Question

1.What could the Federal Reserve have done to fight the Great Depression?

a.Increase the money supply to reduce the interest rate.

b.Increase the money supply to raise the interest rate.

c.Decrease the money supply to reduce the interest rate.

d.Decrease the money supply to raise the interest rate.

2. How could the government have used fiscal policy to fight the Great Depression?

a.Reduce taxes, raise transfers, raise government purchases.

b.Reduce taxes, reduce transfers, reduce government purchases.

c.Raise taxes, reduce transfers, reduce government purchases.

d.Raise taxes, raise transfers, raise government purchases.

3.Which combination of fiscal policies would have been needed to bring down inflation in 1942?

a.Increase government purchases, increase transfers, increase taxes.

b.Increase government purchases, increase transfers, decrease taxes.

c.Decrease government purchases, decrease transfers, decrease taxes.

d.Decrease government purchases, decrease transfers, increase taxes.

QUESTION 4

The budget balance is calculated as tax revenues minus government spending, as a percentage of GDP. Which of the following is true?

a.Both tax increases and government spending increases tend to increase aggregate demand.

b.Both tax decreases and government spending decreases tend to increase aggregate demand.

c.Tax decreases tend to increase aggregate demand, while government spending increases tend to increase aggregate demand.

d.Tax increases tend to increase aggregate demand, while government spending decreases tend to increase aggregate demand.

QUESTION 5

How does the federal funds rate respond to open market operations?

a.When the Fed buys bonds, banks have more money to lend, and the federal funds rate increases. When the Fed sells bonds, banks have less money to lend, the federal funds rate decreases.

b.When the Fed buys bonds, banks have more money to lend, and the federal funds rate decreases. When the Fed sells bonds, banks have less money to lend, the federal funds rate increases.

c.When the Fed buys bonds, banks have less money to lend, and the federal funds rate increases. When the Fed sells bonds, banks have more money to lend, the federal funds rate decreases.

d.When the Fed buys bonds, banks have less money to lend, and the federal funds rate decreases. When the Fed sells bonds, banks have more money to lend, the federal funds rate increases.

Answer 1

1. a.Increase the money supply to reduce the interest rate.
(Federal reserve could have increased the money supply so that interest rate would have fallen to fight great depression.)

2. a.Reduce taxes, raise transfers, raise government purchases.
(Expansionary fiscal policy could have been used by reducing taxes or raising transfers and government spending.)

3. d.Decrease government purchases, decrease transfers, increase taxes.
(Contractionary fiscal policy could be used to fight inflation.)

4. c.Tax decreases tend to increase aggregate demand, while government spending increases tend to increase aggregate demand.
(As tax decreases, consumption spending increases so aggregate demand increases and as government spending increases, aggregate demand in the economy increases)

5. b.When the Fed buys bonds, banks have more money to lend, and the federal funds rate decreases. When the Fed sells bonds, banks have less money to lend, the federal funds rate increases.
(As Fed buys bonds, money supply increases so interest rate decreases and vice versa.)