Question

1. To have long term effects on the economy, monetary and fiscal policies must

A. alter short-run aggregate supply

b. alter short-run aggregate demand

c. affect the level of potential output

d. smooth fluctuations in economic activity over the business cycles

e. none of the above

2. which of the following might contribute to increase per capita income in the long run

a. government expenditure on health and education

b. government expenditure on infrastructure

c. a reduction in sales tax

d. a reduction in mortgage interest rates

e. both a and b

3. which of the following is most likely to explain the creation of a short run inflationary gap

a. a decrease in government purchases

b. a decrease in import purchases

c. an increase in factor supplies

d. an increase in personal saving

e. an increase in labor productivity

4. everything else being equal, which of the following can decrease real GDP

a. decrease in the capital stock of the country

b. decrease in labor productivity rates

c. decrease in land productivity

d. increase in mortality rates

e. all of the above

f. none of the above

5.

Answer 1

Answer 1 d.) smooth fluctuations in economic activity over the business cycles

The dual mandate of the country’s central bank and government is to increase employment and maintain price stability in the long term. Hence, the first three options deal with the short-term impact on the economy. In the long run, the role of monetary and fiscal policies is to reduce recessionary periods to smooth the rough rides of economic downturn or, in other words, to smooth fluctuations in economic activity over the business cycles.

Answer 2 e.) both a and b

The important factors that contribute to increase in per capita income in the long run include, increasing the potential of production through labour, capital and technology. An economy can expand its economic growth or per capita income by accumulation of capital stock and technological progress that results in enhanced labour productivity. Further, this can be brought about by investment in health and education that increases the labour productivity and thereby raises the living standard. Also, government expenditure in infrastructure such as better roads and telephone network leads to increase in potential of production.

Answer 3 c.) an increase in personal saving

A simple definition of a short run inflationary gap is when demand for g/s that is real or actual GDP exceeds the potential GDP. It indicates economic expansion phase in the country. In other words, when aggregate demand in the economy increases than the potential AD. The driving factors behind increase in AD include, rising disposable income, wage increase, high savings, low unemployment, et al.

Answer 4 e.) all of the above

Ceteris paribus, a decline in real GDP occurs due to decline in capital stock, reduction in labour productivity, rising interest rates, decline in government expenditure and so on.