1. Which of the following statements is NOT true when considering the liquidity trap and consumers?

A) They are risk aversive B) They believe the price of non monetary assets will rise ------------------------------------------------------------------------------------ 2. If GDP was $100 million below potential GDP, what should the government do to bring it back to equilibrium? A) Raise government spending by something less than $100 million. B) Raise government spending by $100 million. ------------------------------------------------------------------------------------ 3. Holding all else constant while government is borrowing to cover budget deficits, the crowding out concept suggests interest rates ________ borrowing and spending by business and households. A) fall and encourage B) fall and discourage C) rise and discourage______________________________________________ 4. A country’s economic data indicates that there has been a substantial reduction in the financial capital available to be borrowed by private sector firms. Which of the following is the most likely cause of this situation? A) Increased influx of funds by foreign financial investors. B) Especially large and sustained household saving. C) Especially large and sustained government borrowing.---------------------------------------------------------------------------------- 5. An implementation policy lag describes the length of time it: A) requires to enact a monetary or fiscal policy. B) takes before policy makers recognize that a recession or expansion is occurring. C) takes funds to be dispersed to government agencies.----------------------------------------------------------------------------------- 6. A recognition policy lag describes the length of time it ________. A) takes before policy makers recognize that a recession or expansion is occurring. B) requires for policy impacts to be recognized. ------------------------------------------------------------------------------------------------------ 7. The theory of ________ assumes that individuals will use all information available to them to form the most accurate possible expectations about the future. A) naïve expectations B) Keynesian economics C) rational expectations D) adaptive expectations --------------------------------------------------- 8. New classical economists argue that a tax cut does not shift the aggregate demand curve because: A) prices are inflexible, so real GDP does not change. B) consumers anticipate the effect of an increase in government debt on future taxes. C) households reduce their consumption so they can pay afford to pay higher taxes in the future.