Question 1

Which one of the following combinations of fiscal and monetary policies would be used to correct a negative output gap in an economy?

A) An expansionary fiscal policy that includes reducing taxes and a contractionary monetary policy that includes selling bonds

B) A contractionary fiscal policy that includes decreasing government spending and an expansionary monetary policy that includes purchasing of bonds

C) An expansionary fiscal policy that includes reducing taxes and an expansionary monetary policy that includes purchasing bonds

D) An expansionary fiscal policy that includes decreasing government spending and a contractionary monetary policy that includes selling bonds

E) A contractionary fiscal policy that includes increasing taxes and a contractionary monetary policy that includes purchasing bonds

Question 2 If the money supply in an economy is increased by 5%, the velocity of money is constant, and output is growing at 3%, then

A) the real GDP will increase by 5%

B) the price level will not change

C) the nominal GDP will increase by 3%

D) the price level will increase by 2%

E) the nominal GDP will decrease by 5%

Question 3

Following a government's deficit spending, an equal amount of business spending and household loans are crowded out. Which of the following would be true in this scenario?

A) Unemployment would increase.

B) Unemployment would decrease.

C) Interest rates would decrease.

D) Aggregate demand would be constant.

E) The velocity of money would increase.

Question 4 Use the graph to answer the question that follows.

Capital goods R A P Consumer goodsCountry Real GDP (millions) Population Atlantis 700 10 million Paradise Island 200 2 million