ECON 248 UNIT 5 FINAL PAPER EXAMPREP
COMPLETE QUESTIONS AND ANSWERS
VIEW AHEAD STUDY SHEET
◉ 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? Answer:
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.)
◉ 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? Answer: 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? Answer: 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.)
◉ Which of the following points illustrates an inflationary gap?
Answer: 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.)
◉ An increase in the expected inflation rate will cause which of the
following? Answer: 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.)
◉ Assume the economy is in long-run equilibrium. A decrease in net
exports will result in which of the following in the short run? Answer:
There will be a movement from point B to point C.(Correct. Point B
COMPLETE QUESTIONS AND ANSWERS
VIEW AHEAD STUDY SHEET
◉ 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? Answer:
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.)
◉ 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? Answer: 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? Answer: 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.)
◉ Which of the following points illustrates an inflationary gap?
Answer: 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.)
◉ An increase in the expected inflation rate will cause which of the
following? Answer: 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.)
◉ Assume the economy is in long-run equilibrium. A decrease in net
exports will result in which of the following in the short run? Answer:
There will be a movement from point B to point C.(Correct. Point B
