51

Consider the equation of exchange, MV = PY, and let velocity, V, be a constant with a value of 1.5. Suppose that the economy is currently experiencing an inflationary gap. A given decrease in the money supply, M, will cause which of the following?

a.

A decrease in both P and Y

b.

Inflation only (increase in P)

c.

Reduction in Y with an unchanged P

d.

Economic boom only (increase in Y)

Suppose that initially, an economy is operating at its long-run equilibrium real GDP. Which of the following is the outcome in the short-run and in the long-run from an increase in aggregate demand caused by a reduction in taxation?

a.

An inflationary gap occurs in the short-run but the economy returns to potential GDP in the long-run as labor costs rise

b.

An inflationary gap occurs in the short-run but the economy returns to potential GDP in the long-run as labor costs fall

c.

A recessionary gap occurs in the short-run but the economy returns to potential GDP in the long-run as labor costs rise

d.

A recessionary gap occurs in the short-run but the economy returns to potential GDP in the long-run as labor costs fall

Which of the following is true about fiscal and monetary policy design and implementation?

a.

Both fiscal and monetary policy are the responsibility of the U.S. Congress

b.

Fiscal policy is the responsibility of the U.S. government, whereas monetary policy is the responsibility of the Federal Reserve

c.

Fiscal policy is the responsibility of the Federal Reserve, whereas monetary policy is enacted by the Department of the Treasury

d.

Fiscal policy is implemented by the Federal Deposit Insurance Corporation, whereas monetary policy is implemented by the U.S. government