1) The real-balances effect indicates that:

a) an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending.

b) a lower price level will decrease the real value of many financial assets and therefore reduce spending.

c) a higher price level will increase the real value of many financial assets and therefore increase spending.

d) a higher price level will decrease the real value of many financial assets and therefore reduce spending.

2) Other things equal, a decrease in the real interest rate will:

a) expand investment and shift the AD curve to the left.

b) expand investment and shift the AD curve to the right.

c) reduce investment and shift the AD curve to the left.

d) reduce investment and shift the AD curve to the right.

3) What does it mean when economists say that home buyers are "underwater" on their mortgages?

a) Buyers owe more on their mortgage than the properties are worth.

b) Buyers are financially incapable of repaying their mortgages and bankruptcy is inevitable.

c) Buyers are purchasing homes on flood plains and are highly susceptible to financial losses.

d) Buyers are paying interest rates substantially higher than current market interest rates, creating interest payments that create financial hardship.

4) The Assistant U.S. Attorney General in charge of prosecuting financial crimes did which of the following in response to HSBC bank's years of money laundering and helping firms and individuals cheat on their taxes?

a) Imposed fines on HSBC and prosecuted key executives so as to diminish moral hazard in the financial services industry.

b) Filed an antitrust lawsuit so as to break up HSBC without disrupting the financial system.

c) Imposed only modest fines on HSBC so as not to destabilize the bank and the financial system.

d) Imposed sanctions based on the provisions of the 2010 Wall Street Reform and Consumer Protection Act.

5) Suppose the government cuts taxes to keep the economy's cyclically adjusted budget in balance when the economy is expanding. The government is engaging in a(n):

a) contractionary fiscal policy.

b) expansionary fiscal policy.

c) low-interest-rate policy.

d) neutral fiscal policy.

6) Since actual budget deficits surpassed 10 percent of GDP in 2009:

a) fiscal policy has become contractionary.

b) the deficits as a percentage of GDP have fallen, but fiscal policy has remained expansionary.

c) deficits as a percentage of GDP have continued to rise.

d) deficits as a percentage of GDP have remained constant but risen in dollar amounts.

7) A decrease in aggregate demand will cause a greater decline in real output the:

a) less flexible is the economy's price level.

b) more flexible is the economy's price level.

c) steeper is the economy's AS curve.

d) larger is the economy's marginal propensity to save

 

1)The real-balances effect indicates that a) an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending.

As the real balance indicates the level of money adjusted against inflation. Since the increase in price level decreases the real value of money. As the demand for the money would increase in order to keep constant value of real money.As a result, interest rates would also increase which induces people to spend less money on consumption and investment spending due to an increase in the opportunity cost of holding money for spending purposes.

2) Other things equal, a decrease in the real interest rate will b) expand investment and shift the AD curve to the right.

Since the decrease in the real interest rate decreases the cost of borrowing. As a result, it raises the investment spending which shifts the AD curve to the right.

3) What does it mean when economists say that home buyers are "underwater" on their mortgages a) Buyers owe more on their mortgage than the properties are worth .

Since the underwater on the mortgages means that buyers have got more value of their mortgage even its worth was less. It gives a kick to the home buyer.

4) The Assistant U.S. Attorney General in charge of prosecuting financial crimes did which of the following in response to HSBC bank's years of money laundering and helping firms and individuals cheat on their taxes c) Imposed only modest fines on HSBC so as not to destabilize the bank and the financial system.

Since HSBC was bounded to pay the modest fines which were a kind of warning or deterrent to them for not to try to destabilize the financial scenarios of the country. It is because if firms and individuals would cheat on the taxes then it would hamper the tax revenue and further would impact the financial stability of the country.

5) Suppose the government cuts taxes to keep the economy's cyclically adjusted budget in balance when the economy is expanding. The government is engaging in a(n) b) expansionary fiscal policy .

Since taxation policies fall under the category of fiscal policies so the Government cut the taxes which induces an increment in disposable income of the people. As a result, the aggregate demand would rise and lead to further enhancement of output and income growth. Hence, the government adopted the expansionary fiscal policy here.

6)Since actual budget deficits surpassed 10 percent of GDP in 2009 b) the deficits as a percentage of GDP have fallen, but fiscal policy has remained expansionary.

Since the spending would rise up in 2009 which increased the level of GDP but the deficit caused due to the declining share of the tax revenue caused by the recession and also the government reduced tax rates but still it did not impact much on an increase in tax revenue. Hence, fiscal policy was expansionary but the problem was deficit surpassed the increasing share of GDP.

7) A decrease in aggregate demand will cause a greater decline in the real output the d) larger is the economy's marginal propensity to save .

Since an increase in the marginal propensity to save reduces the level of money for spending. Since it would impact the income generation because one's expenditure is other's income. As a result, the aggregate demand for the goods will fall which would lead to a decline in the real output.