AP Econ Unit 3 MCQs
If the marginal propensity to consume is 0.75, an initial increase in aggregate spending of $1000 will lead to a total change in real GDP equal to
$4000
If the MPS is equal to 0.1, what is the value of the spending multiplier?
10
Which of the following represents an appropriate fiscal policy for the given economic conditions?
A contractionary fiscal policy is appropriate to reduce inflation when there is an inflationary gap.
Assume the economy of Country A is in long-run equilibrium. Which of the following will happen in the short run in Country A if one of its major trading partners, Country B, experiences a recession?
Aggregate demand will decrease and the price level will decrease.
An economy is in long-run macroeconomic equilibrium. What will be the short-run effects of an increase in investment spending?
An increase in real output, a decrease in unemployment, and an increase in the price level
If nominal wages are fixed by labor contracts, then which of the following explains why the aggregate supply curve is upward sloping?
An increase in the price level will increase profits and production.
Which of the following explains the relationship between the price level and real output along the aggregate demand curve?
At a lower price level, domestic goods will become less expensive compared to foreign goods, which causes an increase in spending on domestic goods.
Suppose a nation opened its borders to the free flow of workers from other nations. How would this event likely affect the long-run aggregate supply (LRAS) curve and the production possibilities curve of the nation?
Both curves would shift to the right.
Assume that stock prices and home values have increased, raising household wealth. At the same time, productivity increased due to new technology. What is the likely short-run impact on the economy?
Both the aggregate demand (AD) and the short-run aggregate supply (SRAS) curves shift right, resulting in a higher real output level and indeterminate price level.
The government of Olympia is considering a fiscal policy action to slow the economy and curb inflation. If the marginal propensity to consume is 0.8, which of the following responses correctly identifies a policy action that would help the government achieve its goals and the impact of that action on Olympia's real gross domestic product (GDP)?
Decreasing government spending by $10 billion decreases real GDPGDP by a maximum of $50 billion.
Which of the following is true about the equilibrium real output in the aggregate demand-aggregate supply (AD-AS) model in the short run?
Equilibrium real output can be above, equal to, or below full employment.
Suppose an economy is operating above full employment. Which of the following fiscal policy actions and resulting changes in aggregate demand will move the economy back towards full employment?
Increasing taxes, which will shift the AD curve leftward.
What is an automatic stabilizer?
It is a program or policy that counteracts the business cycle without any new government action required.
Which of the following accurately describes the state of the macro-economy if it is operating at the intersection of the AD1 and SRAS2 curves?
It is operating below full employment and is in a short-run but not a long-run equilibrium.
Assume an economy is currently at full employment. Which of the following best describes the long-run adjustments that will occur in the economy following a negative aggregate demand shock with no government intervention?
Nominal wages will decrease and short-run aggregate supply will increase until full employment is restored in the long run.
If the natural rate of unemployment exceeds the actual rate of unemployment, which of the following will occur in the long run in the absence of government intervention?
Nominal wages will increase.
Which of the following best explains how income taxes can moderate a business cycle during an expansion?
Tax revenues increase automatically as gross domestic product (GDP) rises, which dampens consumption spending.
Suppose that the economy is in a recession. In the absence of government policy action to restore the economy to full employment, how will the economy adjust in the long run?
The SRAS2 curve shifts to the right as nominal wages decrease and full employment is restored.
Which of the following is true when an economy is operating at the intersection of the AD2 and SRAS2 curves?
The economy is in short-run and long-run equilibrium.
Suppose that the prices of labor and inputs to production are fixed in the short run but not in the long run. What is a consequence of this flexibility in the long run?
The long-run aggregate supply curve is vertical and there is no trade-off between inflation and unemployment in the long run.
Country X is currently in long-run macroeconomic equilibrium. If the country's economy experiences a significant increase in the price of energy, a major input in production, which of the following will occur in the short run?
The short-run aggregate supply curve will shift to the left, and the actual rate of unemployment will exceed the natural rate of unemployment.
How will automatic stabilizers affect the economy during a recession?
They will shift the aggregate demand curve to the right, increasing real output.
The full-employment level of output corresponds to which of the following?
all of the above
The presence of income taxes has what effect on the spending multiplier? They
decrease it
Which of the following will cause a rightward shift of the short-run aggregate supply curve?
A decrease in the costs of production
According to the expenditure multiplier, if the marginal propensity to consume is greater than zero, a one-dollar change in autonomous expenditures will result in which of the following?
A greater-than-one-dollar increase in aggregate demand for goods and services
Which of the following is a reason why the aggregate demand curve is downward sloping?
A higher price level decreases real wealth.
