An expansionary monetary policy is less likely to be effective if: Question 22 o

Question

An expansionary monetary policy is less likely to be effective if: Question 22 options: a)The budget deficit increases b)The yield curve becomes inverted. c)The majority of a tax cut is saved. d)Investment fails to respond to a change in interest rates.

Assume we have the following economic data: Unemployment rate = 8% Inflation rate = 2% Annual labor force growth rate = 1% Annual increase in worker productivity = 1% Using the above data if an increase in government spending results in a 4% real GDP growth. For that year we can expect: Question 56 options: a)The gap between actual and potential output will decrease. b)The unemployment rate will remain constant. c)The supply side growth rate will increase. d)The gap between actual and potential output will remain constant.

Unsaved Using the above data assume there is an increase in worker productivity to 2% a year. For that year we can expect: Question 57 options: a)A faster growth rate in aggregate supply. b)A slower growth rate in aggregate demand. c) A decrease in the inflation rate. d)An increase in the unemployment rate.

Unsaved Using the above data assume the federal funds rate decreases from 5% to 2% while to the 10 year Treasury rate remain contant. For that year we can expect: Question 58 options: a)A faster growth rate in aggregate supply.b) A decrease in the unemployment rate.c) The growth rate of aggregate supply and aggregate demand will remain about the same. d)A slower growth rate in aggregate demand.

Unsaved Since the 2007-09 recession, the US economy has seen: Question 59 options: a)A reduction in the annual supply side growth rate due to lower interest rates.b) No change in the nation'sw annual supply side growth rate. c)A reduction in the annual supply side growth rate due to a lower annual rate of worker productivity and labor force growth. d)A reduction in the annual supply side growth rate due to lower federal income tax rates.

Explanation / Answer

1. An expansionary monetary policy is less likely to be effective if the investment fails to respond to a change in interest rates. (In an expanstionary monetary policy, government may reduce discount rate, but banks do not increase their borrowing as a consequence to that, the change of interest rates has no impact.)

2. As the real output will rise, it will get closer to the potential output, and the gap between actual and potential output will decrease.

3. Since the increase in worker productivity is greater than usual, the growth in aggregate supply will also be higher than usual. The correct option is (a).

4. The correct option is (c). Since the 2007-09 recession, the worker productivity has been very low. Moreover, growth in labor force has also declined due to aging population.

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