1. Fiscal policy refers to the: A) manipulation of government spending and taxes to alter economic outcomes (i.e., stabilize domestic output, employment, and the price level). B) manipulation of government spending and taxes to achieve greater equality in the distribution of income. C) altering of the interest rate to change aggregate demand. D) fact that equal increases in government spending and taxation will be contractionary. 2. Assume the economy is in the midst of a severe recession. Which of the following policies would be consistent with active fiscal policy? A) a Congressional proposal to incur a Federal surplus to be used for the retirement of public debt B) a reduction in agricultural subsidies and veterans' benefits C) a postponement of a highway construction program D) a reduction in Federal tax rates on personal and corporate income 3. A major advantage of the built-in or automatic stabilizers is that they: A) simultaneously stabilize the economy and reduce the absolute size of the public debt. B) automatically produce surpluses during recessions and deficits during inflations. C) require no legislative action by Congress to be made effective. D) guarantee that the Federal budget will be balanced over the course of the business cycle. 4. Economists refer to a budget deficit which exists when the economy is achieving full employment as a: A) cyclical deficit. B) surplus in the full-employment budget. C) natural deficit. D) structural deficit. 5. The "crowding out" effect suggests that: A) government spending is increasing at the expense of private investment. B) imports are replacing domestic production. C) private investment is increasing at the expense of government spending. D) consumption is increasing at the expense of investment. 6. Stock market price quotations best exemplify money serving as a: A) store of value. B) unit of account/standard of value. C) medium of exchange. D) index of satisfaction. 7. When diseconomies of scale occur: A) the long-run average total cost curve falls. C) the long-run average total cost curve rises. B) marginal cost intersects average total cost. D) average fixed costs will rise. 8. The transactions demand for money is most closely related to money functioning as a: A) unit of account/standard of value. B) medium of exchange. C) store of value. D) measure of utility. 9. The opportunity cost of holding money: A) is zero because money is not an economic resource. C) varies directly with the interest rate. B) varies inversely with the interest rate. D) varies inversely with the level of economic activity. 10. The group that sets Federal Reserve policy on buying and selling government securities (bills, notes, and bonds) is the: A) Federal Advisory Council. C) Council of Economic Advisers. B) Consumer Advisory Council. D) Federal Open Market Committee (FOMC). 11. If the money income of a consumer decreases and, as a result, his or her demand for product X increases, product X is: A) a normal good. B) a complementary good. C) a substitute good. D) an inferior good. 12. Excess reserves refer to the: A) difference between a bank's vault cash and its reserves deposited at the Federal Reserve Bank. B) minimum amount of actual reserves a bank must keep on hand to back up its customers deposits. C) difference between actual reserves and loans. D) difference between actual reserves and required reserves. 13. In the United States the money supply (M1) is comprised of: A) coins, paper currency, and checkable (demand) deposits. B) currency, checkable (demand) deposits, and Series E bonds. C) coins, paper currency, checkable (demand) deposits, and credit balances with brokers. D) paper currency, coins, gold certificates, and time deposits. 14 The multiple by which the commercial banking system can increase the supply of money on the basis of each dollar of excess reserves is equal to: A) 1/the legal reserve ratio. C) the reciprocal of the income velocity of money. B) 1 minus the legal reserve ratio. D) 1/MPS. 15 Which of the following represents a change in today's banking policies that should prevent a recurrence of the bank panics (runs on banks) of 1930-1933? A) banks are more cautious lenders B) banks keep large amounts of excess reserves on hand C) the FDIC insures bank deposits and knowing that their deposits are guaranteed by the federal government, depositors do not panic and rush to withdraw money when individual banks have financial problems D) the President now has the authority to close banks whenever panics occur 16. The three main tools of monetary policy are: A) tax rate changes, the discount rate, and open-market operations. B) tax rate changes, changes in government expenditures, and open-market operations. C) the discount rate, the reserve ratio, and open-market operations. D) changes in government expenditures, the reserve ratio, and the discount rate. 17. The Federal Reserve System regulates the money supply primarily by: A) controlling the production of coins at the United States mint. B) altering the reserve requirements of commercial banks and thereby the ability of banks to make loans. C) altering the reserves of commercial banks, largely through sales and purchases of government bonds. D) restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply. 18. The discount rate is the interest: A) rate at which the central banks lend to the U.S. Treasury. B) rate at which the Federal Reserve Banks lend to commercial banks. C) yield on long-term government bonds. D) rate at which commercial banks lend to the public. 