AP Macro 5.1 and 5.2

The natural rate of unemployment in Mithrim is 5%, and the current rate of unemployment is 2%. Also, the consumer price index (CPI) has been increasing rapidly.

Which of the following combinations of monetary and fiscal policy would be appropriate to return this economy to full employment?

• Increase government spending; sell bonds

• Increasing taxes; lower the discount rate

• Decreasing taxes; buy bonds

• Increasing taxes; open market sales

The Council of Elrond has decided to increase taxes, and the central bank of Elrond has decided to conduct open market sales of financial assets.

Assuming that wages are sticky, which of the following best describes the impact of these actions on real output and the price level?

• Real output will decrease; the price level will decrease

• Real output decreases; impact on the price level is indeterminate

• Real output increases; the price level increases

• Impact on real output indeterminate; impact on the price level indeterminate

The economy of Isengard is experiencing high inflation and a rate of unemployment below the natural rate.

Which of the following combination of fiscal and monetary policy actions would be the most appropriate response to this output gap?

• Decrease government spending; decrease the money supply

• Increase government spending; decrease taxes

• Decrease taxes; increase the money supply

• Buy bonds; decrease the reserve ratio

The Council of Elrond has decided to increase taxes, and the central bank of Elrond has decided to conduct open market purchases of financial assets.

Assuming that wages are sticky, which of the following best describes the impact of these actions on real output and the price level?

• Impact on real output is indeterminate; price level decreases

• Real output will decrease; the price level will decrease

• Real output decreases; impact on the price level is indeterminate

• Impact on real output indeterminate; impact on the price level indeterminate

If the central bank sells bonds and the government of Valinor increases taxes, which point in this graph best represents where the economy would be operating as a result of these actions?

• Point W or Y

• Point R

• Point Z

• Point X

A short-run Phillips curve shows an inverse relationship between...

• Interest rates and borrowing

• Inflation and unemployment

• Income and consumption

• Prices and quantity demanded

An increase in aggregate demand will cause which of the following?

• A movement along a given short-run Phillips curve

• The long-run Phillips curve to become horizontal

• The short-run Phillips curve to shift to the left

• The long-run Phillips curve to shift to the right

According to the short-run Phillips curve, lower inflation rates are associated with

• higher government spending

• larger budget deficits

• greater labor-force participation rates

• higher unemployment rates

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.

• The SRPC will shift to the right.

• There will be a movement from point B to point A.

• The LRPC will shift to the right.

Which of the following will cause a movement from point X to point Y along the short-run Phillips curve (SRPC) that is shown in the graph above?

• An increase in income taxes

• An increase in input costs

• An increase in government spending

• An increase in the expected inflation rate