AP Macro Unit 5 Exam

An increase in aggregate demand will cause which of the following? (A) A movement along a given short-run Phillips curve (B) The long-run Phillips curve to become horizontal (C) The short-run Phillips curve to shift to the left (D) The long-run Phillips curve to shift to the right (E) The long-run Phillips curve to shift to the left

(A) A movement along a given short-run Phillips curve

Which one of the following is not considered to be a decision regarding fiscal policy? (A) Decisions regarding the money supply (B) Decisions regarding personal income tax (C) Decisions regarding government spending (D) Decisions regarding business taxes (E) Decisions regarding military spending

(A) Decisions regarding the money supply

Which of the following would be an advantage of automatic stabilizers? (A) No additional policy or legislation is needed (B) They are more influential than discretionary fiscal policy (C) They always increase aggregate demand (D) They always increase aggregate supply (E) Both A and C

(A) No additional policy or legislation is needed

Suppose that all banks hold no excess reserves and the reserve requirement is 20%. If Paula deposits $200 she earned for babysitting in the bank, what is the maximum increase in the total money supply? (A) $200 (B) $800 (C) $1,000 (D) $1,600 (E) $2,000

(B) $800

Which of the following combinations of changes in government spending and taxes is necessarily expansionary? (A) Govt Spending: Increase Taxes: Increase (B) Govt Spending: Increase Taxes: Decrease (C) Govt Spending: Decrease Taxes: Not change (D) Govt Spending: Decrease Taxes: Increase (E) Govt Spending: Decrease Taxes: Decrease

(B) Govt Spending: Increase Taxes: Decrease

According to the short-run Phillips curve, an increase in inflation will accompany (A) an increase in the short-run aggregate supply curve (B) a decrease in unemployment (C) an increase in interest rates (D) a decrease in net exports (E) a recession

(B) a decrease in unemployment

Assume that the economy is at full employment. Policymakers wish to maintain the price level but want to encourage greater investment. Which of the following combinations of monetary and fiscal policies would best achieve that goal? (A) Monetary Policy: No change Fiscal Policy: Contractionary (B) Monetary Policy: Expansionary Fiscal Policy: No change (C) Monetary Policy: Expansionary Fiscal Policy: Contractionary (D) Monetary Policy: Expansionary Fiscal Policy: Expansionary (E) Monetary Policy: Contractionary Fiscal Policy: Expansionary

(C) Monetary Policy: Expansionary Fiscal Policy: Contractionary

Which of the following would cause the short-run aggregate supply curve to shift to the right? (A) An increase in the wage rate (B) An increase in the interest rate (C) An increase in the natural rate of employment (D) A decrease in the capital stock (E) A decrease in the expected price

(E) A decrease in the expected price

Which of the following is a supply-side policy designed to increase real GDP? A. A tax credit on capital investment B. An increase in business taxes C. An increase in government regulation D. An increase in government spending E. A reduction in the reserve requirement

A. A tax credit on capital investment

Which of the following terms describes the adverse effect that results when private sector investment spending competes with government deficit financing? A. Crowding out effect B. Real wealth effect C. Multiplier effect D. Exchange rate effect E. Interest rate effect

A. Crowding out effect

At each meeting of the Federal Open Market Committee, the Federal Reserve sets a target for which of the following? I. the federal funds rate II. the prime interest rate III. the market interest rate A. I only B. II only C. III only D. I and III only E. I, II, and III

A. I only

The statement that "the cost of reducing the rate of inflation is that people must lose their jobs" indicates that the speaker believes in a relationship that is usually depicted by which of the following? A. The short-run Phillips Curve B. The liquid trap C. The production function D. The quantity theory of money E. The spending multiplier

A. The short-run Phillips Curve

Assume policy makers increased spending and cut taxes to stimulate the economy. If the government's budget was initially in balance, which of the following will occur? A. There will be a budget deficit, real interest rates will increase, and investment spending will be crowded out. B. There will be a budget deficit, real interest rates will decrease, and investment spending will increase. C. There will be a budget surplus, real interest rates will increase, and investment spending will be crowded out. D. There will be a budget surplus, real interest rates will decrease, and investment spending will increase. E. The budget will remain in balance, real interest rates will not change, and investment spending will not change.

