Economics EOC Quiz Answer Key Macroeconomic Concepts - (SSEMA1) Economic Activity, (SSEMA2) Federal Reserve, (SSEMA3) Fiscal Policy

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1 Economics EOC Quiz Answer Key Macroeconomic Concepts - (SSEMA1) Economic Activity, (SSEMA2) Federal Reserve, (SSEMA3) Fiscal Policy Student Name: Teacher Name: Heather Creamer Date: Score: 1) Inflation is defined as a rise in the general level of prices. When inflation occurs, the buying power of the dollar would A) increase. B) decrease. C) remain stable. D) not be affected by inflation. When inflation occurs, the buying power of the dollar would decrease. Inflation results in less "bang for your buck" because it erodes the purchasing power of a unit of currency. 2) If the federal government spends more than it collects in revenue, then A) it is running a surplus. B) it is running a deficit. C) the inflation rate should decline. D) the unemployment rate may increase. A government is running a deficit when there is more money going out than coming in. This is not generally a good thing, but then again it can be beneficial in certain times (like during FDR's "New Deal" plans). 3) Which statement describes economic activity in a recession? A) consumer spending declines B) business production increases C) the employment rate increases D) government regulations decrease During a recession, consumer spending declines. Furthermore, business production decreases and the unemployment rate increases. 4) Of the following groups, who would be the most impacted by inflation? A) members of strong labor unions B) people who do not have any debt C) employees who have received raises D) individuals living on fixed incomes Of the groups listed, indiviudals living on fixed incomes would be most impacted by inflation. Their incomes do not change yet the prices of goods and services are increasing. They can buy less goods and services. 1/7

2 5) The Consumer Price Index (CPI) is best used to determine A) the Dow Jones Index. B) the rate of inflation. C) the unemployment rate. D) currency exchange rates. The Consumer Price Index shows the increase (or decrease) of prices for goods and services. It therefore is used to determine the rate of inflation. 6) Which result occurs when federal government expenditures are greater than the federal government's total receipts? A) reduced net exports B) increased excise taxes C) a federal budget surplus D) a federal budget deficit In economics, each factor leads to other factors. These factors dictate the state of the nation s economy. It the government spends more money than it takes in during a given time, the result is a federal budget deficit, or a shortage of government funds. 7) Which of these is the BEST definition of GDP? A) a description of the quality of life in a nation B) average value of production of intermediate goods C) a collection of all government assets that could earn money D) market value of all goods and services produced in a country The GDP, or Gross Domestic Product, is best defined as the market value of all goods and services produced in a country. Each country in the world has its own GDP, and this economic statistic is often used to measure the general health of nations' economies. 8) Aggregate demand in the U.S. is influenced by both A) inflation and debt. B) monetary policy and debt. C) inflation and fiscal policy. D) monetary policy and fiscal policy. Aggregate demand in the U.S. is influenced by both monetary policy and fiscal policy. It is the total demand for final goods and services in the economy at a given time and price level. 2/7

3 9) A period during which real GDP declines for two quarters in a row, or six consecutive months, is MOST LIKELY a A) peak. B) recession. C) recovery. D) trough. A period during which real GDP declines for two quarters in a row, or six consecutive months, is MOST LIKELY a recession. A prolonged recession is called a "depression." 10) The single most important measure of the economy's overall economic performance, or the measure of national output, is called A) National Income (NI). B) Net National Product (NNP). C) Gross National Product (GNP). D) Gross Domestic Product (GDP). Gross Domestic Product (GDP) is a measure of national output, or the dollar amount of all final goods and services produced within a country's national borders in a year. 11) The process by which the Federal Reserve controls the supply, availability, and cost of money in order to keep the economy stable is A) fiscal policy. B) monetary policy. C) the interest rate. D) the discount rate. The process by which the Federal Reserve controls the supply, availability, and cost of money in order to keep the economy stable is monetary policy. Setting discount rates and interest rates are two ways the Federal Reserve keeps monetary policy in check. Fiscal policy refers to government borrowing, spending, and taxation. 3/7

