Question

7) Given the relationship between interest rates and planned investment planned investment A) increases if the interest rate drops from 6% to 4%. B) increases if the interest rate rises from 6% to 8%. C) is unaffected by any changes in interest rates. D) both A) and B) are correct. 8) To combat a recession with fiscal policy, the government should A) reduce government spending. B) reduce taxes on consumers to increase consumer disposable income. C) lower interest rates and increase investment by increasing the money supply. D) increase taxes on business to encourage investment. 9) The type of unemployment that increases during recessions and declines when the economy experiences good times is known as A) the natural rate of unemployment. B) cyclical unemployment. C) structural unemployment. D) frictional unemployment. 10) If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.) A) a $300 billion decrease in GDP B) a $300 billion increase in GDP C) a $30 billion increase in GDP D) a $133.33 billion decrease in GDP E) a $133.33 billion increase in GDP 11) The best definition of Mi is approximately A) paper money plus coins in circulation B) currency and coins in circulation plus reserves held with the central bank C) currency and coins in circulation, reserves with the Central Bank, plus checking account balances D) the monetary base, plus checking accounts, plus money market funds and savings accounts. 12) Suppose that you deposit $2,000 in your bank and the required reserve ratio is 15 percent. The maximum loan your bank can made as a direct result of your deposit is A) $300. B) $1,700. C) $2,000. D) $20,000 13). A velocity of 6 means money changes hands, on average, every A) 6 years. B) 6 months. C) 2 months. D) 1/6 of a month. 14) Silver is an example of a A) commodity money. B) barter money C) fiat money D) representative money.

Answer 1

7) With increase in interest rate, planned investment falls and vice-versa. Thus, here, only option a is correct.

8) From option a, with reduction in government spending, fiscal policy fails to combat recession as aggregate demand falls. From option b, with reduction in taxes and increasing disposable income for consumers, aggregate demand rises which can help the economy to recover from recession. From option c, increasing money supply is not in provision with fiscal policy and hence, not a valid solution here. From option d, increasing taxes on business to promote investment is also not in provision with fiscal policy. Thus, only option b is correct here.

9) Type of unemployment which rises during recession but declines with good times in the economy is referred to as cyclical unemployment. Here, option b is correct.

10) GDP falls with increase in taxes,

Then, change in GDP = tax multiplier * tax = -1.5*$200 billion = -$300 billion

Thus, option a is correct only.

11) Option c is correct as M1 comprises of currency and coins in circulation, reserves with Central bank plus checking account balances but does not includes savings accounts.

12) Deposit in the bank = $2000

Required reserve = 15% of total deposit = 15/100*2000 = $300

Thus, loanable amount = $2000-$300 = $1700 (option b is correct)

13) A velocity of 6 means money changes hands 6 times a year i.e, in every two months. Here, option c is correct.

14) Silver was used as a medium of exchange under barter system. This is referred as barter money. Hence, option b is correct.