A. There will be a budget deficit, real interest rates will increase, and investment spending will be crowded out.

A cut in income taxes is an example of A. an expansionary fiscal policy. B. a contractionary fiscal policy. C. an expansionary monetary policy. D. a contractionary monetary policy. E. none of the above.

A. an expansionary fiscal policy.

Contractionary monetary policy attempts to ______ aggregate demand by ______ interest rates. A. decrease, increasing B. increase, decreasing C. decrease, decreasing D. increase, increasing E. increase, maintaining

A. decrease, increasing

Which of the following actions can the Fed take to decrease the equilibrium interest rate? A. increase the money supply B. increase money demand C. decrease the money supply D. decrease money demand E. both (a) and (d)

A. increase the money supply

An increase in the expected inflation rate will cause which of the following? A. A rightward shift in the aggregate demand curve B. A rightward shift in the short-run Phillips curve C. A rightward shift in the short-run aggregate supply curve D. A leftward shift in the long-run Phillips curve E. A leftward shift in the long-run aggregate supply curve

B. A rightward shift in the short-run Phillips curve

Which of the following will move the government budget toward surplus? A. Expansionary fiscal policy B. Contractionary fiscal policy C. Contractionary monetary policy D. A recession E. Supply-side growth polices

B. Contractionary fiscal policy

Which of the following best describes the chain of events known as "crowding out" as a result of expansionary fiscal policy resulting in a budget deficit? A. Demand for LF: Increase Interest Rates: Increase Investment: Increase B. Demand for LF: Increase Interest Rates: Increase Investment: Decrease C. Demand for LF: Increase Interest Rates: Decrease Investment: Increase D. Demand for LF: Decrease Interest Rates: Increase Investment: Increase E. Demand for LF: Decrease Interest Rates: Decrease Investment: Decrease

B. Demand for LF: Increase Interest Rates: Increase Investment: Decrease

If government spending exceeds tax revenues, which of the following is necessarily true? There is a I. positive budget balance. II. budget deficit. III. recession. A. I only B. II only C. III only D. I and II only E. I, II, and III

B. II only

The long-run Phillips curve is I. the same as the short-run Phillips curve. II. vertical. III. the short-run Phillips curve plus expected inflation. A. I only B. II only C. III only D. I and II only E. I, II, and III

B. II only

Which of the following policies will most likely promote long-run economic growth? A. Decreasing government spending on infrastructure B. Increasing funding for research and development C. Decreasing funding for primary education D. Decreasing investment tax credits E. Increasing tax rates on interest earned on savings

B. Increasing funding for research and development

When the unemployment rate is 10% and the CPI is rising at 2%, the federal government CUTS taxes and increases government spending. If the Federal Reserve buys bonds on the open market, interest rates, investment, RGDP, and the price level are most likely to change in which of the following ways? A. Interest rates: Decrease Investment: Decrease RGDP: Increase PL: Increase B. Interest rates: Decrease Investment: Increase RGDP: Increase PL: Increase C. Interest rates: Increase Investment: Decrease RGDP: Decrease PL: Decrease D. Interest rates: Increase Investment: Decrease RGDP: Increase PL: Increase E. Interest rates: Increase Investment: Increase RGDP: Increase PL: Increase

B. Interest rates: Decrease Investment: Increase RGDP: Increase PL: Increase

Assume an economy is in long-run equilibrium and the central bank engages in an expansionary monetary policy for a prolonged time period. If the velocity of money is constant, which of the following is true according to the quantity theory of money? A. The government's budget deficit will increase. B. Price level will increase at the same rate as the money supply. C. Real output will exceed full employment in the long run. D. The actual unemployment rate will exceed the natural rate of unemployment. E. The production possibilities curve will shift inward.