4 12) When the Federal Reserve sells government securities on the open market, what effect does this action have on the nation s money supply and interest rates? A) Money Supply - Decreases / Interest Rates - Increase B) Money Supply - Increases / Interest Rates - Increase C) Money Supply - Decreases / Interest Rates - Decrease D) Money Supply - Increases / Interest Rates - Decrease When the Federal Reserve sells government securities on the open market, it collects payment from banks, which decreases the money banks have in their reserve accounts, so the money supply decreases. Because there is less money, the interest rates increase and it costs more to borrow money. On the other hand, when the Federal Reserve buys securities, it increases the money supply, which causes interest rates to decrease. 13) What is the name of the "central bank" of the United States? A) Bank of the U.S. B) The Federal Reserve C) U.S. Congressional Bank D) The Federal Bank of America The Federal Reserve, also called the Fed, is the central bank of the United States. The Federal Reserve consists of 12 regional Federal Reserve banks and a central Board of Governors 14) Monetary policy is BEST described as A) benefits received by employees in addition to wages and salaries. B) actions by the Federal Reserve System to expand or contract the money supply. C) a system that relies on supply and demand to determine the value of one currency to another. D) actions by the federal government to use spending and revenue collection to influence the economy. Monetary policy is BEST described as actions by the Federal Reserve System to expand or contract the money supply. Controlling interest rates is a key component of this. 15) What would MOST LIKELY happen if the Federal Reserve decided to increase the reserve requirement in banks? A) The amount of federal taxes people owe would decrease. B) The amount of federal taxes people owe would increase. C) The amount of money circulating in the economy would decrease. D) The amount of money circulating in the economy would increase. If the Federal Reserve increased the reserve requirement in banks, the amount of money circulating in the economy would decrease. Banks would have to hold on to more of their money rather than lend it to borrowers. 16) The Federal Reserve wants to increase the money supply in the United States. What is the Federal Reserve likely to do to accomplish this? A) reduce the discount rate B) sell securities on the open market C) increase the reserve requirement for banks D) require banks to hold a reserve for all types of deposits If the Federal Reserve were to reduce the discount rate banks would be encouraged to borrow money from the Federal Reserve and then make more loans to their customers. This would increase the money supply in the nation. 4/7

5 17) All of these are ways in which the Federal Reserve system can A) control the stock market. B) regulate the money supply. C) decrease consumer spending. D) challenge Presidential power. setting the discount and interest rates establishing reserve requirements for banks buying and selling US government securities All of these are ways in which the Federal Reserve can regulate the money supply. The ultimate goal of the Fed is to promote economic stability and these would help do that. 18) What consumer behavior is the Federal Reserve Board trying to encourage when it implements a loose monetary policy? A) increased saving and spending B) decreased saving and spending C) increased saving and reduced spending D) decreased saving and increased spending A loose monetary policy is implemented to bring about decreased saving and increased spending. This is in order to give businesses a boost in production and, potentially, employment. 19) Which of these actions of the Federal Reserve can slow economic growth? A) The Federal Reserve regulates the amount of money that flows into and out of the nation s economy. B) The Federal Reserve buys securities, which puts money back into the hands of people who can spend it in the marketplace. C) The Federal Reserve decreases the reserve requirement and banks have more money to loan to people who want to borrow it. D) The Federal Reserve increases the discount rate, which causes interest rates to rise and people to save rather than to spend. If the Federal Reserve increases the discount rate, which causes interest rates to rise and people to save rather than spend, it can slow economic growth. When people save, they spend less and the money supply decreases. This also could cause employment problems, for if people are not spending money on goods and services then businesses cannot continue to employ as many people, nor can they expand their business. 20) What is the term for the situation where more money is available for borrowing and investment? A) loose money B) open market C) tight money D) fiscal policy Loose money or "easy" money means more money is available for borrowing and spending. Loose money may help economic growth and employment though it can cause inflation. 5/7

