Macroeconomics Unit 5 Study Notes

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Questions and Answers

If an economy is in long-run equilibrium, which of the following combinations of policy actions will necessarily result in inflation in the short run?

Increasing administered interest rates and increasing government spending

Increasing administered interest rates and decreasing government spending

Decreasing administered interest rates and increasing government spending (correct)

Decreasing administered interest rates and decreasing government spending

Given the situation illustrated in the graph and holding all other influences constant, which of the following policies will restore the macroeconomic equilibrium to full employment?

An expansionary fiscal policy and an expansionary monetary policy

A contractionary fiscal policy and an expansionary monetary policy

An expansionary fiscal policy and a contractionary monetary policy

A contractionary fiscal policy and a contractionary monetary policy (correct)

If the actual inflation rate is less than the expected inflation rate, which of the following must be true? Potential real output exceeds equilibrium real output.

True

Assume members of the Organization of the Petroleum Exporting Countries (OPEC) agree to a coordinated increase in oil production. If the economy is at equilibrium at point B, what effect will this have on the Phillips curve model in the long run?

The SRPC will shift to the left. Signup and view all the answers

According to the quantity theory of money, if the money supply is $40 billion, real output is $100 billion, and the price level is 1.2, what is the velocity of money?

3.0 Signup and view all the answers

Country X's economy is currently at full employment. Assume Country X's central bank increases the money supply by 2 percent over a prolonged period. According to the quantity theory of money, which of the following will happen in the long run for a given velocity of money?

Nominal output will increase by 2%. Signup and view all the answers

Which of the following is true about the national debt of the United States?

It is the accumulation of past and current budget deficits and surpluses. Signup and view all the answers

Which of the following will most likely occur if a government adopts an annually balanced budget rule that requires the government to eliminate any deficits or surpluses?

The automatic stabilizing effect of fiscal policy will be eliminated. Signup and view all the answers

If the total of government spending plus government transfer payments is less than tax revenues, which of the following must be true? The government budget is in surplus.

True Signup and view all the answers

The United States national debt is

the amount of money owed to holders of United States government securities Signup and view all the answers

Assume a country's government has a balanced budget. If the economy goes into a recession, what will happen to the government's budget in the short run?

It will be in deficit, because there will be an automatic decrease in tax receipts. Signup and view all the answers

Assume a country's banking system has limited reserves. If the government has increased the budget deficit and interest rates have remained constant, which of the following is true?

Government spending is greater than tax revenue, and the central bank increases the money supply. Signup and view all the answers

Crowding out occurs when

government borrowing to finance its spending decreases private sector spending Signup and view all the answers

An increase in government spending financed by increased borrowing will most likely change the real interest rate and the gross private domestic investment in which of the following ways?

Real Interest RateGross Private Domestic InvestmentIncreaseDecrease Signup and view all the answers

If investment demand becomes less responsive to changes in interest rates, which of the following is true?

An expansionary fiscal policy results in less crowding out. Signup and view all the answers

Which of the following describes the effect of an increase in a government's budget deficit on the real interest rate and private investment?

Increase, Decrease Signup and view all the answers

Increases in human capital can be achieved by which of the following?

Improving the quality of job-training programs Signup and view all the answers

Economic growth is best defined as

a sustained increase in real gross domestic product per capita Signup and view all the answers

Country A's growth rate in per capita real gross domestic product (GDP) has been consistently higher than that of Country B. Which of the following factors can account for these differences in the per capita GDP growth rates?

The labor force of Country A is becoming more skilled than the labor force of Country B. Signup and view all the answers

Economic growth refers to an increase in which of the following?

Potential real gross domestic product Signup and view all the answers

If an economy experiences an improvement in technology, what will happen to its production possibilities curve (PPC) and its long-run aggregate supply (LRAS) curve?

Both curves shift outward. Signup and view all the answers

If the government offers a tax credit to businesses, what will be the most likely effects of this action?

An increase in investment spending, an increase in the capital stock, and an increase in real output Signup and view all the answers

An increase in which of the following would be most likely to increase long-run growth?

Subsidies to businesses for purchases of capital goods Signup and view all the answers

Policymakers concerned about fostering long-run growth in an economy that is currently in a recession would most likely recommend which of the following combinations of monetary and fiscal policy actions?

Monetary PolicyFiscal PolicyDecrease administered interest ratesNo change Signup and view all the answers

If marginal business tax rates are decreased, how will aggregate supply and employment change in the long run?

Aggregate SupplyEmploymentIncreaseIncrease Signup and view all the answers

Study Notes

Unit 5 Macroeconomics Study Notes

Short-Run Inflationary Policies: Decreasing administered interest rates and increasing government spending can lead to inflation in the short run.
Restoring Macroeconomic Equilibrium: A contractionary fiscal policy paired with a contractionary monetary policy can restore equilibrium to full employment.
Actual vs. Expected Inflation: If actual inflation is lower than expected inflation, potential real output exceeds equilibrium real output.
OPEC Production Increase (Long-Run): A coordinated increase in OPEC oil production will shift the short-run Phillips Curve (SRPC) to the left in the long run.
Velocity of Money: Given a money supply of $40 billion, real output of $100 billion, and a price level of 1.2, the velocity of money is 3.0.
Long-Run Money Supply Increase: A 2% increase in the money supply over time will increase nominal output by 2% (given constant velocity) in the long run.
National Debt: The national debt is the accumulation of past and current budget deficits and surpluses.
Balanced Budget Rule: An annually balanced budget rule eliminates the automatic stabilizing effect of fiscal policy.
Government Budget Surplus/Deficit: If government spending plus transfers are less than tax revenues, the budget is in surplus.
National Debt Definition: The national debt represents the total amount owed by the government to its creditors.
Recessionary Budget Impact: A recessionary period results in an automatic budget deficit due to decreased tax revenue.
Limited Reserves and Budget Deficit: Limited banking system reserves, an increased budget deficit, and constant interest rates suggest that the central bank increases the money supply to support the deficit spending.
Crowding Out: Government borrowing to fund its spending can decrease private sector investment and lead to crowding out.
Government Spending & Real Interest Rates: Increased government spending financed by borrowing will most likely increase real interest rates and decrease private investment.
Investment Demand Responsiveness: If investment demand is less responsive to interest rate changes, an expansionary fiscal policy will lead to less crowding out.
Budget Deficit Impact on Interest Rates and Investment: An increase in the government's budget deficit will cause an increase in the real interest rate and a decrease in private investment.
Improving Human Capital: Improvements in job-training programs can increase human capital.
Economic Growth Definition: Economic growth is a persistent increase in per capita real GDP.
Per Capita GDP Growth Differences: Differences in per capita GDP growth rates may originate from differences in labor force skills between countries.
Economic Growth & Potential GDP: Economic growth refers to an increase in potential real GDP.
Technological Advancement and PPC/LRAS: Technological improvements shift both the production possibilities curve (PPC) and the long-run aggregate supply (LRAS) curve outward.
Tax Credit and Business Effects: Government tax credits increase investment spending, capital stock, and potentially real output.
Long-Run Growth Increase: Subsidies for business capital purchases are likely to increase long-run growth.
Policy Recommendations for Recession: Policymakers facing a recession would recommend decreasing administered interest rates but maintain current fiscal policy levels to boost the economy.
Marginal Business Tax Decrease Impact: Decreasing marginal business tax rates increase aggregate supply and employment in the long run.

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Explore key concepts in Macroeconomics Unit 5 including short-run inflationary policies, restoring macroeconomic equilibrium, and the effects of OPEC production increases. This quiz will test your understanding of theories such as the velocity of money and long-run money supply implications.