Which of the following causes a positive demand shock?
an increase in wealth
The maximum effect on real GDP of a $100 million increase in government purchases of goods and services
an increase of more than $100 million
The horizontal intercept of the long-run aggregate supply curve is
at potential output
Which of the following will occur as a result of an increase in the aggregate price level?
there will be no change in aggregate demand or supply
Because changes in the aggregate price level have no effect on aggregate output in the long run, the long-run aggregate supply curve is
vertical
If an economy is initially in long-run equilibrium and then experiences a negative demand shock, what will happen to wages, the aggregate price level, and real GDP in the long run?
wages: decrease aggregate price level: decrease real GDP: no change
If an economy is initially in long-run equilibrium and then experiences a positive demand shock, what will happen to wages, the aggregate price level, and real GDP in the long run?
wages: increase aggregate price level: increase real GDP: no change
An autonomous increase in aggregate spending of $100 million would lead to a total increase in real GDP of how much if the MPC is equal to 0.8?
$500 million
If the marginal propensity to consumer is 0.9, every $10 billion increase in taxes will cause a change in spending equal to
-$90 billion
If the marginal propensity to consume is equal to 0.80, the spending multiplier is
5.00
Assume the marginal propensity to consume is 0.8. How will a decrease in taxes of $100 billion and a decrease in government spending of $100 billion affect aggregate demand?
Aggregate demand will decrease by $100 billion.
Which of the following changes will necessarily cause inflation?
An increase in aggregate demand and a decrease in short-run aggregate supply.
Which of the following will most likely cause the short-run aggregate supply curve to shift to the left?
An increase in energy prices
Which of the following will result in a rightward shift of the aggregate demand curve?
An increase in exports
The movement from point g to point h is best described as which of the following?
An increase in real output due to an increase in the price level
Given the graph of the short-run aggregate supply (SRAS)(SRAS) and long-run aggregate supply (LRAS)(LRAS) curves above, which of the following is true?
At point X, the economy is experiencing a recessionary gap.
Which of the following explains why the long-run aggregate supply curve corresponds to the production possibilities curve?
Both curves illustrate the maximum sustainable capacity.
Based on the data on savings and disposable income in the table above, what are the income tax multiplier and the spending multiplier?
The tax multiplier is −9−and the spending multiplier is 10.
Which of the following will occur if the price of steel decreases as a result of the discovery of new deposits of iron ore used to make steel?
aggregate supply will increase
Which of the following is a government transfer program?
all of the above
Which of the following will shift the short-run aggregate supply curve? A change in
all of the above
Which of the following contributes to the lag in implementing fiscal policy?
all of the above contribute
A cut in income taxes is an example of
an expansionary fiscal policy
A decrease in the price level will produce a movement between which of the following two points on the diagram above?
From point Y to point Z
Changes in which of the following leads to a shift of the aggregate consumption function?
an increase in expected future disposable income
Which of the following best describes the aggregate demand curve?
It is a curve that shows the level of spending by consumers, businesses, the government, and the foreign sector at different price levels.
Which of the following statements best describes the concept of an automatic stabilizer?
It is nondiscretionary fiscal policy that mitigates business cycles by increasing aggregate demand during recessions and decreasing aggregate demand during expansions.
Which of the following is true about the long-run aggregate supply curve?
It is the result of nominal wages being fully flexible
An increase in taxes on businesses in the United States will likely have what impact on the short-run aggregate supply SRAS curve in the United States?
It will cause the SRAS curve to shift leftward.
Which of the following will remain unchanged when the price level decreases?
Long-run aggregate supply
Using the disposable income and consumption data in the table above, calculate the value of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS).
MPC=0.60 , MPS=0.40
If there is an adverse (negative) short-run aggregate supply shock due to an increase in the price of natural resources and the government pursues no policy to address the supply shock, then which of the following will occur in the long run?
Nominal wages will fall with no change in the natural rate of unemployment.
An economy is currently in short-run equilibrium, and real output is below the full-employment level of output. Which of the following market adjustments is most likely to occur in the long run?
Nominal wages will fall, shifting the short-run aggregate supply curve to the right.
Which of the following must be true in the long run?
Prices and wages are flexible.
Which of the following is an example of an automatic stabilizer?
Progressive income taxes
Assume the marginal propensity to consume is 0.75. What will happen if government spending increases by $100 billion?
Real output will increase by a maximum of $400 billion.
Recessions will most likely be less severe if tax revenues and transfer payments automatically change in which of the following ways?
Tax revenues decrease, and transfer payments increase.
Assume the countries of Ornania and Kumbagi are major trading partners. Ornania is currently in long-run macroeconomic equilibrium. As a result of a recession in its economy, Kumbagi decreases its demand for goods produced in Ornania. Which of the following will occur in Ornania in the short run?
The aggregate demand curve will shift to the left, resulting in a recessionary gap.
If the MPC is 0.75 and government spending and taxes are both increased by $10 million, which of the following is true?
The balanced budget multiplier is equal to 1
Which of the following causes a negative supply shock?
an increase in oil prices
Which of the following leads to self-correction when the economy is experiencing a recessionary gap?
