U5 MCQ

Answer E The economy is in a recessionary gap. A decrease in the income taxes is an expansionary fiscal policy that will increase aggregate demand and increase real output. An increase in the money supply 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.

An economy is in short-run equilibrium as illustrated by the graph below. 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 decrease in the money supply C. An increase in the money supply and an increase in the discount rate D. A decrease in the money supply and an increase in income taxes E. A decrease in income taxes and an increase in the money supply

Answer B 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.

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

Answer C An open-market purchase of government bonds is an expansionary monetary policy that will increase aggregate demand, real output, and the price level. A decrease in income taxes is an expansionary fiscal policy that will increase aggregate demand, real output, and the price level. Both policies are expansionary and will result in a decrease in unemployment.

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. 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

Answer B 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.

Assume an economy is in long-run equilibrium and the central bank engages in an expansionary monetary policy for a prolonged 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 possibility curve will shift inward

Answer A Starting from a balanced budget, an increase in government spending accompanied by a decrease in taxes will result in a government budget deficit. 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 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

Answer E An increase in income taxes is a contractionary fiscal policy that will decrease aggregate demand and decrease real output. Selling government bonds on the open market 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.

Country X's 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? 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 interest rate on overnight interbank loans E. An increase in income taxes and an open-market sale of government bonds by the country's central bank

Answer C An increase in the labor force and labor productivity will increase potential real GDP. Therefore, the LRAS curve will shift to the right, and the PPC will shift outward.

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? A. The LRAS curve will shift to the right, and the PPC will shift inward B. The LRAS curve will shift to the right, and the PPC will remain unchanged C. The LRAS curve will shift to the right, and the PPF will shift outward D. The LRAS curve will shift to the left, and the PPC will remain unchanged E. The LRAS curve will shift to the left, and the PPC will shift inward

Answer E Providing incentives to the private sector engaging in investment in infrastructure will increase physical capital and labor productivity.

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 financed by national savings 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 from businesses in the construction sector

Answer E 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.

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

Answer C Advances in technological development will shift the LRAS curve to the right, resulting in economic growth and a lower natural rate of unemployment.

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 economic growth and a lower full employment level of output B. The long-run aggregate supply curve will shift to the left, resulting in economic growth and a higher natural unemployment rate C. The long-run aggregate supply curve will shift to the right, resulting in economic growth and a lower natural unemployment rate 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

Answer B 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 LRAS curve would shift to the right.

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? 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 LRAS 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 LRAS 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 LRAS curve would shift to the left D. Public savings would increase and real interest rate 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 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 LRAS curve would shift to the left

Answer B When the economics is at full employment, changes in the money supply have no effect on real output in the long run.

Suppose that an economy with flexible wages and prices is in the 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 and price levels fall. E. Real output rises as price levels fall.

Answer D Nominal GDP is the product of real GDP and the price level. Therefore, real GDP = $25million/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 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? A. Real GDP is $2.5 million, 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

Answer E Borrowing to finance spending will increase the size of the national debt.

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

Answer A Point X represents an inflationary gap. Point X corresponds to a short-run equilibrium beyond full employment (in the context of the aggregate demand and aggregate supply model) with an actual inflation rate above the expected inflation rate and an unemployment rate below the natural rate of unemployment.

Use the graph below of a long-run Phillips Curve (LRPC) and a short-run Phillips Curve (SRPC) to answer the question. Which of the following points illustrates an inflationary gap? A. X B. Y C. Z D. K E. J

Answer D 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 SRPC from point B to point C, resulting in a lower inflation rate and a higher unemployment in the short run.

Use the graph below of the long-run Phillips Curve (LRPC) and the short-run Phillips Curve (SRPC) to answer the question. 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 SRPC will shift to the left B. The SRPC will shift to the right C. The LRPC 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

Answer D An increase in human capital increases labor productivity, which increases output per capita and aggregate production in the long run.

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

Answer D The government budget is in surplus when tax revenues exceed government purchases and transfer payments.

Which of the following describes a surplus in the government budget A.Private savings exceed private investment spending B. Private savings exceed consumptions spending C. Private savings exceed government purchases plus transfer payments D. Tax revenues exceed government purchases plus transfer payments E. National debt exceed government purchases plus transfer payments

Answer B Increasing funding for research and development will improve technology, an important source of economic growth.

Which of the following policies would most likely promote long-run economic growth? A. Decrease government spending on infrastructure B. Increasing funding for research and development C. Decreasing funding or primary education D. Decreasing investment tax credits E. Increasing tax rates on interest earned on savings

Answer A 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.

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

Answer D 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.

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 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