ECON 110 EXAM 3 QUESTIONS AND
CORRECT ANSWERS
The 2008-2009 deficit stimulus spending by the federal government is an example of expansionary
sound finance. ✅✅CORRECT ANSW-F
T or F: Expectations of inflation are assumed to be constant at each point on a given short-run
Phillips curve. ✅✅CORRECT ANSW-T
If prices are inflexible, monetary policy:
A. affects both nominal and real income.
B. affects real income but not nominal income.
C. affects nominal income but not real income.
D. does not affect real or nominal income. ✅✅CORRECT ANSW-A
The Ricardian equivalence theorem is correct if two assumptions are true. These assumptions are
that people have:
A. access to savings instruments ad recognize the link between deficits and future taxes.
B. no access to savings instruments and recognize the link between deficits and future taxes.
C. access to savings instruments and cannot recognize the link between deficits and taxes.
D. no access to savings instruments and cannot recognize the link between deficits and taxes.
✅✅CORRECT ANSW-A
T or F: The three tools of monetary policy are open market operations, setting prices, and the
velocity of money. ✅✅CORRECT ANSW-F
T or F: A decrease in the federal funds rate is an indication that monetary policy is expansionary.
✅✅CORRECT ANSW-T
T or F: Financing expansionary fiscal policy by increasing the deficit does not generally affect interest
rates. ✅✅CORRECT ANSW-F
, T or F: The prices of assets are included in standard measures of inflation. ✅✅CORRECT ANSW-F
In the AS/AD model, a contradictory monetary policy:
A. reduces investment but increases aggregate demand.
B. increases both investment and aggregate demand.
C. reduces both investment and aggregate demand.
D. increases investment but reduces aggregate demand. ✅✅CORRECT ANSW-C
Fed watchers are:
A. financial advisers for the government, telling them when raising taxes will raise revenue and when
it won't.
B. part of the Fed governor system and are given voting power on the FOMC.
C. individuals or organizations whose sole occupation is to follow the Fed's FOMC.
D. individuals or organizations whose sole occupation is to predict the future of the interest rates.
✅✅CORRECT ANSW-C
Federal Reserve sales of government securities:
A. increase bank reserves and increase the money supply.
B. decrease bank reserves and decrease the money supply.
C. decrease bank reserves and increase the money supply.
D. increase bank reserves and decrease the money supply. ✅✅CORRECT ANSW-B
Suppose the reserve requirement is 5%. How much would reserves need to be initially increased to
eventually increase the money supply to 1,000?
A. 25
B. 50
C. 250
D. 500 ✅✅CORRECT ANSW-B
If the Fed simultaneously lowers the reserve requirement and sells government bonds, the money
supply will:
A. contract.
B. remain unchanged.
CORRECT ANSWERS
The 2008-2009 deficit stimulus spending by the federal government is an example of expansionary
sound finance. ✅✅CORRECT ANSW-F
T or F: Expectations of inflation are assumed to be constant at each point on a given short-run
Phillips curve. ✅✅CORRECT ANSW-T
If prices are inflexible, monetary policy:
A. affects both nominal and real income.
B. affects real income but not nominal income.
C. affects nominal income but not real income.
D. does not affect real or nominal income. ✅✅CORRECT ANSW-A
The Ricardian equivalence theorem is correct if two assumptions are true. These assumptions are
that people have:
A. access to savings instruments ad recognize the link between deficits and future taxes.
B. no access to savings instruments and recognize the link between deficits and future taxes.
C. access to savings instruments and cannot recognize the link between deficits and taxes.
D. no access to savings instruments and cannot recognize the link between deficits and taxes.
✅✅CORRECT ANSW-A
T or F: The three tools of monetary policy are open market operations, setting prices, and the
velocity of money. ✅✅CORRECT ANSW-F
T or F: A decrease in the federal funds rate is an indication that monetary policy is expansionary.
✅✅CORRECT ANSW-T
T or F: Financing expansionary fiscal policy by increasing the deficit does not generally affect interest
rates. ✅✅CORRECT ANSW-F
, T or F: The prices of assets are included in standard measures of inflation. ✅✅CORRECT ANSW-F
In the AS/AD model, a contradictory monetary policy:
A. reduces investment but increases aggregate demand.
B. increases both investment and aggregate demand.
C. reduces both investment and aggregate demand.
D. increases investment but reduces aggregate demand. ✅✅CORRECT ANSW-C
Fed watchers are:
A. financial advisers for the government, telling them when raising taxes will raise revenue and when
it won't.
B. part of the Fed governor system and are given voting power on the FOMC.
C. individuals or organizations whose sole occupation is to follow the Fed's FOMC.
D. individuals or organizations whose sole occupation is to predict the future of the interest rates.
✅✅CORRECT ANSW-C
Federal Reserve sales of government securities:
A. increase bank reserves and increase the money supply.
B. decrease bank reserves and decrease the money supply.
C. decrease bank reserves and increase the money supply.
D. increase bank reserves and decrease the money supply. ✅✅CORRECT ANSW-B
Suppose the reserve requirement is 5%. How much would reserves need to be initially increased to
eventually increase the money supply to 1,000?
A. 25
B. 50
C. 250
D. 500 ✅✅CORRECT ANSW-B
If the Fed simultaneously lowers the reserve requirement and sells government bonds, the money
supply will:
A. contract.
B. remain unchanged.
