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21.Suppose the Federal funds rate is 5 percent. If the Fed decides to decrease the target for the Federal funds rate from 5 percent to 4 percent, it should take:
A) a defensive action and raise reserve requirements.
B) a defensive action and reduce reserve requirements.
C) an offensive action and raise reserve requirements.
D) an offensive action and reduce reserve requirements.
Suppose that investment is not very responsive to interest rates, so that a sizable increase in interest rates has only a minor effect on investment. In this case, monetary policy would have:
A) no effect on output.

B) a modest effect on output at best.
C) a substantial effect on output.
D) a massive effect on output.
Monetary policy that seeks to minimize the business cycle in the AS/AD model involves:
A) monetary policy throughout the business cycle.
B) expansionary monetary policy throughout the business cycle.
C) contractionary monetary policy during boom periods and expansionary monetary policy during recession.
D) contractionary monetary policy during recession and expansionary monetary policy during boom periods.
Suppose inflation is expected to be 5 percent but it is actually 3 percent. The people who lose from the difference between actual and expected inflation are most likely to be the:
A) owners of firms and lenders.
B) owners of firms and borrowers.
C) workers and lenders.
D) workers and borrowers.

During the Great Depression of the 1930s, the U.S. experienced deflation. Partly as a consequence of this, nearly half the banks in the U.S. failed during this period. Deflation contributes to bank failures by:
A) increasing consumer spending and aggregate demand.
B) reducing real interest rates.
C) reducing asset prices and bank loan collateral.
D) preventing the central bank from reducing nominal interest rates.

Annual inflation in Zimbabwe was 32 percent in 1998, 383 percent in 2003, and increased to more than 100,000 percent in 2009. What would a classical economist who sees great merit in the quantity theory of money look for in trying to explain this rise in inflation?
A) A poor distribution of income.
B) A very low rate of unemployment.
C) Very low interest rates.
D) A rapid increase in the quantity of money in circulation.

In January 2009, Zimbabwe reached about a 100,000 percent inflation rate, with the economy on the verge of bartering. At this level of inflation, why is the central bank of Zimbabwe not exercising a contractionary monetary policy?
A) The central bank of this country does not believe in the equation of exchange.
B) The authorities believe that there is no direct relationship between money supply and inflation.
C) The government and the central bank have full control of its spending.
D) The political structure of this country is such that excessive budget deficits are constantly financed with bonds bought by the central bank.

Velocity can be calculated as the ratio of:
A) nominal GDP to real GNP.
B) nominal GDP to the money supply.
C) real GDP to the price level.
D) the money supply to the price level.

The inflation tax is:
A) an implicit tax on the holders of cash and the holders of any obligations specified in real terms.
B) an implicit tax on the holders of cash and the holders of any obligations specified in nominal terms.
C) an explicit tax on wealth.
D) an explicit tax on consumption.

In the early 1980s, inflation in the U.S. fell from over 10 percent to under 5 percent while unemployment increased from 6 percent to 10 percent. These changes can be represented by a movement along:
A) the short-run Phillips curve.
B) the long-run Phillips curve.
C) both the short-run and long-run Phillips curves.
D) neither the short-run nor the long-run Phillips curves.

Based on the long-run Phillips curve, we can conclude that expected inflation plays:
A) no role in determining inflation.
B) a minor role in determining inflation.
C) an important role in determining inflation.
D) an uncertain role in determining inflation.
Assuming the central bank is interested in both inflation and unemployment, what options does a central bank have in dealing with a supply-side shock?
A) None. The central bank influences the demand side, so can do nothing to counteract the effects of a supply-side shock.
B) It can completely offset the effects of the shock with expansionary monetary policy.
C) It can completely offset the effects of the shock with contractionary monetary policy.
D) It faces a dilemma: if it corrects one problem, it makes the other problem worse.

If an economy operates below potential income, the actual deficit is:
A) smaller than the structural deficit.
B) larger than the structural deficit.
C) the same as the structural deficit.
D) comparable to the structural deficit.

In 2007, the U.S. economy was operating close to potential. The budget deficits experienced by the U.S. in 2007 was:
A) primarily passive deficits.
B) primarily structural deficits.
C) neither structural nor passive deficits.
D) about evenly split between structural and passive deficits.

Economists generally are:
A) more concerned about structural deficits than passive deficits.
B) equally concerned about structural and passive deficits.
C) more concerned about passive deficits than structural deficits.
D) not concerned about structural or passive deficits.

If inflation is correctly anticipated, those who buy government bonds will:
A) suffer losses regardless of inflation because interest paid on government bonds is set by Congress.
B) not suffer losses because inflation does not affect the purchasing power.
C) suffer losses because they will be compensated by lower interest payments.
D) not suffer losses because they will be compensated by higher interest payments.

Government debt is defined as:
A) a shortfall of incoming revenue under outgoing payment.
B) a shortfall of outgoing payments under incoming revenue.
C) accumulated deficits minus accumulated surpluses.
D) accumulated deficits plus accumulated surpluses.

One of the reasons government debt is different from individual debt is:
A) government does not pay interest on its debt.
B) government never really needs to pay back its debt.
C) all government debt is owed to other government agencies.
D) the government debt is unrelated to income.

Debt is measured relative to GDP because:
A) the ability of a country to pay off its debt depends on its productive capacity.
B) the ability to produce output depends on the size of the nation's debt.
C) GDP is always used as a reference point in economics.
D) as long as this ratio remains high, the government will have no trouble repaying the debt.

Paying interest on external government debt rather than on domestic debt produces:
A) a net reduction in domestic income.
B) a redistribution of income within the country.
C) a net increase in domestic income.
D) no change in the level or distribution of domestic income.