macro: fiscal and monetary policy actions in the short run

King Thranduil of the Woodland Realm is trying to rescue the kingdom from a severe recession by engaging in expansionary fiscal policy. As a result of the expansionary fiscal policy, the Woodland Realm now has a budget deficit. Meanwhile, the president of the central bank is Smaug, who wants to maintain a steady interest rate. What is the appropriate action for the central bank to take in order to reduce the impact of the expansionary fiscal policy on interest rates?

Buy bonds

The nation of Eldemar is experiencing rapid inflation, which the government is taking fiscal policy actions to counteract. However, the traitor Ulfang is the chairperson of the central bank of Eldemar and is planning to undermine the government's efforts. Which of the following is a monetary policy action that Ulfang (as chair of the central bank) could use to block the government's efforts to control inflation?

Buy bonds

The natural rate of unemployment in Mithrim is 5% and the current rate of unemployment is 9%, Which of the following combinations of monetary and fiscal policy would be appropriate to return an economy to full employment?

Buy bonds; decrease taxes

The production possibilities curve (PPC) of the nation of Mithrim is shown here. The economy is currently operating at Point B in the graph below. What combination of monetary and fiscal policy would be the most likely to return the economy to point C?

Buy bonds; decrease taxes

Which of the following combinations of monetary policy and fiscal policy would be the appropriate response to a severe recession?

Buy bonds; decrease taxes

Problem The economy of Isengard is experiencing high inflation and a rate of unemployment below the natural rate. Which of the following combination of fiscal and monetary policy actions would be the most appropriate response to this output gap?

Decrease government spending; decrease the money supply

The Council of Elrond has decided to increase taxes, and the central bank of Elrond has decided to conduct open market purchases of financial assets. Assuming that wages are sticky, which of the following best describes the impact of these actions on real output and the price level?

Impact on real output indeterminate; impact on the price level indeterminate

The economy of Rivendell experienced the AD shock shown in this graph. Which of the following combinations of monetary and fiscal policy would be appropriate to combat the effect on the price level shown in this graph?

Increase taxes; open market sales

The natural rate of unemployment in Mithrim is 5%, and the current rate of unemployment is 2%. Also, the consumer price index (CPI) has been increasing rapidly. Which of the following combinations of monetary and fiscal policy would be appropriate to return this economy to full employment?

Increasing taxes; open market sales

The economy of Mithrim is experiencing a severe recession. As a result, the government is conducting expansionary fiscal policy. The central bank of Mithrim is considering expansionary monetary policy to aid in the recovery efforts. Which of the following is an example of a monetary policy action that would work with the expansionary fiscal policy to close the output gap?

Open market purchases

The economy of Valinor is currently operating on point X. A bowed out production possibilities curve (PPC) with capital goods on the vertical axis and consumption goods on the horizontal axis. There are five points in the image: point R is on the interior of the PPC, Point Y is on the PPC halfway between each axis, Point X is on the PPC to the left of point Y, point W is at the intersection of the PPC on the vertical axis, and Point Z in outside of the PPC. If the central bank sells bonds and the government of Valinor increases taxes, which point in this graph best represents where the economy would be operating as a result of these actions?

Point R

The Council of Elrond has decided to increase taxes, and the central bank of Elrond has decided to conduct open market sales of financial assets. Assuming that wages are sticky, which of the following best describes the impact of these actions on real output and the price level?

Real output will decrease; the price level will decrease