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
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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