Monday, February 20, 2017

2012 Macro Multiple Choice (Fiscal & Monetary Combo)

2012 Macro Multiple Choice (Fiscal & Monetary Combo)

Answer - (A)

First - you must know that fiscal = Taxes & Government spending
monetary = OMO, discount rate, reserve requirements
Second - Fiscal and Monetary policies - expansionary and contractionary
Third - inflation is the price level

So, a reduction in inflation (PL) is a contractional fiscal and monetary policy
Fiscal - Increase taxes (contractional) - AD decreases PL falls
Monetary - Sell Bonds (contractional) - MS decreases, interest rates rise, investment falls, PL falls

 Answer - (D)

Understand that demand-pull inflation is an increase in AD pushes the PL up.

Reducing Demand pull inflation, means lowering AD thus the PL

The fiscal policy to reduce Demand Pull inflation = Government spending decreases and taxes increase

If this Fiscal contractionary policy occurs
(A) GDP will decrease
(B) Labor force participation rate will decrease
(C) the PL price level will decrease
(D) Unemployment will increase
(E) Wage levels will fall

Answer - (C)

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