B. Price level will increase at the same rate as the money supply.

Suppose a country's government increases the allowable deduction for individual retirement accounts per person. Holding all other influences constant, how would this policy action affect the country's loanable funds market, its production possibilities curve, and its long-run aggregate supply (LRAS) curve? A. Private savings would decrease and real interest rates would increase in the loanable funds market, the nation's production possibilities curve would shift inward, and its LRAS curve would shift to the left. B. Private savings would increase and real interest rates would decrease in the loanable funds market, the nation's production possibilities curve would shift outward, and its LRAS curve would shift to the right. C. Public savings would decrease and real interest rates would increase in the loanable funds market, the nation's production possibilities curve would shift inward, and its LRAS curve would shift to the left. D. Public savings would increase and real interest rates would decrease in the loanable funds market, the nation's production possibilities curve would shift outward, and its LRAS curve would shift to the right. E. National savings would decrease and real interest rates would increase in the loanable funds market, the nation's production possibilities curve would shift inward, and its LRAS curve would shift to the left.

B. Private savings would increase and real interest rates would decrease in the loanable funds market, the nation's production possibilities curve would shift outward, and its LRAS curve would shift to the right.

Suppose that an economy with flexible wages and prices is in long-run equilibrium when the central bank contracts the money supply. What is the long-run effect on real output in the economy? A. Real output falls. B. Real output is unchanged. C. Real output rises. D. Real output falls as price levels fall. E. Real output rises as price levels fall.

B. Real output is unchanged. [When the economy is at full employment, changes in the money supply have no effect on real output in the long run.]

In order to be called an automatic, or built-in, stabilizer, which of the following must taxes automatically do in a recessionary period and in an inflationary period? A. Recessionary Period: Decrease Inflationary Period: Decrease B. Recessionary Period: Decrease Inflationary Period: Increase C. Recessionary Period: Increase Inflationary Period: Decrease D. Recessionary Period: Increase Inflationary Period: Increase E. Recessionary Period: No change Inflationary Period: No change

B. Recessionary Period: Decrease Inflationary Period: Increase

Which of the following monetary and fiscal policy combinations would definitely cause an increase in aggregate demand? A. Reserve Requirements: Decrease Taxes: Decrease Government Spending: Decrease B. Reserve Requirements: Decrease Taxes: Decrease Government Spending: Increase C. Reserve Requirements: Increase Taxes: Decrease Government Spending: Increase D. Reserve Requirements: Increase Taxes: Increase Government Spending: Decrease E. Reserve Requirements: Increase Taxes: Decrease Government Spending: Decrease

B. Reserve Requirements: Decrease Taxes: Decrease Government Spending: Increase

An expansionary fiscal policy will result in an increase in the interest rate unless which of the following occurs? A. Taxes are cut instead of government expenditures being increased. B. The money supply is increased. C. Wage and price controls are imposed. D. The exchange rate is fixed E. The Federal Reserve sells government bonds

B. The money supply is increased.

An expansionary monetary policy may promote long-run growth if it leads to A. an increase in consumption B. an increase in investment C. an increase in government spending D. a constant level of government spending E. a decrease in net exports

B. an increase in investment

Assume that taxes and interest rates remain unchanged when government spending increases, and that both savings and consumer spending increase when income increases. The ultimate effect on real GDP of a $100 million increase in government purchases of goods and services will be A. an increase of $100 million. B. an increase of more than $100 million. C. an increase of less than $100 million. D. an increase of either more than or less than $100 million, depending on the MPC. E. a decrease of $100 million.

