1.The federal government implements an expansionary fiscal policy of increased spending and decreased taxes. Policy advisors predict output will
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Question

1.The federal government implements an expansionary fiscal policy

of increased spending and decreased taxes. Policy advisors predict output will increase 4% but are surprised when only 3% growth occurs. What might account for the fact that GDP increased by less than the multiplier predicted? (B or E?)

a. Policy advisors' calculation of MPS was too high
b. The aggregate supply curve was perfectly elastic
c. Foreign purchases of domestic goods was greater than expected due to a devalued currency
d. Consumption increases more than expected because of the decrease in taxes.
e. Investment decreased due to rising interest rates.


2.The long-run Phillips Curve indicates that there is no relationship between inflation and unemployment in the long run. Therefore, which of the following would cause an increase in the natural rate of unemployment and shift the LRPC to the right? (a or d?)
a. An increase in unemployment benefits for the long-term unemployed
b. The elimination of various social welfare programs
c. A decrease in the duration of unemployment
d. An increase in core inflation rates
e. Expansionary monetary policies.


3.Assume U.S. trade is currently balanced such that total exports equal total imports. If the central bank were to pursue a policy of purchasing government bonds on the open market, what would be a likely consequence regarding the balance of trade? (a or e?)

a. Exports would increase, imports would decrease and a trade surplus would result
b. Exports would decrease, imports would increase and a trade deficit would result
c. Imports and exports would increase and trade would maintain balance
d. Imports and exports would decrease, but the effect on the balance of trade would be indeterminate.
e. None of the above would occur as only the credit account would be affected.

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