7. Contractionary fiscal policy a) Decreases interest rate and aggregate demand.

Question

7. Contractionary fiscal policy

a) Decreases interest rate and aggregate demand.

b) Aims to decrease the money supply.

c) Includes a reduction in the rate of required reserves.

d) Includes a reduction in taxes.

e) a and d.

f) All of the above.

8. Which of the following is true?

a) The negative relationship between the FFR and the price of treasury bills is a result of a change in the supply of treasury bills.

b) The price of treasury bills is likely to increase in the time of recession because the Fed increases the demand of treasury bills.

c) The price of treasury bills is likely to decrease in the time of recession as a result of a decrease in the Federal Funds Rate.

d) a and b.

e) a and c.

9. Regulating the banking system is necessary

a) Because the banking system tends to shift the aggregate supply continuously to the right.

b) Because the banking system determines the money supply and money supply affects aggregate demand.

c) To minimize run on banks.

d) b and c.

e) All of the above.

10. Open market operations in the time of recession

a) Refers to selling treasury bills in order to increase interest rate.

b) Refers to buying treasury bills in order to decrease money supply

c) Refers to buying treasury bills in order to decrease the interest rate.

d) Refers to buying treasury bills in order to increase money supply.

e) c and d.

f) b and d.

Explanation / Answer

a) "E"

Both A and D statements are correct. A contractionary fiscal policy will decrease the interest rate and income of the people. It will also cut the taxes in the economy.

b) "C"

At the time of recession, the price of the bills goes down because of decreasing in the FFR.

c) "D"

the bank can affect the supply of money and aggregate demand and it is also important to prevent the bank runs.  

d) The correct answer is "A" and "D". both the statements are correct.

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