19. Which of the following best describes the cause-effect chain of an easy money policy? A) A decrease in the money supply will lower interest rates, increase investment spending, and increase AD and GDP where AD refers to aggregate demand and GDP refers to gross domestic product. B) A decrease in the money supply will raise interest rates, decrease investment spending, and decrease AD and GDP. C) An increase in the money supply will raise interest rates, decrease investment spending, and decrease AD and GDP. D) An increase in the money supply will lower interest rates, increase investment spending, and increase AD and GDP. 20. An easy money policy may be less effective than a tight money policy because: A) the Federal Reserve Banks are always willing to make loans to commercial banks which are short of reserves. B) fiscal policy always works at cross purposes with an easy money policy. C) the circularity or feedback problem complicates an easy money policy more than it does a tight money policy. D) commercial banks may not be willing to increase their loan activity or may be unable to find loan customers. 21. In which of the following instances will total revenue of the firm decline? A) price rises and supply is inelastic C) price rises and demand is inelastic B) price rises and supply is elastic D) price rises and demand is elastic 22. If the price elasticity of demand for gasoline is 0.20: A) the demand for gasoline is linear. B) a rise in the price of gasoline will reduce total revenue. C) a 10% rise in the price of gasoline will lead to a 2% decrease in the amount of gas purchased D) a 10% rise in the price of gasoline will lead to a 20% increase the amount of gas purchased 23. The law of diminishing marginal utility states that: A) total utility is maximized when consumers obtain the same amount of utility per unit of each product consumed. B) beyond some point additional units of a product will yield less and less extra satisfaction to a consumer. C) price must be lowered to induce firms to supply more of a product. D) it will take larger and larger amounts of resources beyond some point to produce successive units of a product. 24 Suppose that MUx/Px exceeds MUy/Py (where MU refers to the marginal utility and P refers to price). To maximize utility the consumer who is spending all her money income should buy: A) less of X only if its price rises. C) more of Y and less of X. B) more of Y only if its price rises. D) more of X and less of Y. 25. An economic cost can best be defined as: A) any contractual obligation which results in a flow of money expenditures from an enterprise to resource suppliers. B) any contractual obligation to labor or material suppliers. C) compensations which must be received by resource owners to insure their continued supply. D) all costs exclusive of payments to fixed factors of production. 26. Implicit and explicit costs are different in that: A) explicit costs are relevant only in the short run. B) implicit costs are relevant only in the short run. C) the latter refer to non-expenditure costs and the former to out-of-pocket costs. D) the former refer to non-expenditure costs and the latter to out-of-pocket costs. 27 To economists the main difference between "the short run" and "the long run" is that: A) the law of diminishing returns applies in the long run, but not in the short run. B) in the long run all resources are variable, while in the short run at least one resource is fixed. C) fixed costs are more important to decision making in the long run than they are in the short run. D) in the short run all resources are fixed, while in the long run all resources are variable. 28 The law of diminishing returns indicates that: A) as extra units of a variable resource are added to a fixed resource, marginal product (i.e., the contribution to total output of another unit of variable input) will decline beyond some point. B) because of economies and diseconomies of scale a competitive firm's long-run average total cost curve is U-shaped. C) the demand for goods produced by purely competitive industries is downsloping. D) beyond some point the extra utility derived from additional units of a product will yield the consumer smaller and smaller extra amounts of satisfaction. 29. If you operated a small bakery, which of the following would be a variable cost in the short run? A) baking ovens C) annual lease payment for use of the building B) interest on business loans D) baking supplies (flour, salt, etc.) 30. A bank temporarily short of required reserves may be able to remedy this situation by: A) borrowing funds in the Federal funds market. C) shifting vault cash to its reserve account at the Federal Reserve B) granting new loans. D) buying bonds from the public.