The short-run aggregate supply curve shifts to the right
In the AD−ASAD−AS model, which of the following is true?
The economy is in a recessionary gap when the short-run equilibrium real output is below the long-run equilibrium real output.
If potential output is equal to actual aggregate output, which of the following is true?
The economy is in long-run equilibrium
Which of the following statements is true if this economy is operating at P1 and Y1?
The economy is in short-run macroeconomic equilibrium
Based on the diagram above, which of the following describes the short-run equilibrium?
The economy is operating above full employment.
Based on the level of savings and disposable income data in the table above, which of the following must be true?
The marginal propensity to consume is 0.9.
Which of the following is illustrated by the long-run aggregate supply (LRAS) curve and the production possibilities curve (PPC)?
The maximum sustainable capacity
Which of the following is true when the economy is experiencing a recessionary gap?
There is high unemployment
The government of Euroland is considering increasing government spending to avoid a recession. What is the most likely effect on aggregate demand (AD) in Euroland?
There will be a rightward shift in the AD curve.
In an economy where wages and prices are sticky, which of the following will happen as a result of an increase in the price level?
There will be an upward movement along the short-run aggregate supply curve to a higher real output level.
Based on the diagram above, which of the following describes what will happen in the long-run adjustment process?
Wages and input prices will increase.
Which of the following is an example of a negative supply shock?
World oil supplies are disrupted
Which of the following will shift the aggregate demand curve to the right?
a decrease in the existing stock of capital
Which of the following government policies will shift the aggregate demand curve to the left?
a decrease in the quantity of money
The maximum effect on real GDP of $100 million increase in taxes will be
a decrease of more than $100 million
Compared to an increase in taxes, an equal-sized increase in government spending will have what effect on real GDP?
a larger, positive effect
A positive supply shock will lead to which of the following?
a rightward shift of the short-run aggregate supply curve
Which of the following will occur if an increase in interest rates leads to a decrease in investment spending?
aggregate demand will decrease
Which of the following will occur if the federal government reduces defense spending?
aggregate demand will decrease
During stagflation, what happens to the aggregate price level and real GDP?
aggregate price level: increases real GDP: decreases
The Consumer Confidence Index is used to measure which of the following?
consumer expectations
Decreases in the stock market decrease aggregate demand by decreasing which of the following?
consumer wealth
Which of the following is a fiscal policy that is appropriate to combat inflation?
decreasing government spending
A change in real GDP that results when the domestic price level increases relative to a foreign price level is the _______ effect of a change in the price level.
exchange rate
Which type of policy can be used to address a decrease in aggregate output to below potential output?
expansionary
Which of the following is an example of a fiscal policy appropriate to combat a recession?
expansionary fiscal policy
As a result of the real wealth effect, a higher aggregate price level will reduce which of the following?
households' purchasing power
Which of the following is an example of a fiscal policy appropriate to combat unemployment?
increasing government spending
Which of the following is an example of expansionary fiscal policy?
increasing government spending
A lump-sum tax is
independent of income
The interest rate effect of a decrease in the aggregate price level will increase which of the following?
investment spending
The marginal propensity to consume
is the increase in consumption when disposable income increases by $1
Which of the following is not an automatic stabilizer?
monetary policy
The collapse of wealth and business and consumer confidence that caused the Great Depression is an example of which type of shock?
negative demand shock
Which of the following types of shocks poses a policy dilemma due to the inability to use stabilization policy to address inflation and unemployment at the same time?
negative supply shock
Actual investment spending in any period is equal to
planned investment spending + unplanned inventory investment
When the economy is experiencing an inflationary gap, the output gap is
positive
A decrease in which of the following will cause the short-run aggregate supply curve to shift to the left?
productivity
A change in consumer spending that results from a change in consumers' purchasing power is known as the _______ effect of a change in the aggregate price level.
real wealth
The economy depicted in the graph is experiencing an
recessionary gap
Which of the following is an example of an automatic stabilizer?
sales taxes
Sticky nominal wages in the short run cause the short-run aggregate supply curve to
slope upward
That employers are reluctant to decrease nominal wages during economic downturns and raise nominal wages during economic expansions is one reason nominal wages are described as
sticky
A higher aggregate price level leads to higher profit per unit of output and increased output in the short run because of which of the following?
sticky nominal wages
The short-run aggregate supply curve is upward sloping due to
sticky wages
Which of the following is an example of a positive demand shock?
the discovery of a large, previously unknown oil field
The level of planned investment spending is negatively related to
the interest rate
The slope of a household's consumption function is equal to
the marginal propensity to consume
Which of the following does not explain the slope of the aggregate demand curve?
the product-substitution effect of a change in the aggregate price level
Short-run equilibrium aggregate output is the quantity of aggregate output produced when
the quantity of aggregate output supplied is equal to the quantity demanded