B. an increase of more than $100 million.

Which of the following is a fiscal policy that is appropriate to combat inflation? A. decreasing taxes B. decreasing government spending C. increasing government transfers D. increasing interest rates E. expansionary fiscal policy

B. decreasing government spending

Which of the following is an example of expansionary fiscal policy? A. increasing taxes B. increasing government spending C. decreasing government transfers D. decreasing interest rates E. increasing the money supply

B. increasing government spending

Which of the following is true for the long-run Phillips curve? It A. is horizontal B. shows no relationship between the inflation rate and the unemployment rate C. shows the point where the expected rate of inflation exceed the actual rate of inflation D. is negatively sloped E. does not change if the natural rate of unemployment changes

B. shows no relationship between the inflation rate and the unemployment rate

An increase in expected inflation will shift A. the short-run Phillips curve to the left. B. the short-run Phillips curve to the right. C. the long-run Phillips curve to the right. D. the long-run Phillips curve to the left. E. neither the short-run nor the long-run Phillips curve.

B. the short-run Phillips curve to the right.

An open-market purchase of government bonds accompanied by a decrease in income taxes will result in which of the following in the short run? A. A decrease in real output B. A decrease in the price level C. A decrease in unemployment D. A decrease in nominal wages E. A decrease in the natural rate of unemployment

C. A decrease in unemployment

Assume that the economy has a low unemployment rate and a high rate of inflation. Which of the following sets of monetary and fiscal policies would be consistent and designed to reduce the rate of inflation? A. Discount rate: Increase Government spending: Increase OMO: Buy bonds B. Discount rate: Increase Government spending: Increase OMO: Sell bonds C. Discount rate: Increase Government spending: Decrease OMO: Sell bonds D. Discount rate: Increase Government spending: Decrease OMO: Buy bonds E. Discount rate: Decrease Government spending: Decrease OMO: Buy bonds

C. Discount rate: Increase Government spending: Decrease OMO: Sell bonds

In the long run, changes in the quantity of money affect which of the following? I. real aggregate output II. interest rates III. the aggregate price level A. I only B. II only C. III only D. I and II only E. I, II, and III

C. III only

When the unemployment rate is 4.5% and the CPI is rising at a 12%, the federal government raises taxes and cuts government spending. If the Federal Reserve sells bonds on the open market, interest rates, incestement, RGDP, and the price level are most likely to change in which of the following ways? A. Interest rates: Decrease Investment: Decrease RGDP: Increase PL: Increase B. Interest rates: Increase Investment: Decrease RGDP: Increase PL: Increase C. Interest rates: Increase Investment: Decrease RGDP: Decrease PL: Decrease D. Interest rates: Decrease Investment: Increase RGDP: Increase PL: Increase E. Interest rates: Decrease Investment: Decrease RGDP: Increase PL: Increase

C. Interest rates: Increase Investment: Decrease RGDP: Decrease PL: Decrease

How will a nation's production possibilities curve (PPC) and long-run aggregate supply (LRAS) curve change as a result of an increase in both the labor force and productivity? A. The LRAS curve will shift to the right, and the PPC will shift inward. B. The LRAS curve will shift to the right, and the PPC will remain unchanged. C. The LRAS curve will shift to the right, and the PPC will shift outward. D. The LRAS curve will shift to the left, and the PPC will remain unchanged. E. The LRAS curve will shift to the left, and the PPC will shift inward.

C. The LRAS curve will shift to the right, and the PPC will shift outward.

Steady advances in technological development will result in which of the following? A. The long-run aggregate supply curve will shift to the right, resulting in economic growth and a lower full employment level of output. B. The long-run aggregate supply curve will shift to the left, resulting in economic growth and a higher natural unemployment rate. C. The long-run aggregate supply curve will shift to the right, resulting in economic growth and a lower natural unemployment rate. D. The short-run aggregate supply curve will shift to the left, resulting in a lower price level and a higher full employment level of output. E. The short-run aggregate supply curve will shift to the right, resulting in a higher price level and a higher natural rate of unemployment.

C. The long-run aggregate supply curve will shift to the right, resulting in economic growth and a lower natural unemployment rate.

