Congress proposes to stimulate the economy by cutting taxes for middle income families but raising taxes for wealthier tax payers. The effect will be the same net taxes collected, but most tax payers would pay less in taxes. According to which of the following economic theories would this stimulate the economy?
Answer(s): B
Since there was no net reduction in taxes, the tax plan would not create a fiscal stimulus. Marginal tax rates have effectively increased under this plan, implying a negative supply-side impact. Monetary policy involves changing the money supply, which is not applicable here.
An increase in the nominal interest rate would
Answer(s): C
The nominal interest rate represents the opportunity cost of holding money as cash-money held as cash earns no interest. Money held in some checking accounting or other interest bearing accounts earns a positive interest rate. Thus, money held as cash could be earning this interest rate. An increase in the nominal interest rate encourages people to hold less money as cash and to hold more money in interest bearing accounts since they can now earn a greater return by doing so.
An increase in the long-run aggregate supply curve indicates that
Answer(s): D
Short run increases in aggregate supply do not shift the long run potential of the economy; only increases in the long run aggregate supply curve will effectively increase potential GDP. Short run aggregate supply may exceed the long run potential of the economy but only temporarily.
Which of the following will most likely occur in the short run when the long-run equilibrium of an economy is disturbed by an unanticipated decrease in aggregate demand?
In response to a decline in aggregate demand, resources may be inflexible; that is, they may not decline sufficiently to adjust to the reduction in aggregate demand. As a result, there will be a recession in which output declines and prices in other markets decline.
In year 0, $10 could purchase a certain basket of goods. In year 20, the identical basket of goods cost $36. What was the average annualized inflation rate during this period?
Answer(s): E
The calculation is as follows: (36/10)^(1/20)-1=0.0661
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