and services by $200 and exports decline by $50, at most the equilibrium
level of income will MPC = 0.8, G increases by $200 and E declines by $50 => +200-50
(A) decrease by $250 spending multiplier = 1/(1-MPC) = 1/(1-0.8) = 5
(B) decrease by $1,000 delta spending = 200 - 50 = 150
equilibrium level of income = spending multiplier x delta spending = 5x150 = 750
(C) increase by $150
(D) increase by $750
(E) increase by $1,250

3. Assume that Atlantic National Bank has demand deposits of $100,000 and no excess reserves,
and that the reserve requirement is 10 percent. A customer withdraws $5,000 from the bank. To
meet the reserve requirement, the bank must increase its reserves by
(A) $500 D 0ld = 100000, D new = 100000-5000 = 95000
(B) $1,000 RR = rr x D => RR new = 0.1x95000 = 9500, RR old = 0.1x100000 = 10000
=> The bank must increase its reserves by 10000-9500 = 500
(C) $2,000
(D) $4,000
(E) $4,500

4. Automatic stabilizers can do which of the following?

(A) Offset the destabilizing influence of changes in tax revenues
(B) Aid the economy to move away from the full-employment output level
(C)Allow policymakers to formulate a set of rules flexible and comprehensive enough to
eliminate discretionary actions
(D) Cause tax revenues to decrease when gross domestic product (GDP) decreases and to
increase when GDP increases
(E) Allow policymakers to prescribe public works programs during inflationary periods because
expenditures for unemployment and welfare have correspondingly decreased

5.

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 D = 100000

ER = 15000

A commercial bank is facing the conditions given above. If the reserve requirement is 12 percent
and the bank does not sell any of its securities, the maximum amount of additional lending this
bank can undertake is RR = rr x D = 0.12 x 100000 = 12000
The maximum amount of additional lending = total reserves - RR = 15000-12000 = 3000
(A) $15,000
(B) $12,000
(C) $3,000
(D) $1,800
(E) 0

6. If the government increases expenditures on goods and services and increases taxation by the
same amount, which of the following will occur?
(A) Aggregate demand will be unchanged.
(B) Aggregate demand will increase.
(C) Interest rates will decrease.
(D) The money supply will decrease.
(E) The money supply will increase.

7. Banks expand the money supply when

(A) Issuing credit cards
(B) printing money
(C) cashing checks
(D) making loans
(E) accepting deposits

8. Assume that the marginal propensity to consume out of disposable income is 0.8 and that the
government taxes all income at a constant rate of 30 percent. If gross income increases by $100,
consumption will initially increase by
(A) $44
(B) $56 mpc = 0.8, income tax rate = 30% => Tax = 30%x100 = 30 (gross income = 100)
(C) $70 disposable income: Yd = 100-30=70
consumption increase = 70x0.8 = 56
(D) $80 Yd = gross income - tax
(E) $100

9. Assume that Jane’s marginal propensity to consume equals 0.8, and that in 2004 Jane spent
$36,000 from her disposable income of $40,000. If her disposable income in 2005 increased to
$50,000, her consumption spending increased by
(A) $4,000 To solve the problem, use the formula for calculating the change in consumption spending:
(B) $8,000 ΔC=MPC×ΔY
Where:ΔC is the change in consumption spending.
(C) $9,000 MPC is the marginal propensity to consume (0.8 in this case).
ΔY is the change in disposable income.
Step 1: Calculate ΔY=50,000−40,000=10,000

Step 2: Calculate ΔC=0.8×10,000=8,000 2

(D) $10,000
(E) $14,000

10. Assume that in a banking system in which banks hold no excess reserves, the public holds
part of its money in cash and the rest in checking accounts. If the required reserve ratio is 10
percent, actual reserves are $10 million, and currency in circulation is equal to $20 million, M1
will be equal to
D = (RR - ER)/rr = (10mil - 0)/0.1 = 100mil
(A) $20 million M1 = D+C = 100mil + 20mil
(B) $30 million
(C) $90 million
(D) $120 million
(E) $150 million

11. If the required reserve ratio is 10 percent, what is the maximum change in the money
supply from John’s deposit of $50,000 cash into his checking account?
(A) $5,000 RR = rr x D = 0.1 X 50000 = 5000
(B) $45,000 We can predict the maximum change in the money supply with the money multiplier.
(C) $55,000 => mm = 1/rr = 1/0.1 = 10
(D) $450,000 Maximum Change in Money Supply=Deposit×Money Multiplier
Maximum Change in Money Supply=50,000×10=500,000
(E) $500,000

12. If the expected inflation rate is 6%, the nominal interest rate is 2%, and the actual inflation
rate is 4%, what is the actual real interest rate?
(A)-4%
real = nominal - actual inflation = 2% - 4%
(B)-2%
(C) 2%
(D) 4%
(E) 6%