Monetary neutrality means that, in the long run, changes in the money supply A. cannot happen. B. have no effect on the economy. C. have no real effect on the economy. D. increase real GDP. E. change real interest rates.

C. have no real effect on the economy.

A lump-sum tax is A. higher as income increases. B. lower as income increases. C. independent of income. D. the most common form of tax. E. a type of business tax.

C. independent of income.

The Phillips curve shows the relationship between A. unemployment and economic growth B. unemployment and full employment C. inflation and unemployment D. inflation and investment E. inflation and real interest rates

C. inflation and unemployment

The short-run Phillips curve shows a ____________ relationship between ____________. A. negative, the aggregate price level and aggregate output B. positive, the aggregate price level and aggregate output C. negative, unemployment and inflation D. positive, unemployment and aggregate output E. positive, unemployment and the aggregate price level

C. negative, unemployment and inflation

Which of the following is a goal of monetary policy? A. zero inflation B. deflation C. price stability D. increased potential output E. decreased actual real GDP

C. price stability

Which of the following changes is most likely to cause economic growth? A. A decrease in private savings B. A decrease in labor productivity C. A decrease in physical capital D. An increase in human capital E. An increase in the price level

D. An increase in human capital

Which of the following monetary and fiscal policy combinations would definitely cause a decrease in aggregate demand in the short-run? A. Discount rate: Decrease Government spending: Decrease OMO: Buy bonds B. Discount rate: Decrease Government spending: Increase OMO: Buy bonds C. Discount rate: Decrease Government spending: Increase OMO: Sell bonds D. Discount rate: Increase Government spending: Decrease OMO: Sell bonds E. Discount rate: Increase Government spending: Decrease OMO: Buy bonds

D. Discount rate: Increase Government spending: Decrease OMO: Sell bonds

Automatic stabilizers in the economy include which of the following? I. A progressive personal income tax II. Unemployment compensation III. Congressional action that increases tax rates A. I only B. II only C. III only D. I and II only E. I and III only

D. I and II only

Which of the following will most likely occur if a country's government is continuously borrowing to finance its spending without changing taxes? A. The economy will experience an inflationary gap in the long run. B. The government budget will be in deficit and the national debt will decrease. C. The government budget will be in surplus and the national debt will increase. D. Private investment in plant and equipment will decrease, resulting in a lower rate of economic growth in the long run. E. Private investment in plant and equipment will increase, resulting in a higher rate of economic growth in the long run.

D. Private investment in plant and equipment will decrease, resulting in a lower rate of economic growth in the long run.

Suppose the nominal GDP is $25 million, the price level is 1.25, and the central bank has set the money supply at $10 million. What is the real GDP and the velocity of money according to the quantity theory of money? A. Real GDP is $2.5 million, and the velocity of money is 12.5. B. Real GDP is $10 million, and the velocity of money is 20. C. Real GDP is $12.5 million, and the velocity of money is 8. D. Real GDP is $20 million, and the velocity of money is 2.5. E. Real GDP is $25 million, and the velocity of money is 8.

D. Real GDP is $20 million, and the velocity of money is 2.5.

Which of the following describes a surplus in the government budget? A. Private savings exceed private investment spending. B. Private savings exceed consumption spending. C. Private savings exceed government purchases plus transfer payments. D. Tax revenues exceed government purchases plus transfer payments. E. National debt exceeds government purchases plus transfer payments.

D. Tax revenues exceed government purchases plus transfer payments.

During a recession in the United States, what happens automatically to tax revenues and government spending? A. Tax revenues: increase Government spending: increases B. Tax revenues: decrease Government spending: decreases C. Tax revenues: increase Government spending: decreases D. Tax revenues: decrease Government spending: increases E. Tax revenues: decrease Government spending: does not change

D. Tax revenues: decrease Government spending: increases

Which of the following fiscal policies is expansionary? A. Taxes Government: increase by $100M Spending: increases by $100M B. Taxes Government: decrease by $100M Spending: decreases by $100M C. Taxes Government: increase by $100M Spending: decreases by $100M D. Taxes Government: decrease by $100M Spending: increases by $100M E. both (a) and (d)

