Connect stabilization choices to their long-run consequences through Phillips curves, money growth, government debt, crowding out, productivity, and growth policy.
The country of Arden has a banking system with limited reserves. Arden's economy falls into a recession, and its government and central bank each implement policies to restore full employment. Which of the following combinations of fiscal and monetary policy would be most effective to achieve this objective?
Arden's government increases taxes on businesses, and its central bank decreases the required reserve ratio.
Arden's government increases spending, and its central bank sells bonds on the open market.
Arden's government increases the minimum wage, and its central bank increases the required reserve ratio.
Arden's government decreases unemployment benefits, and its central bank buys bonds on the open market.
Arden's government decreases personal income tax rates, and its central bank buys bonds on the open market.
Assume that the economy of Barrikos is in short-run equilibrium, with its economic data summarized in the table provided. The government budget is balanced, and the capital and financial account (CFA) balance is zero.
Using the relevant numerical values, draw a correctly labeled graph of the short-run and long-run Phillips curves for Barrikos. Indicate the current short-run equilibrium with a point labeled X. Plot the relevant numerical values on the graph.
Assume that the fiscal policy action identified in part C is implemented.
Assume there is no change in inflationary expectations. On your graph in part B, show a possible new short-run equilibrium point, labeled Z, that would result from the fiscal policy action identified in part C.
Assume that commercial banks must hold a minimum of 20% of their deposits as reserves. Now suppose that the central bank of the country sells $100,000 of government bonds to commercial banks.
Given the change in the money supply in part (a), if the velocity of money is constant, what will happen to the nominal gross domestic product? Explain.
Based on the change in the nominal gross domestic product in part (c), what happens to the price level if the real gross domestic product is constant?
Begin your response to this question at the top of a new page in the separate Free Response booklet and fill in the appropriate circle at the top of each page to indicate the question number.
The economy of Country Zeta is in long-run equilibrium; however, the government is concerned about the size of the national debt.
Identify one specific fiscal policy action the government could take to reduce the national debt.