Assume That the Economy Is Initially Operating at the Natural

question 32

Multiple Choice

Assume that the economy is initially operating at the natural level of output. A simultaneous increase in taxes and a decrease in the price target by the central bank will cause which of the following?

• A) A reduction in investment in the medium run.
• B) An increase in the aggregate price level, no change in output, and no change in the interest rate in the medium run.
• C) An increase in output and an increase in the aggregate price level in the short run.
• D) A reduction in the interest rate in the medium run.
• E) A decrease in output and a decrease in the nominal wage in the short run.

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Definitions:

Present Value

The today's value of money or cash flows to be received in the future, factored by a particular rate of return.

Oil Reserve

Quantities of crude oil that are held underground or in storage, available for extraction and use.

Market Rate Of Interest

The prevailing rate at which interest is paid by borrowers for loans or earned by investors in the marketplace, determined by supply and demand forces.

Market Rate Of Interest

The prevailing rate of interest determined by supply and demand in the credit market.