Unit 5

Assume that the economy is operating in long-run equilibrium. To balance the budget, the government raises personal income taxes. In the shortrun, the increase in personal income taxes would most likely cause each of the following changes. Aggregate Demand Short-run Aggregate Supply Price Level Real Gross Domestic Product

Decrease Constant Decrease Decrease

Each of the following policies serves as an automatic stabilizer in the U.S economy EXCEPT:

Social Security benefits

Stagflation results from

a decrease in aggregate supply

All the following are fiscal policy actions that will reduce inflationary pressure on the economy EXCEPT

a decrease in the amount of money in circulation

Crowding-out occurs when

government borrowing increases interest rates, so firms reduce investment

Given a stable long-run Phillips curve with a 5% natural rate of unemployment, attempts to use monetary policy to reduce the unemployment rate below 5% in the long run will

have no effect on the unemployment rate

In terms of expansionary fiscal policy, tax cuts are less effective than government spending increases because

households save part of a tax cut

A situation in which the federal government's expenditures are greater than its revenues in one year is

budget deficit

When the government implements an expansionary fiscal policy to resolve a recessionary gap, it results in a

budget deficit

Economists who believe a country faces many unmet social and infrastructure needs would recommend that government officials

increase government spending during a recession

Demand-pull inflation most likely results from

increased consumer incomes

Each of the following factors promotes long-run economic growth EXCEPT

increases in the interest rate

An expansionary fiscal policy decision requires that the government borrow in order to cover budget deficits. This borrowing will most likely impact the demand for money, interest rate, business investment demand for physical capital, and the ultimate fiscal policy expansion as follows Money Demand Interest Rate Business Investment Fiscal Policy Expansion

increases increases decreased decreased

The short-run Phillips curve illustrates the relationship between

inflation and unemployment

The long-run Phillips curve illustrates that the natural rate of unemployment

is relatively stable

Concerns about the size of the national debt include all of the following EXCEPT

lower interest rates as a result of increased government borrowing

The crowding-out effect tends to be weak during recessions because

private investment declines during a recession

A reduction in personal taxes will cause

real GDP to increase

The federal government finances deficits by

selling bonds

An increase in government spending increases the real GDP by more than the amount of the initial spending because of the

spending multiplier

Automatic stabilizers have an advantage over discretionary fiscal policy because automatic stabilizers

take effect without requiring action by policymakers

According to the Laffercurve, economic growth is best promoted through the increased incentives to work, save, and invest provided by lower

taxes

A decrease in short-run aggregate supply would result if

the cost of production increased

In order to increase initial consumption by a specific amount

the smaller the MPC, the larger a tax cut will be needed

As illustrated by the long-run Phillips curve, in the long run

there is no relationship between inflation and unemployment

An expansionary fiscal policy would cause a movement

to the left along the Phillips curve, reducing the unemployment rate but increasing the inflation rate

Long-run economic growth occurs when the

vertical aggregate supply curve shifts rightward

When aggregate demand decreases, price levels may not adjust easily downward to the new full-employment equilibrium because

wages tend to be inflexible

If the government decides to use contractionary fiscal policy while having to increase government spending, it must increase taxes by

More than it raises spending

In the graph above, assume the economy is operating in the long-run equilibrium position identified by point a. If the government were to increase spending, then

AD1 would shift to the right, leading to higher business profits, higher short-run price levels, and a new short-run equilibrium point at point b

Two-thirds of the U.S. public debt is held by

American bondholders

Fiscal policy can be difficult to implement for all of the following reasons EXCEPT

Congress prefers to leave fiscal policy decisions to the Federal Reserve.

In the graph above, assume the economy is operating in short-run equilibrium at point A. Without government intervention, the following adjustments would most likely happen. Aggregate Demand Short-run Aggregate Supply Price Level Real Gross Domestic Product

Constant Decrease Increase Decrease

Assume an oil-importing economy is operating in long-run equilibrium. Unexpectedly, widespread civil unrest severely curtails oil exports in oil-producing countries, resulting in severe world-wide shortages. In the shortrun, the most likely impact would be that Aggregate Demand Short-run Aggregate Supply Price Level Real Gross Domestic Product

Constant Decreases Increases Decreases

Assume that the economy is operating in short-run equilibrium at point A. Without government intervention, the following adjustments would most likely happen. Aggregate Demand Short-run Aggregate Supply Price Level Real Gross Domestic Product

Constant Increase Decrease Increase

Which of the following factors could result in cost-push inflation? I. An increase in energy costs II. An increase in workers' wages III. A decrease in interest rates

I and II only

Long-run economic growth is illustrated by a rightward shift of the I. vertical aggregate supply curve II. upward-sloping aggregate supply curve III. production possibilities curve

I and III only

Which of the following are expansionary fiscal policy actions? I. Reduction in Social Security withholding taxes II. Purchase of government bonds in the open market III. Increase in the corporate tax rate IV. Decrease in the personal tax rate

I and IV only

Criticisms of the Laffer curve include concerns that tax cuts I. have little impact on incentives and are slow to emerge II. give some workers an incentive to work less, because they can afford to "buy more leisure" III. lead to lower government revenues and a higher national debt

I, II, and III

In the graph above, in the longrun, the shift from point a2 on SRAS1 to b2 on SRAS2 occurs when I. nominal wages increase II. pricelevels increase III. profits decrease IV. real output decreases

I, III, and IV only

In the graph above, in the shortrun, a movement from point a1 to a2 along the short-run aggregate supply curve is based on the assumption that the I. expected price level for resources remains constant II. expected price level for resources will increase to P2 III. price level will increase IV. real output will increase

I, III, and IV only

If the actual inflation rate is higher than the expected inflation rate I. wages temporarily increase II. profits temporarily increase III. unemployment temporarily falls

II and III only

If the economy is facing a recession, an appropriate fiscal policy action would be to I. increase the money supply II. increase government spending III. reduce taxes

II and III only

Which of the following would be the most effective policy combination for resolving a recession in the short run, while still promoting long-run economic growth? Monetary Policy Fiscal Policy

Increase the money supply Do nothing

A favorable supply shock, such as a significant increase in crop output, will cause which of the following effects on real output and the price level? Real Output Price Level

Increase, Decrease

If a country is experiencing significant cyclical unemployment, how would an increase in government spending affect real output, the price level, and unemployment? Real Output Price Level Unemployment

Increase, Increase, Decrease

As Country G slides into recession, policymakers are concerned about the increasing national debt. To curb the debt, lawmakers raise taxes and significantly cut government spending. As a result of these debt reduction policies

aggregate demand will decrease

During recessions, federal government officials find their expansionary fiscal policy actions thwarted by the actions of state and local government officials, who are raising taxes and lowering spending because most state and local governments

are required to balance their budgets annually