D089 Principles of Economics - Set 1 - Part 3

Correct Answer: Decreases government spending and increases taxes

Contractionary fiscal policy is used to reduce inflation by decreasing aggregate demand, usually through reduced government spending and higher taxes.

Correct Answer: Comparative advantage is based on lower opportunity cost

Comparative advantage refers to producing a good at a lower opportunity cost, while absolute advantage refers to producing more of a good with the same resources.

Correct Answer: It reduces interest rates

Expansionary monetary policy increases the money supply, which lowers interest rates and encourages borrowing and investment.

Correct Answer: It shifts the LRAS curve to the right

An increase in productivity allows the economy to produce more output with the same resources, shifting the LRAS curve to the right and increasing potential GDP.

Correct Answer: Decreases purchasing power

Inflation erodes the purchasing power of money, meaning that each unit of currency buys fewer goods and services over time.

Correct Answer: The money supply increases

When the Federal Reserve buys government securities, it injects money into the economy, increasing the money supply and lowering interest rates.

Correct Answer: A change in the price of the good itself

A movement along the supply curve occurs when there is a change in the price of the good, holding all other factors constant.

Correct Answer: It influences the interest rates banks charge each other for overnight loans

The Federal Funds Rate is the interest rate at which banks lend to each other overnight, and it is a key tool in monetary policy.

Correct Answer: The maximum price allowed by law

A price ceiling is a legal limit on how high the price of a good can be, often set to make essential goods more affordable.

Correct Answer: Money that has no intrinsic value but is declared legal tender by the government

Fiat money has no intrinsic value; its value is derived from government regulation or law, such as modern paper currency.