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The effects of the stock market on the economy can be described as follows:
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| Higher stock prices increase household wealth and consumption only in the future; therefore, current consumption remains the same, and current output, income, and aggregate spending are not affected. |
| Higher stock prices decrease household wealth, causing a decrease in current and future consumption, a decrease in output and income, and lower aggregate spending today. |
| Higher stock prices increase household wealth, causing an increase in current and future consumption, an increase in output and income, and higher aggregate spending today. |
| Stock prices are not a determinant of household wealth; thus, changes in stock prices do not affect consumption, output, income, or aggregate spending. |
| Changes in the stock market affect the monetary side of the economy but not the real economy. |
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If household wealth decreases by one dollar, the corresponding decrease in consumption in the subsequent year is estimated to be:
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| About 2 cents. |
| About 4 cents. |
| About 10 cents. |
| About 75 cents. |
| About the same, one dollar. |
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The decrease in consumption as a result of a decrease in stock prices is:
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| Slower and smoother than the corresponding decrease in wealth. |
| Faster and more volatile than the corresponding decrease in wealth. |
| Gradual but highly volatile. |
| Unpredictable. |
| Nonexistent. Stock prices do not affect consumption. |
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What was the impact of the stock market crash of 1987?
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| The stock market crash sent the economy almost immediately into a recession. |
| The Fed adopted tight monetary policy, which aggravated the situation. |
| There was a negative wealth effect, but not as large as it could have been if the decrease in wealth had been considered more permanent. |
| The crash had a significant effect on consumption. |
| All of the above. |
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If the wealth multiplier is 1.4, and households spend 5 cents of each additional dollar increase in wealth, how much is the impact on spending of an increase in stock prices that adds $3 trillion to household wealth?
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| $21 million. |
| $3 trillion. |
| $28 billion. |
| $210 billion. |
| $28 trillion. |
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Which of the following statements is entirely correct?
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| The Fed is likely to increase the money supply during times of high output and low inflation. |
| The Fed is likely to increase the money supply during times of low output and low inflation. |
| The Fed is likely to decrease the money supply during times of high output and low inflation. |
| The Fed's behavior "goes with the wind;" that is, when the economy expands, the Fed expands the money supply, and when the economy contracts, the Fed contracts the money supply. |
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Refer to the graph below. Suppose the economy is at point d. At this point, the Fed is more likely to: 
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| Expand the money supply. |
| Contract the money supply. |
| Increase government spending. |
| Decrease government spending. |
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During which of the following time periods did the Fed adopt contractionary monetary policy?
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| During the 1990-1991 recession. |
| After the 1990-1991 recession, in 1992 and 1993. |
| At the end of 1993. |
| At the end of 1998. |
| All of the above. |
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The time it takes for the economy to adjust to the new conditions after a new policy is implemented is known as:
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| The recognition lag. |
| The implementation lag. |
| The response lag. |
| The stabilization policy lag. |
| The "fool in the shower." |
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Which of the following changes in fiscal policy has a shorter response lag than the others?
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| An increase in government spending. |
| A cut in personal taxes. |
| A cut in business taxes. |
| All of the above measures have about the same response lag. |
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The relationship between fiscal policy, monetary policy, and response lags is as follows:
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| The response lags for fiscal policy are longer than the response lags for monetary policy. |
| Monetary policy can be adjusted more quickly than fiscal policy, but the response to monetary changes is slower than the response to changes in fiscal policy. |
| Extra government spending stimulates extra private spending almost instantaneously. |
| Monetary and fiscal policy changes have almost identical response lags. |
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Which of the following pieces of proposed legislation called for automatic spending cuts whenever a budget deficit was larger than the targeted amount?
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| The Omnibus Budget Reconciliation Act of 1993. |
| The Gramm-Rudman-Hollings Bill of 1986, referred to as GRH. |
| The balanced-budget amendment of 1995. |
| All of the legislation pieces above required automatic spending cuts whenever a budget deficit was larger than the targeted amount. |
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Which of the following statements is true?
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| The government budget deficit tends to rise when GDP rises, and tends to fall when GDP falls. |
| The government budget deficit tends to rise when GDP falls, and tends to fall when GDP rises. |
| There is no consistent relationship between the government budget deficit and the level of GDP. |
| An increase in government spending shifts the AD curve to the left and results in a decrease in output and a contraction in the economy; thus, revenue from personal and corporate income taxes will fall. |
| A decrease in government spending lowers GDP by about the same amount of the decrease. |
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The relationship between government spending and the government's budget deficit is as follows:
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| A decrease in government spending causes an increase in GDP and a decrease in the budget deficit. |
| A decrease in government spending causes a decrease in GDP, and the decrease in GDP causes an increase in the budget deficit. |
| In order to reduce the deficit, any decrease in government spending must be less than the targeted decrease in the deficit. |
| Increasing or decreasing government spending does not have any impact on the government's budget deficit. |
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Suppose that the multiplier of government spending is 1.5 and the deficit response index (DRI) equals - .20. What is the impact of a $20 billion reduction in government spending on the budget deficit?
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| $4 billion reduction in the budget deficit. |
| $3 billion reduction in the budget deficit. |
| $9 billion reduction in the budget deficit. |
| $6 billion reduction in the budget deficit. |
| $4.5 billion reduction in the budget deficit. |
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Suppose that the economy goes into a recession after the government had targeted the deficit; that is, the government had set the size of the deficit in advance. Then,
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| Contraction in the economy will be larger than it would have been without deficit targeting. |
| Contraction in the economy will be smaller than it would have been without deficit targeting. |
| Contraction in the economy will be automatically eliminated. |
| Contraction in the economy would be impossible. |
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Trends in the economies of European countries include the following:
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| The inflation rate has been generally falling over time. |
| A fairly high level of unemployment across most of Europe has prevailed since 1980. |
| Union power has kept the real wage rate too high to allow full employment to be achieved. |
| Monetary and fiscal policies have not been expansionary enough. |
| All of the above. |