13. Fred Jones withdraws in cash from his savings account. What immediate effect does this
transaction have on the monetary aggregate measures of M1 and M2?
(A) M1 will increase; M2 will increase;
(B) M1 will increase, M2 will not change;
(C) M1 will decrease, M2 will not change;
(D) M1 will not change, M2 will decrease
(E) M1 will not change, M2 will not change

14. Which of the following will cause an increase in aggregate demand?

(A) An increase in the price level
(B) A decrease in income taxes
(C) An increase in the demand for money
(D) A decrease in the supply of money
(E) A decrease in government transfer payments

15. A central bank can increase the money supply by

(A) selling gold reserves to the banks

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(B) selling foreign currency holdings
(C) buying government bonds on the open market
(D) buying gold from foreign central banks
(E) borrowing reserves from foreign governments

16. If the marginal propensity to consume is 0.9, the government increases purchases by $100,
and net exports decline by $60, the equilibrium level of real gross domestic product will
(A) decrease by up to $400
spending multiplier = 1/(1-mpc) = 1/0.1 = 10
(B) increase by up to $400 delta gdp of gov = 100 x sm = 100 x 10 = 1000
(C) increase by up to $600 delta gdp of export = -60 xmpc = -60 x 10 = -600
delta gdp total = delta gdp gov + delta gdp export = 1000 - 600 = 400
(D) decrease by up to $1,600
(E) increase by up to $1,600

17. Assume the marginal propensity to consume is 0.8. How will a decrease in taxes of $100
billion and a decrease in government spending of $100 billion affect aggregate demand?
(A) Aggregate demand will decrease by $900 billion.
(B) Aggregate demand will decrease by $500 billion. multiplier = 1/(1-0.8) = 5
tax multiplier = mpc x multiplier = 0.8*5 = 4
(C) Aggregate demand will decrease by $400 billion. total decrease in gov spending: 100 bil x multiplier = 100x5
(D) Aggregate demand will decrease by $100 billion. =500 bil
total decrease in tax: 100 bil x tax mul = 100 x 4 = 400
(E) Aggregate demand will not change. net change in AD = -500+400 = -100

18. Which of the following would lead to an increase in nominal interest rates?
(A) An expansionary monetary policy accompanied by an increase in the demand for money
(B) An expansionary monetary policy accompanied by a decrease in the demand for money
(C) An expansionary monetary policy conducted without any change in the demand for money
(D) A contractionary monetary policy accompanied by an increase in the demand for money
(E) A contractionary monetary policy accompanied by a decrease in the demand for money

19. Which of the following changes will necessarily occur as a result of an increase in the
nominal interest rate?
(A) The money demand curve will shift to the left.
(B) The money demand curve will shift to the right.
(C) The money supply curve will shift to the left.
(D) The quantity of money supplied will decrease.
(E) The quantity of money demanded will decrease.

20. The narrowest definition of money, M1, includes which of the following
(A) savings accounts
(B) bank reserves
(C) government bonds
(D) certificates of deposit
(E) credit cards

21. Assume that banks hold no excess reserves. A decrease in the required reserve ratio will
cause total reserves in banks, the money multiplier, and the money supply to change in which of
the following ways?
total reserves don't change bcs reserves are determined by central bank policies and remained fixed
m = 1/rr mà rr decrease => m increases
MS = m x total reserves mà m increases, total reserves unchanged => MS increases
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22. Which of the following is a fiscal policy action aimed at reducing unemployment?
(A) Decreasing government expenditures
(B) Decreasing income taxes
(C) Decreasing tax credits
(D) Increasing nominal interest rates
(E) Increasing required reserves

23. Suppose that disposable income is $1,000, consumption is $700, and the marginal
propensity to consume (MPC) is 0.6. If disposable income then increases by $100, consumption
and savings will equal which of the following?

Yd new = 1100

= 0.6 x 100 = 60

= 700 + 60 = 760

saving = delta yd - delta c = 100 -

60=40
s new = s old + delta s
= yd - c + delta s = 300 + 40 = 340

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 24. With a constant money supply, if the demand for money decreases, the equilibrium interest
rate and quantity of money will change in which of the following ways?

Q unchanged bcs constant MS

25. Expansionary fiscal policy will most likely result in

(A) a decrease in the money supply
(B) an increase in the marginal propensity to consume
(C) an increase in nominal interest rates
(D) a decrease in the level of output
(E) a decrease in the price level

26. If the Federal Reserve institutes a policy to reduce inflation, which of the following is
most likely to increase?
(A) Tax rates
(B) Investment
(C) Government spending
(D) Interest rates
(E) Gross domestic product

27. If there is an increase in nominal income, which of the following will most likely occur
in the short run?
(A) The supply of money will decrease.
(B) The supply of money will increase.
(C) The demand for money will increase.
(D) The demand for money will decrease.
(E) There will be no impact on the money market.

