Module 40 Econ

An economy is in short-run equilibrium as illustrated by the graph above. Which of the following combination of policy actions would definitely move the economy toward long-run equilibrium?

A decrease in income taxes and an increase 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?

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

Assume policy makers increased spending and cute taxes to stimulate the economy. If the government'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.

Which of the following illustrates an inflationary gap?

X

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

finance spending by borrowing

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

There will be a movement from point B to point C.

An open-market purchase of government bonds accompanied by a decrease in income taxes will result in which of the following in the short run?

A decrease in unemployment

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

Country's X economy is in an inflationary gap. Which of the following combinations of fiscal and monetary policy actions would restore full employment in the short run?

An increase in income taxes and an open-market sale of government bonds by the country's central bank

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

Crowding out effect

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

Granting tax credits for businesses in the construction sector.

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?

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

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) curve?

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

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

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 when the central band contracts the money supply. What is the long-run effect on real output in the 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 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 PPC 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 natural unemployment rate.

If tax revenues are less than the total of government spending plus government transfer payments, which of the following will happen?

The national debt will increase

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

increasing funding for research and development