UNIT 5 Econ

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. (Correct. 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 describes a surplus in the government budget?

Tax revenues exceed government purchases plus transfer payments.(Correct. The government budget is in surplus when tax revenues exceed government purchases and transfer payments.)

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 decrease in income taxes and a central bank bond purchase(Correct. 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 decrease in unemployment(Correct. 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 rightward shift in the short-run Phillips curve(Correct. 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?

An increase in human capital(Correct. 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?

An increase in income taxes and an increase in the central bank's administered interest rates(Correct. 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?

Crowding out effect(Correct. 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?

Granting tax credits for businesses in the construction sector (Correct. Providing incentives to the private sector engaging in investment in infrastructure will increase physical capital.)

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

Increasing funding for research and development(Correct. Increasing funding for research and development will improve technology, an important source of economic growth.)

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.(Correct. 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.)

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.( Correct. 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 nominal GDPGDP is $25 million, the price level is 1.25, and the money supply is $10 million. What is real GDPGDP 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.

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 PPC will shift outward.(Correct. 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.)

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 a higher full employment level of output. (Correct. Advances in technological development will result in economic growth, shifting the LRAS curve 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?

The national debt will increase.(Correct. 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.)

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?

The real output is unchanged.(Correct. When the economy is at full employment, changes in the money supply have no effect on real output in the long run.)

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?

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

Which of the following points illustrates an inflationary gap?

X(Correct. 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.)

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(Correct. Borrowing to finance spending will increase the size of the national debt.)