Unit 3: Macroeconomics Test
TEST CORRECTIONS MUST CLEARLY EXPLAIN WHY THE CORRECT ANSWER
IS CORRECT ON A SEPARATE DOCUMENT WITH YOUR ORIGINAL TEST
ATTACHED. REVISIONS ARE DUE BY FRIDAY 12/7
True or False: For #1 - #5 write TRUE or FALSE
1. Macroeconomics is the study of the economic decisions of private businesses and large corporations
2. To decrease aggregate demand, the government would increase its spending and lower taxes.
3. The Federal Reserve can increase the money supply by buying bonds and lowering reserve requirements.
4. “Crowding Out” is the idea that too much government debt would cause low interest rates and discourage investors
from trusting private banks.
5. In the United States, the top 5% of income earners pay over 50% of federal income taxes.
Multiple Choice: For #6 - #25 write A, B, C or D
6. If a company is dumping waste into the ocean with no consequences, what economic role of government is NOT
being effectively carried out?
a. Protecting workers b. Protecting consumers, savers, and investors
c. Maintaining competition d. Addressing externalities
7. The Food & Drug Administration, National Highway Safety Administration and Federal Deposit Insurance
Corporation are all government agencies that aim to meet the following role in the US economy:
a. Protecting consumers, savers, and investors b. Protecting property rights
c. Maintaining competition d. Addressing externalities
8. A property tax that charges all home owners 1.5% of the assessed value of their home annually is a type of:
a. regressive tax b. progressive tax c. proportional tax d. aggregate tax
9. An income tax that has various brackets charging different income levels different percentages is a type of:
a. regressive tax b. progressive tax c. proportional tax d. aggregate tax
10. A tax on gasoline that adds 20 cents to the price of each gallon of gas is a type of:
a. regressive tax b. progressive tax c. proportional tax d. aggregate tax
11. The largest source of federal government revenue comes from
a. property taxes b. sales taxes c. personal income taxes d. payroll taxes
12. The federal government spends the greatest portion of its discretionary budget on which of the following?
a. Roads b. Military Defense c. Social Security d. K-12 Education
13. The federal government spends the greatest portion of its mandatory budget on which of the following?
a. Roads b. Military Defense c. Social Security d. K-12 Education
14. The California state government spends the greatest portion of its budget on which of the following?
a. Military Defense b. Roads c. Social Security d. K-12 Education
15. Which of the following sources of federal tax revenue has shrunk most over the past fifty years?
a. Personal income taxes b. Payroll taxes c. Corporate income taxes d. Estate taxes
16. If the economy is in a recession, which of the following would be an appropriate fiscal policy?
a. lower taxes b. increase government spending c. reduce interest rates d. A and B
17. If the US had inflation that was over 5% for more than a year, the federal government would most likely
a. raise taxes and increase spending b. lower taxes and lower spending
c. raise taxes and decrease spending d. lower taxes and increase spending
18. Which of the following did liberal economist John Maynard Keynes support?
a. Adam Smith’s belief in no government intervention in the economy was correct.
b. In order to best promote the social equality, economies should be strongly controlled by a central government.
c. Recessions were temporary situations in all economies, and that they would fix themselves.
d. Economies can avoid or lessen the impact of a recession with government stimulus to aggregate demand.
19. Which of the following is NOT TRUE of supporters of “Supply Side” economic policy?
a. They tend to be political liberals
b. They agree with the concepts expressed in the “Laffer Curve”
c. They believe that some fiscal policy tools can be a valuable to help improve the economy
d. They support subsidies and tax breaks for businesses
20. Which of the following is TRUE of Treasury Bills, Treasury Notes and Treasury Bonds?
a. They are all types of federal government taxes
b. They are all instruments of borrowing by the federal government
c. They are all examples of the “multiplier effect”
d. They are all fiscal tools supported most by “Classical” economists
21. The financial instrument controlled by the Federal Reserve that can influence the “price of money” is called
a. the discount rate b. the exchange rate c. the inflation rate d. the currency rate
22. When unemployment is high, the Federal Reserve is likely to
a. raise interest rates to speed up the economy b. raise interest rates to slow down the economy
c. lower interest rates to speed up the economy d. lower interest rates to slow down the economy
23. Which of the following is NOT a tool that the Federal Reserve has at its disposal to help stabilize the economy?
a. open market operations b. the ability to raise or lower taxes
c. the ability to raise or lower the interest rates d. the ability to adjust bank reserve requirements
24. When implementing a “tight-money” policy, the Federal Reserve will
a. buy government bonds and raise interest rates. b. sell government bonds and raise interest rates.
c. buy government bonds and lower interest rates. d. sell government bonds and lower interest rates.
25. Which statement is NOT true about the graph on
the left?
a. The economy started in a recession measured by AD1.
b. The economy improved when AD1 shifted to the AD2.
c. Unemployment was lower at AD1 than AD2.
d. Inflation rose slightly as the economy moved from
AD1 to AD2.
Short Answer (5 Points Each)
1. Summarize the main difference between political liberals and political conservatives on what government
Fiscal Policy should be? Mention taxes, government spending and debt in your answer.
2. a) Describe what tools of Monetary Policy could be used by the Fed to combat a recession.
b) Describe how the graphs below illustrate the impacts of the actions you describe in part a.
3. a) What is inflation and why can it be a major problem for an economy?
b) Describe TWO specific contractionary policies (fiscal or monetary) that could be used to combat
inflation and briefly explain why the actions you describe would help reduce inflation.
