Econ Chapter 5 Study Guide

An economy with limited reserves in its banking system is in short-run equilibrium asillustrated in the graph provided. Which of the following combinations of policy actionswould definitely move the economy toward long-run equilibrium?

A decrease in government spending and an increase in income taxes

An increase in the expected inflation rate will cause which of the following?

A rightward shift in the short-run Phillips curve

Which of the following changes is most likely to cause economic growth?

An increase in human capital

Which of the following terms describes the adverse effect that results when private sectorinvestment spending competes with government deficit financing?

Crowding out effect

If economic growth through investment in the economy's infrastructure is desirable, whichof the following policies will most likely achieve this objective?

Granting tax credits from businesses in the construction sector

Which of the following policies will most likely promote long-run economic growth?

Increasing funding for research and development

Assume an economy is in long-run equilibrium and the central bank engages in anexpansionary monetary policy for a prolonged time period. If the velocity of money isconstant, which of the following is true according to the quantity theory of money

Price level will increase at the same rate as the money supply.

Which of the following will most likely occur if a country's government is continuouslyborrowing to finance its spending without changing taxes?

Private investment in plant and equipment will decrease, resulting in a lower rate ofeconomic growth in the long run.

Suppose nominal GDP is $25 million, the price level is 1.25, and the money supply is $10million. What is real GDP and the velocity of money according to the quantity theory ofmoney?

Real GDP is $20 million, and the velocity of money is 2.5

Suppose that an economy with flexible wages and prices is in long-run equilibrium whenthe central bank contracts the money supply. What is the long-run effect on real output inthe economy?

Real output is unchanged.

Which of the following describes a surplus in the government budget?

Tax revenues exceed government purchases plus transfer payments.

How will a nation's production possibilities curve (PPC) and long-run aggregate supply(LRAS) curve change as a result of an increase in both the labor force and productivity?

The LRAS curve will shift to the right, and the PPF will shift outward

Steady advances in technological development will result in which of the following?

The long-run aggregate supply curve will shift to the right, resulting in economic growth and a lower natural unemployment rate

f tax revenues are less than the total of government spending plus government transferpayments, which of the following will happen?

The national debt will increase.

Assume policy makers increased spending and cut taxes to stimulate the economy. If thegovernment's budget was initially in balance, which of the following will occur?

There will be a budget deficit, real interest rates will increase, and investment spending will be crowded out

Country X's economy is in an inflationary gap. Which of the following combinations offiscal and monetary policy actions would be most effective to restore full employment inthe short run?

decrease in government spending and an open-market purchase of government bondsby the country's central bank

A decrease in the policy rate accompanied by a decrease in income taxes will result inwhich of the following in the short run?

decrease in unemployment

To reduce the size of a country's national debt, a government could potentially take all ofthe following actions EXCEPT

finance spending by borrowing

Assume the economy is in long-run equilibrium. A decrease in net exports will result inwhich of the following in the short run?

there will be a movement from point B to point C

Use the graph below of a long-run Phillips Curve (LRPC) and a short-run Phillips Curve(SRPC) to answer the question.

x