Practice FP questions for the test

1. Please refer to the following chart to answer question number 1

Federal Reserve Tools Fiscal Policy Tools
Discount rate
taxing
Reserve Requirement
spending
borrowing
One tool is missing from the Federal Reserves list of tools. Which would be
the term to fill in that third box?
a. buy/sell securities
b. Board of Governors
c. Monetary Policy
d. district banks
2. If the economy is in an inflationary period, what action would Fiscal
Policy most likely take?
a) Decrease taxes
b) Decrease the discount rate
c) Increase taxes
d) Increase spending
3. If GDP is raising and the unemployment rate is decreasing, what
actions would Monetary Policy and Fiscal Policy take to try to fix this
economic situation?
a.
b.
c.
d.

Federal Reserve
raise the Discount rate
lower the Federal Funds rate
lower the Discount rate
raise the Federal Funds rate

Fiscal Policy
lower taxes
raise taxes
decrease spending
decrease spending

4. If Fiscal Policy is trying to promote stability and economic growth

through tax cuts, what type of policy is Fiscal policy using?
a) Expansionary Fiscal Policy
b) Restrictive Fiscal Policy
c) Easy Money Policy
d) Tight Money Policy
5. If a nation currently has a budget deficit, their income is not covering the cost
of running their country. If this budget is not revised, what could be a
possible result of this situation?
a) A budget surplus
b) A balanced budget
c) A mounting debt

d) Discretionary fiscal policy

6. Which of the following best describes the goal of Monetary Policy?
a) Controlling taxes
b) Controlling the national debt
c) Controlling the money supply
d) Stopping inflation
7. If the Federal Reserve is trying to promote economic stability by lowering the
Federal Funds rate, what action would Fiscal Policy take?
a) Lowering taxes
b) Increasing taxes
c) Decreasing spending
d) Decreasing borrowing
8. A consumer is at the store and purchases a new vacuum cleaner. At
checkout, that consumer will have to pay an additional tax on that purchase;
a sales tax. What type of tax is a sales tax?
a) Progress tax
b) Proportional tax
c) Keynesian Tax
d) Personal Income tax
9. If the economy is in a recession, the Fed could do all of the following EXCEPT
a) Lower taxes
b) Lower the Discount rate
c) Lower the Federal Funds rate
d) Buy securities
10.How are Fiscal Policy and the Federal Reserve similar?
a) They both use the same tools to fix economic problems
b) They both try to promote economic stability
c) They always must have Congressional approval before passing
d) They both have a Board of Governors
11. If you are a classical economist, which statement would you support?
a) Let the economy work out its own problems
b) The more the government spends to improve the economy, the better
c) The government should be involved to help during recessions
d) The government is the key to economic success
Answers
1. A
2. C
3. D
4. A
5. C
6. C
7. A
8. B

9. A
10.B
11.A