6 21) If the federal government wants to encourage businesses and consumers to spend more money, it would MOST LIKELY A) increase the tax rate. B) decrease the tax rate. C) increase the reserve requirement. D) decrease government spending on goods and services. If the federal government wants to encourage businesses and consumers to spend more money, it would MOST LIKELY decrease the tax rate. This would give people more money to spend which would, in turn, spark the economy... ideally. 22) The process by which the government manages spending and taxes to influence the direction of the economy is A) tax policy. B) trade policy. C) fiscal policy. D) monetary policy. Fiscal policy is how the government manages money to achieve specific goals, like economic growth with stable prices. Public spending and taxation are the two main components of fiscal policy. 23) Which of these is MOST LIKELY to occur after the government increases taxes? A) Annual deficits increase. B) The national debt increases. C) Consumer spending decreases. D) Government programs decrease. The government collects taxes to fund programs as well as to reduce debts and deficits. At the same time, higher taxes mean that consumers have to give more money to the government. This leaves consumers with less disposable income and consumer spending decreases. 24) Unemployment insurance, Welfare, Medicare, Medicaid, and Social Security are key components of A) fiscal policy. B) monetary policy. C) supply-side policy. D) wage-price controls. Unemployment insurance, welfare, medicare, medicaid, and Social Security are key components of fiscal policy. Fiscal policy is represented by taxation and spending programs and, together with monetary policy, is part of a country's Macroeconomic policy. 25) In 2008, many United States families received a tax rebate check from the Internal Revenue Service (IRS). Why were tax rebate checks distributed? A) to stimulate the economy B) to slow down productivity C) to decrease consumer spending D) to increase the federal income tax Tax rebate checks were distributed to stimulate the economy. The government was trying to encourage consumer spending to stimulate the economy. 6/7

7 26) Which action would be a change in the government's fiscal policy? A) an increase in taxes B) a decrease in unemployment C) a decrease in collected revenues D) an increase in the price of goods Fiscal policy is the process by which a government gathers and spends money. An increase in taxes would mean a change in fiscal policy. Unemployment, prices of goods, and revenue collections are connected to fiscal policy, but are not actually policies set by the government. 27) The federal government uses government spending and tax rates to help control recessions and encourage economic activity. This is called A) fiscal policy. B) monetary policy. C) supply-side economics. D) open market operations. The federal government uses government spending and tax rates to help control recessions and encourage economic activity. This is called fiscal policy and can be used to influence the level of demand in the economy. 28) The leaders of a small country decide that they need to enact a contractionary fiscal policy. Which action is consistent with this fiscal policy? A) reduce taxes B) lower its discount rate C) reduce government spending D) lower the price of securities If the country follows a contractionary fiscal policy, it will reduce the size of its budget. It needs to spend less money and keep more of it. One way to do this is to reduce government spending. Lowering the country s discount rate would result in it having less money, since the discount rate is the interest rate that the government charges on loans it makes to banks. The same is true of taxes. Lowering the price of securities relates to the country s money supply. 29) Of the following taxes, what is the name for the taxes that all homeowners must pay? A) Sales Tax B) Income Tax C) Excise Tax D) Property Tax The property tax is the tax that is collected from homeowners. Property is another word for land or buildings that a person owns. 30) State governments often decide to place a "sin tax" on specific products or goods, like alcohol and tobacco. Which rationale is LEAST LIKELY to encourage governments to adopt a "sin tax"? A) "Sin taxes" encourage people to consume less of a good because it is illegal. B) "Sin taxes" quickly raise funds through indirect taxes affecting users only. C) "Sin taxes" disproportionally affects lower income groups. D) "Sin taxes" generate funding for special projects. While it is true that "sin taxes" disproportionally affect lower income groups, this is not a reason that governments would want to adopt them. Instead, governments would focus on the fact that the tax might discourage behaviors- such as smoking- that could be more costly down the road. 7/7

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