macro unit 5
An economy with limited reserves in its banking system is in short-run equilibrium as illustrated in the graph provided. Which of the following combinations of policy actions would definitely move the economy toward long-run equilibrium? A A decrease in government spending and an increase in income taxes B An increase in government spending and a central bank bond sale C A central bank bond purchase and an increase in the discount rate D A central bank bond sale and an increase in income taxes E A decrease in income taxes and a central bank bond purchase
A decrease in income taxes and a central bank bond purchase The economy is in a recessionary gap. A decrease in income taxes is an expansionary fiscal policy that will increase aggregate demand and increase real output. A central bank bond purchase is an expansionary monetary policy that will increase aggregate demand and real output. The two policy actions are expansionary and will close the recessionary gap and move the economy toward full employment.
A decrease in the policy rate accompanied by a decrease in income taxes will result in which of the following in the short run? A A decrease in real output B A decrease in the price level C A decrease in unemployment D A decrease in nominal wages E A decrease in the natural rate of unemployment
A decrease in unemployment A decrease in the policy rate is an expansionary monetary policy that will decrease nominal interest rates, increase interest-sensitive spending, and increase aggregate demand, resulting in an increase in real output and the price level. A decrease in income taxes is an expansionary fiscal policy that will increase aggregate demand, resulting in an increase in real output and the price level. Both policies are expansionary and will result in a decrease in unemployment.
An increase in the expected inflation rate will cause which of the following? A A rightward shift in the aggregate demand curve B A rightward shift in the short-run Phillips curve C A rightward shift in the short-run aggregate supply curve D A leftward shift in the long-run Phillips curve E A leftward shift in the long-run aggregate supply curve
A rightward shift in the short-run Phillips curve The short-run Phillips curve is drawn for a given expected inflation rate and so it shifts as inflationary expectations change. An increase in the expected inflation rate shifts the short-run Phillips curve to the right, which implies a higher unemployment rate for any given expected inflation rate.
Which of the following changes is most likely to cause economic growth? A A decrease in private savings B A decrease in labor productivity C A decrease in physical capital D An increase in human capital E An increase in the price level
An increase in human capital An increase in human capital increases labor productivity, which increases output per capita and aggregate production in the long run.
Country X's economy is in an inflationary gap. Which of the following combinations of fiscal and monetary policy actions would be most effective to restore full employment in the short run? A A decrease in income taxes and a decrease in the required reserve ratio B A decrease in income taxes and an increase in the discount rate C A decrease in government spending and an open-market purchase of government bonds by the country's central bank D An increase in government spending and targeting a lower policy rate E An increase in income taxes and an increase in the central bank's administered interest rates
An increase in income taxes and an increase in the central bank's administered interest rates An increase in income taxes is a contractionary fiscal policy that will decrease aggregate demand and decrease real output. Increasing the central bank's administered interest rates is a contractionary monetary policy that will decrease aggregate demand and decrease real output. Both policies are contractionary and will close the inflationary gap and move the economy closer to full employment.
Which of the following terms describes the adverse effect that results when private sector investment spending competes with government deficit financing? A Crowding out effect B Real wealth effect C Multiplier effect D Exchange rate effect E Interest rate effect
Crowding out effect Crowding out refers to the adverse effect of increased government borrowing in the loanable funds market, which increases real interest rates and crowds out private investment.
If economic growth through investment in the economy's infrastructure is desirable, which of the following policies will most likely achieve this objective? A Reducing income and wealth inequality B Increasing government borrowing for transfer payments C Decreasing spending on education and training of workers for higher-income jobs D Reducing subsidies for business investment in research and development E Granting tax credits for businesses in the construction sector
Granting tax credits for businesses in the construction sector Providing incentives to the private sector engaging in investment in infrastructure will increase physical capital.
Assume an economy is in long-run equilibrium and the central bank engages in an expansionary monetary policy for a prolonged time period. If the velocity of money is constant, which of the following is true according to the quantity theory of money? A The government's budget deficit will increase. B Price level will increase at the same rate as the money supply. C Real output will exceed full employment in the long run. D The actual unemployment rate will exceed the natural rate of unemployment. E The production possibilities curve will shift inward.
Price level will increase at the same rate as the money supply. According to the quantity theory of money, velocity and real output are assumed to be constant in the long run, and therefore the price level rises proportionally to changes in the money supply.
Which of the following will most likely occur if a country's government is continuously borrowing to finance its spending without changing taxes? A The economy will experience an inflationary gap in the long run. B The government budget will be in deficit and the national debt will decrease. C The government budget will be in surplus and the national debt will increase. D Private investment in plant and equipment will decrease, resulting in a lower rate of economic growth in the long run. E Private investment in plant and equipment will increase, resulting in a higher rate of economic growth in the long run.
Private investment in plant and equipment will decrease, resulting in a lower rate of economic growth in the long run. An increase in government borrowing will increase the demand for loanable funds, which increases real interest rates. As a result, private investment spending in plant and equipment will be crowded out or decrease, reducing the rate of physical capital accumulation and slowing economic growth in the long run.
