Fiscal and Monetary Policy — High School Economics practice questions

Lowering the reserve requirement would:

1. force banks to lend less
2. raise taxes on banks
3. let banks lend more
4. shrink the money supply

Answer: C — let banks lend more

C) Correct — More of each deposit can be loaned. A) Raising it would do that. B) Reserve requirements are not taxes. D) Lending more expands it.

The Fed's dual mandate is to pursue:

1. balanced budgets and low taxes
2. high stock prices and a strong dollar
3. maximum employment and stable prices
4. free trade and low tariffs

Answer: C — maximum employment and stable prices

C) Correct — Congress assigned these goals. A) Are fiscal goals. B) Are not its mandate. D) Are trade policy goals.

The federal funds rate is the interest rate:

1. the government pays on savings bonds
2. charged on credit cards
3. the Fed charges banks directly
4. banks charge each other for overnight loans

Answer: D — banks charge each other for overnight loans

D) Correct — The Fed sets a target for this rate. A) Is a different rate. B) Card rates are set by lenders. C) Is the discount rate.

Fiscal policy involves changes in:

1. the money supply and interest rates
2. exchange rates only
3. the price of stocks
4. government spending and taxes

Answer: D — government spending and taxes

D) Correct — It is set by Congress and the President. A) Is monetary policy. B) Is not fiscal policy. C) Markets set stock prices.

A budget deficit differs from the national debt because a deficit is:

1. the total of all past borrowing
2. money owed only to other countries
3. one year's shortfall
4. a surplus of revenue

Answer: C — one year's shortfall

C) Correct — The debt is the total of past deficits minus surpluses. A) Describes the national debt. B) Most debt is owed to Americans. D) A deficit means spending exceeds revenue.

Crowding out occurs when government borrowing:

1. lowers interest rates for private businesses
2. increases private investment
3. raises rates and reduces private investment
4. reduces the national debt

Answer: C — raises rates and reduces private investment

C) Correct — Competition for loans pushes rates up. A) Borrowing raises rates. B) Higher rates discourage it. D) Borrowing adds to debt.

In the short run, an increase in aggregate demand usually raises:

1. output but lowers prices
2. prices but lowers output
3. both output and the price level
4. neither output nor prices

Answer: C — both output and the price level

C) Correct — The AD curve shifts right along aggregate supply. A) Prices usually rise. B) Describes a supply shock. D) AD shifts change both.

The marginal propensity to consume is 0.8. A $10 billion increase in government spending can raise GDP by up to:

1. $8 billion
2. $12.5 billion
3. $50 billion
4. $10 billion

Answer: C — $50 billion

C) Correct — Multiplier = 1 ÷ (1 − 0.8) = 5. A) Multiplies by the MPC instead. B) Divides by 0.8 instead. D) Ignores the multiplier.

Expansionary monetary policy works mainly by:

1. raising taxes to reduce spending
2. raising interest rates to reduce borrowing
3. cutting government programs
4. lowering interest rates to encourage borrowing

Answer: D — lowering interest rates to encourage borrowing

D) Correct — More borrowing raises spending. A) Is contractionary fiscal policy. B) Is contractionary monetary policy. C) Is fiscal policy.

Supply-side economists argue that lower tax rates can:

1. always raise total government tax revenue
2. reduce aggregate supply
3. increase incentives to work and invest
4. have no effect on behavior

Answer: C — increase incentives to work and invest

C) Correct — They focus on raising aggregate supply. A) Revenue effects are debated. B) They aim to increase it. D) They argue taxes change behavior.

What is the Keynesian view of recessions?

Recessions are caused by insufficient aggregate demand, justifying active government spending and tax cuts to restore demand.

What is monetary policy?

Central bank actions to manage money supply and interest rates. Conducted by the Federal Reserve in the U.S.

What is the Phillips curve?

Hypothesized inverse relationship between unemployment and inflation in the short run. Less reliable in long run.