### Macroeconomics Practice Test - 6: Monetary and Fiscal Policy in a Closed Economy

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1. A liquidity effect occurs when

1. A reduction in government spending lowers the rate of interest

2. A money supply increase lowers the rate of interest

3. An increase in government spending increases the rate of interest

4. A money supply increase raises the rate of interest

2. A liquidity effect will normally result in an output effect because

1. Lower interest rates will increase the store-of-value demand for money

2. Lower interest will cause less crowding-out

3. Lower interest rates will increase interest-sensitive spending

4. Lower interest rates will cause more crowding-out

3. A change in the money supply has a greater effect upon output

1. The more interest-sensitive private sector spending is

2. The less interest-sensitive private sector spending is

3. The smaller the expenditure multiplier is

4. The more interest-sensitive money holdings are to the rate of interest

4. A money supply increase shifts LM rightward by $$\Delta \overline M \left( {1/k} \right),$$ with the actual change in output closely approximating the shift of LM when

1. LM is steeply sloped and IS is steeply sloped

2. LM is vertical and IS is steeply sloped

3. LM is steeply sloped and IS is vertical

4. LM is relatively flat as is IS

5. In which of the following situations will an increase in the money supply have no effect upon output?

1. LM is steeply sloped and IS is relatively flat

2. LM is vertical and IS is steeply sloped

3. LM is steeply sloped and IS is vertical

4. LM is relatively flat as is IS

6. $${k_e}$$is the expenditure multiplier, b the interest sensitivity of private sector spending, h the interest sensitivity of the demand for money, and k is the transaction demand for money. From the following sets of values for $${k_e},$$ b, h, and k, find the one in which a change in the money supply will have the largest multiplying effect on output

1. $${k_e},$$ = 5, b = 5, h = 5, k = 0.20

2. $${k_e},$$ = 4, b = 1, h = 5, k = 0.20

3. $${k_e},$$ = 5, b = 10, h = 1, k = 0.20

4. $${k_e},$$ = 4, b = 5, h = 10, k = 0.10

7. An increase in government spending shifts IS rightward by $${k_e}\Delta \overline G ,$$ with the actual change in output closely approximating the schedule's shift when

1. The LM is relatively flat and IS is steeply sloped

2. The LM is vertical and IS is steeply sloped

3. The LM is relatively flat as is IS

4. The LM is steeply sloped and the IS is relatively flat

8. Crowding-out is more likely to occur when

1. The demand for money is interest-sensitive, and private sector spending is largely interest-insensitive

2. The demand for money is interest-sensitive, and private sector spending is interest-sensitive

3. The demand for money is interest-insensitive, and private sector spending is interest-insensitive

4. The demand for money is interest-insensitive, and private sector spending is interest-sensitive

9. Crowding-out occurs when

1. A decrease in the money supply raises the rate of interest which crowds-out interest-sensitive private sector spending

2. An increase in taxes for the private sector reduces private sector disposable income and spending

3. A reduction in income taxes results in a higher interest rate, which crowds-out interest-sensitive private sector spending

4. A reduction in government spending induces less consumption spending

10. From the following sets of values fo $${k_e},$$ b, h, and k, find the set in which a change in government spending has the largest multiplier effect on output

1. $${k_e},$$ = 5, b = 5, h = 5, k = 0.20

2. $${k_e},$$ = 10, b = 5, h = 10, k = 0.20

3. $${k_e},$$ = 5, b = 10, h = 1, k = 0.20

4. $${k_e},$$ = 5, b = 5, h = 1, k = 0.10