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 28. Assume a closed economy with no government and a marginal propensity to consume of
0.80. The marginal propensity to save for this economy is
(A) 4.0
(B) 1.0 mps = 1-mpc = 1 - 0.8 = 0.2
(C) 0.8
(D) 0.2
(E) 0

29. The table below shows the level of household savings at various levels of disposable
income in a country.
mpc = 1 - delta s/delta yd = 0.9
delta savings spending multiplier = 1/(1 - mpc) = 1/0.1 = 10
= 200 tax multiplier = -mpc/(1-mpc) = -9
delta yd
= 2000

(A) The tax multiplier is -0.1 and the spending multiplier is 0.9.
(B) The tax multiplier is 0.2 and the spending multiplier is -0.8
(C) The tax multiplier is -2 and the spending multiplier is 8.
(D) The tax multiplier is -9 and the spending multiplier is 10.
(E) The tax multiplier is 10 and the spending multiplier is -1

30. A decrease in taxes will necessarily result in an increase in which of the following?
(A) Nominal gross domestic product increases in tax lead to increase in disposable income => higher consumer
(B) Unemployment spending => nomial gdp tăng
(C) Exports
(D) Marginal propensity to save
(E) Money supply

31. If a nation’s government cuts income taxes, how will consumption spending, real output,
and unemployment change in the short run?
(A) Consumption spending will increase, real output will increase, and unemployment will
decrease.
(B) Consumption spending will increase, real output will decrease, and unemployment will
decrease.
(C) Consumption spending will decrease, real output will decrease, and unemployment will
increase.
(D) Consumption spending, real output, and unemployment will all decrease.
(E) Consumption spending, real output, and unemployment will all increase.

32. Which of the following is true about the marginal propensity to consume?
(A) It is the percentage of total income that is spent on consumption.
(B) It determines the size of the simple spending multiplier.

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(C) It increases as incomes increase because increases in income cause people to spend more.
(D) It is the same as the money multiplier.
(E) It is equal to the average propensity to consume for people with low incomes.

33. An economy is currently producing $250billion of output. The full-employment output is

$260 billion and the marginal propensity to consume is 0.75. Assuming no crowding out and a
horizontal aggregate supply curve, what level of additional spending is necessary to achieve full
employment? Output Gap=Full-Employment Output−Current Output=260billion−250billion=10billion
(A) $2.5 billion Spending multiplier (M) = 1/(1 - MPC) = 1/(1-0.75) = 4
Level of spending needed to achieve full employment = delta G (gov spending) = output gap/M = 2.5 billion
(B) $5 billion
(C) $10 billion
(D) $25 billlion
(E) $40 billion

34. Which of the following can be expected to cause an increase in gross domestic product in
the short run?
(A) An increase in the tax rate
(B) An increase in the interest rate
(C) Equal increases in both imports and exports
(D) Equal increases in both taxes and government expenditures
(E) Equal decreases in both investment and government expenditures

35. An appropriate fiscal policy to combat a recession would be to increase which of the
following?
(A) Interest rates
(B) The money supply
(C) Taxes
(D) Government spending
(E) The sales of government bonds

36. Which of the following statements is true about an expansionary fiscal policy?
(A) It decreases demand for loanable funds.
(B) It decreases the equilibrium price level.
(C) It decreases the equilibrium real interest rate.
(D) It increases aggregate demand.
(E) It increases the money supply.

37. Which of the following combinations of changes in government spending and taxes is
necessarily expansionary?

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38. If the government implements an expansionary fiscal policy, how will real gross domestic
product (GDP) and the price level be affected in the short run?

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39. Which of the following is an example of fiscal policy?
(A) Increasing government expenditures to build highways
(B) Increasing the money supply to increase income
(C) Decreasing the discount rate to lower unemployment and inflation
(D) Decreasing the policy rate to stimulate investment
(E) Decreasing the reserve ratio to increase bank reserves

40. Which of the following describes the impact of an automatic stabilizer during an economic
contraction?
(A) As incomes rise, more individuals move up to higher income tax brackets, causing an
automatic tax increase and reducing consumption.
(B) As prices fall, workers accept lower wages, causing short-run aggregate supply to increase.
(C) As unemployment falls, fewer individuals receive unemployment benefits, reducing
consumption.
(D) As unemployment rises, the government implements a tax decrease, stimulating
consumption.
(E) As unemployment rises, more individuals receive unemployment benefits, stimulating
consumption.

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KEY FOR MCQ FOR FISCAL POLICY AND MONETARY POLICY CHAPTER

1. B 11. D 21. E 31. A

2. D 12. B 22. B 32. B
3. E 13. E 23. E 33. A
4. D 14. B 24. E 34. D
5. C 15. C 25. C 35. D
6. B 16. B 26. D 36. D
7. D 17. D 27. C 37. B
8. B 18. D 28. D 38. D
9. B 19. E 29. D 39. A
10. D 20. A 30. A 40. E

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