Macroeconomic objectives and policies: Practice Questions

Which of the following is an example of an interventionist supply-side policy designed to increase an economy's long-term productivity?

A government decides to reduce the rate of corporation tax and increase spending on infrastructure. What are the most likely effects of these policies on the Long-Run Aggregate Supply (LRAS) and the natural rate of unemployment?

An economy is currently experiencing a high rate of cost-push inflation and a rising current account deficit. If the government implements a reflationary fiscal policy, what is the most likely outcome for these two variables?

If a Central Bank engages in Quantitative Easing (QE), which of the following is the most likely transmission mechanism to increase Aggregate Demand (AD)?

If a government implements an expansionary fiscal policy when the economy is already operating at the full-employment level of output on a classical Long-Run Aggregate Supply (LRAS) curve, what is the most likely long-term result?

With reference to a short-run Phillips curve diagram, explain the trade-off between the rate of inflation and the level of unemployment.

Analyze the sequence of effects through which an increase in interest rates by a central bank might lead to a worsening of the current account balance on the balance of payments.

The government of a country decides to implement a series of supply-side policies, including a reduction in corporation tax and increased spending on education and training.
(a) Using an AD/AS diagram, explain how these policies are intended to achieve the macroeconomic objective of economic growth.
(b) Distinguish between a government budget deficit and a balance of payments deficit on the current account.

A government is currently facing a high rate of unemployment and intends to use reflationary fiscal policy to stimulate the economy. However, the central bank is concerned that this will lead to a significant increase in the rate of inflation.

(a) With the aid of a short-run Phillips curve diagram, explain the potential conflict between the macroeconomic objectives of low unemployment and low inflation.

(b) Evaluate the extent to which interventionist supply-side policies are more effective than demand-side policies in achieving a sustained reduction in the rate of unemployment without causing inflationary pressure.