D. Taxes Government: decrease by $100M Spending: increases by $100M

Which of the following is true about the relationship between the deficit and the debt? They A. are inversely related B. are equal in most years C. both increase every year in the US D. are positively related E. must both be paid off at regular intervals

D. are positively related

An increase in the money supply will lead to which of the following in the short run? A. higher interest rates B. decreased investment spending C. decreased consumer spending D. increased aggregate demand E. lower real GDP

D. increased aggregate demand

In the short-run, combining an expansionary fiscal policy with a tight money policy is most likely to cause A. real GDP to increase B. real GDP to decrease C. interest rates to fall D. interest rates to rise E. the federal budget deficit to decrease

D. interest rates to rise

How do the effects of an increase in SRAS compare to the effects of an increase in aggregate demand? An increase in SRAS will increase A. real GDP, while the increase in AD will not. B. both real GDP and the price level, while the increase in AD will only increase real GDP. C. neither real GDP nor the price level, which is the same effect as the increase in AD. D. real GDP but not the price level, while the increase in AD will increase both real GDP and the price level. E. only the price level, while the increase in AD will increase only real GDP.

D. real GDP but not the price level, while the increase in AD will increase both real GDP and the price level.

Country X's economy is in an inflationary gap. Which of the following combinations of fiscal and monetary policy actions would restore full employment in the short run? A. A decrease in income taxes and a decrease in the required reserve ratio B. A decrease in income taxes and an increase in the discount rate C. A decrease in government spending and an open-market purchase of government bonds by the country's central bank D. An increase in government spending and targeting a lower interest rate on overnight interbank loans E. An increase in income taxes and an open-market sale of government bonds by the country's central bank

E. An increase in income taxes and an open-market sale of government bonds by the country's central bank

If economic growth through investment in the economy's infrastructure is desirable, which of the following policies will most likely achieve this objective? A. Reducing income and wealth inequality B. Increasing government borrowing financed by national savings C. Decreasing spending on education and training of workers for higher-income jobs D. Reducing subsidies for business investment in research and development E. Granting tax credits for businesses in the construction sector

E. Granting tax credits for businesses in the construction sector

Which of the following contributes to the lag in implementing fiscal policy? I. It takes time for Congress and the president to pass spending and tax changes. II. Current economic data take time to collect and analyze. III. It takes time to realize an output gap exists. A. I only B. II only C. III only D. I and III only E. I, II, and III

E. I, II, and III

If tax revenues are less than the total of government spending plus government transfer payments, which of the following will happen? A. The tax multiplier will increase. B. The spending multiplier will increase. C. The government budget will be in surplus. D. There will be an inflationary gap. E. The national debt will increase.

E. The national debt will increase.

Which of the following is a government transfer program? A. Social Security B. Medicare/Medicaid C. unemployment insurance D. food stamps E. all of the above

E. all of the above

Which of the following is a reason to be concerned about persistent budget deficits? A. crowding out B. government default C. the opportunity cost of future interest payments D. higher interest rates leading to decreased long- run growth E. all of the above

E. all of the above

To counter the crowding-out effect on interest rates cause by the government's deficit spending, the Federal Reserve can A. cut tax rates B. increase tax rates C. increase the discount rate D. increase the reserve requirement E. buy bonds through OMO

E. buy bonds through OMO

To reduce the size of a country's national debt, a government could potentially take all of the following actions EXCEPT A. decrease the supply of government bonds B. decrease borrowing of private loanable funds C. increase taxes D. decrease expenditures E. finance spending by borrowing

E. finance spending by borrowing Correct. Borrowing to finance spending will increase the size of the national debt.

Which of the following is NOT an automatic stabilizer? A. income taxes B. unemployment insurance C. Medicaid D. food stamps E. monetary policy

E. monetary policy