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1. Describe the three functions of money. 2. Explain the role banks play in the creation of money. 3. Describe the five-step process that starts with an increase or decrease in the money supply and ends with an increase or decrease in GDP. 4. Evaluate current monetary policy.

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1. To counteract an economic contraction, the Federal Reserve (the Fed) often attempts to stimulate the economy by reducing interest rates. Describe the five-step process that starts with an increase in the money supply and ends with an increase in GDP.

2. To counteract inflation, the Fed often attempts to dampen economic growth by increasing interest rates. Describe the five-step process that starts with a decrease in the money supply and ends with a reduction in inflation and GDP.

3. What factors determine the effectiveness of this five-step process?

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5. Fiscal policy is enacted through changes in

A. interest rates and the price level.

B. the supply of money and foreign exchange.

C. unemployment and inflation

D. taxation and government spending.

6. In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could

A. increase taxes by $16 billion.

B. increase taxes by $24 billion.

C. decrease government spending by $10 billion.

D. decrease government spending by $16 billion.

7. If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement

A. contractionary fiscal policy.

B. no change in fiscal policy.

C. expansionary fiscal policy.

D. countercyclical fiscal policy.

8. Most economists believe that fiscal policy is:

A. better than the monetary policy for "fine-tuning" the economy.

B. better than the monetary policy for month-to-month stabilization.

C. not as good as the monetary policy for month-to-month stabilization.

D. not very good at pushing the economy in a particular direction.

9. An increase in the legal reserve ratio

A. increases the money supply by increasing excess reserves

B. decreases the money supply by decreasing excess reserves

C. increases the money supply by decreasing excess reserves

D. decreases the money supply by increasing excess reserves

10. The discount rate is the rate of interest at which

A. Federal Reserve Banks lend to commercial banks

B. savings and loan associations lend to some builders

C. Federal Reserve Banks lend to large corporations.

D. commercial banks lend to large corporations

11. Which of the following actions by the Fed most likely increase commercial bank lending?

A. raising the reserve ratio

B. increasing the federal funds rate target

C. reducing the interest paid on excess reserves held at the Fed

D. selling bonds to commercial banks and the public

12. Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ______, which will ______ investment spending.

A. decrease; decrease

B. decrease; increase

C. increase; increase

D. increase; decrease

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A) Which of the following is the most description of events when monetary authorities increase the size of commercial banks' excess reserves?

1.A rise in interest rates increase the money, causing a decrease in investment spending, output, and employment

2. A fall in interest rates decrease the money supply, causing an increase in investment spending, output, and employment

3. The money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increase

4. The money supply is decreased, which increases the interest rate, and causes investment spending, output and employment to decrease

B) A tariff is a:

1. tax

2.Price ceiling

3. Quantity limit

4. Subsidy

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1. Describe the three functions of money. 2. Explain the role banks play in the creation of money. 3. Describe the five-step process that starts with an increase or decrease in the money supply and ends with an increase or decrease in GDP. 4. Evaluate current monetary policy.

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