Suppose a country's government increases the allowable deduction for individual retirement accounts per person. Holding all other influences constant, how would this policy action affect the country's loanable funds market, its production possibilities curve, and its long-run aggregate supply (LRAS)(LRAS) curve? A Private savings would decrease and real interest rates would increase in the loanable funds market, the nation's production possibilities curve would shift inward, and its LRASLRAS curve would shift to the left. B Private savings would increase and real interest rates would decrease in the loanable funds market, the nation's production possibilities curve would shift outward, and its LRASLRAS curve would shift to the right. C Public savings would decrease and real interest rates would increase in the loanable funds market, the nation's production possibilities curve would shift inward, and its LRASLRAS curve would shift to the left. D Public savings would increase and real interest rates would decrease in the loanable funds market, the nation's production possibilities curve would shift outward, and its LRASLRAS curve would shift to the right. E National savings would decrease and real interest rates would increase in the loanable funds market, the nation's production possibilities curve would shift inward, and its LRASLRAS curve would shift to the left.
Private savings would increase and real interest rates would decrease in the loanable funds market, the nation's production possibilities curve would shift outward, and its LRAS curve would shift to the right. Private savings would increase and real interest rates would decrease in the loanable funds market, which would increase investment spending in plant and equipment. With more physical capital accumulation, the nation's production possibilities curve would shift outward and its LRASLRAS curve would shift to the right.
Suppose nominal GDP is $25 million, the price level is 1.25, and the money supply is $10 million. What is real GDP and the velocity of money according to the quantity theory of money? A Real GDP is $2.5million, and the velocity of money is 12.5. B Real GDP is $10 million, and the velocity of money is 20. C Real GDP is $12.5 million, and the velocity of money is 8. D Real GDP is $20 million, and the velocity of money is 2.5. E Real GDP is $25 million, and the velocity of money is 8.
Real GDP is $20 million, and the velocity of money is 2.5. --------------------------------------------------------------- Nominal GDP is the product of real GDP and the price level. Therefore, real GDP =$25 million/1.25=$20 million According to the quantity theory of money, the product of the money supply (M) and the velocity of money (V) is equal to the product of the price level (P) and real GDP (Y). Therefore, V=PY/M= $25 million/$10 million= 2.5
Suppose that an economy with flexible wages and prices is in long-run equilibrium when the central bank contracts the money supply. What is the long-run effect on real output in the economy? A Real output falls. B Real output is unchanged. C Real output rises. D Real output falls as price levels fall. E Real output rises as price levels fall.
Real output is unchanged. When the economy is at full employment, changes in the money supply have no effect on real output in the long run.
Which of the following describes a surplus in the government budget? A Private savings exceed private investment spending. B Private savings exceed consumption spending. C Private savings exceed government purchases plus transfer payments. D Tax revenues exceed government purchases plus transfer payments. E National debt exceeds government purchases plus transfer payments.
Tax revenues exceed government purchases plus transfer payments. The government budget is in surplus when tax revenues exceed government purchases and transfer payments.
Steady advances in technological development will result in which of the following? A The long-run aggregate supply curve will shift to the right, resulting in a lower full employment level of output. B The long-run aggregate supply curve will shift to the left, resulting in a higher natural unemployment rate. C The long-run aggregate supply curve will shift to the right, resulting in a higher full employment level of output. D The short-run aggregate supply curve will shift to the left, resulting in a lower price level and a higher full employment level of output. E The short-run aggregate supply curve will shift to the right, resulting in a higher price level and a higher natural rate of unemployment.
The long-run aggregate supply curve will shift to the right, resulting in a higher full employment level of output.
If tax revenues are less than the total of government spending plus government transfer payments, which of the following will happen? A The tax multiplier will increase. B The spending multiplier will increase. C The government budget will be in surplus. D There will be an inflationary gap. E The national debt will increase.
The national debt will increase. When tax revenues are less than the sum of government spending and transfer payments, there is a government budget deficit, which increases the national debt.
Assume policy makers increased spending and cut taxes to stimulate the economy. If the government's budget was initially in balance, which of the following will occur? A There will be a budget deficit, real interest rates will increase, and investment spending will be crowded out. B There will be a budget deficit, real interest rates will decrease, and investment spending will increase. C There will be a budget surplus, real interest rates will increase, and investment spending will be crowded out. D There will be a budget surplus, real interest rates will decrease, and investment spending will increase. E The budget will remain in balance, real interest rates will not change, and investment spending will not change.
There will be a budget deficit, real interest rates will increase, and investment spending will be crowded out. Starting from a balanced budget, an increase in government spending accompanied by a decrease in taxes will result in a government budget deficit (not a budget surplus). To finance the deficit the government will have to borrow, which increases the demand for loanable funds causing an increase in real interest rates and crowding out investment spending.
Assume the economy is in long-run equilibrium. A decrease in net exports will result in which of the following in the short run? A The SRPCSRPC will shift to the left. B The SRPCSRPC will shift to the right. C The LRPCLRPC will shift to the right. D There will be a movement from point B to point C. E There will be a movement from point B to point A.
There will be a movement from point B to point C. Point B illustrates long-run equilibrium. A decrease in net exports decreases aggregate demand, the price level, and real output. A negative demand shock corresponds to a downward movement along the SRPCSRPC from point B to point C, resulting in a lower inflation rate and a higher unemployment rate in the short run.
expansionary monetary policy: buy or sell bonds
buy bonds
To reduce the size of a country's national debt, a government could potentially take all of the following actions EXCEPT A decrease the supply of government bonds B decrease borrowing of private loanable funds C increase taxes D decrease expenditures E finance spending by borrowing
finance spending by borrowing
contractionary monetary policy: buy or sell bonds
sell bonds
deficit spending
the trade-off of increasing government spending without raising taxes to close a recessionary gap
budget deficit
when annual government spending and transfer payments are greater than tax revenue
budget surplus
when annual government spending and transfer payments are less than tax revenue
