1. Real interest rates
a) cannot be negative.
b) can be negative only if inflation is negative.
c) can be negative only if inflation is zero.
d) can be negative only if inflation is greater than zero.
2. The political business cycle refers to
a) the fact that about every four years some politician advocates greater government control of the Fed.
b) the potential for a central bank to increase the money supply and therefore real GDP to help the incumbent get re-elected.
c) the part of the business cycle caused by the reluctance of politicians to smooth the business cycle.
d) changes in output created by the monetary rule the Fed must follow.
3. Suppose aggregate demand fell. In order to stabilize the economy, the government might
a) decrease the money supply.
b) decrease government expenditures.
c) decrease taxes.
d) do nothing.
4. Which of the following likely occurs when households and firms become more pessimistic?
a) increased spending, increased aggregate demand, rising real GDP, and a rising unemployment rate
b) decreased spending, increased aggregate demand, rising real GDP, and a falling unemployment rate
c) decreased spending, decreased aggregate demand, falling real GDP, and a rising unemployment rate
d) decreased spending, decreased aggregate demand, falling real GDP, and a falling unemployment rate