AP Macro Unit 3 Multiple Choice Questions

An important assumption in Keynesian theory is that: A. Prices are rigid downward and decreases in aggregate demand will lead to an increase in unemployment. B. Price rigidity will cause downturns in the economy to self-correct. C. When aggregate demand is inadequate, prices will fall. D. When interest rates are high, government needs more money. E. Changes in the technology are the major cause of changes in employment & price level.

A. Prices are rigid downward and decreases in aggregate demand will lead to an increase in unemployment.

If, at full employment, the government wants to increase its spending by $200 billion without increasing inflation in the short run, it must do which of the following? A. Raise taxes by more than $200 billion B. Raise taxes by less than $200 C. Raise taxes by $200 billion D. Lower taxes by $200 billion E. Decrease the budget deficit

A. Raise taxes by more than $200 billion

Velocity of money is best described as: A. The number of times the average dollar is spent in a year B. Equivalent to nominal GDP C. Equivalent to Price level D. Equivalent to real GDP E. Another term for the spending multiplier

A. The number of times the average dollar is spent in a year

The quantity theory of money suggests that: A. An increase in spending will always lead to inflation B. An increase in the amount of money will lead to a proportional increase in prices C. Hyperinflation is due to increase in the cost of key resources D. Demand-pull inflation will occur as countries produce more output E. The quantity of money times the velocity of money equals the real GDP

B. An increase in the amount of money will lead to a proportional increase in prices

The formula to calculate the expenditures or simple multiplier is: A. 1/MPC B. 1/1-MPS C. 1/1-MPC D. MPC/MPS E. MPS/MPC

C. 1/1-MPC

A negative supply shock would most likely result in: A. A decrease in aggregate demand B. A decrease in the general price level C. A decrease in national income D. An increase in employment E. An increase in nominal GDP

C. A decrease in national income

Which of the following would cause a rightward shift of the aggregate supply curve? A. An increase in the costs for production B. A tax cut for consumers C. An across-the-board reduction of wages in the manufacturing sector D. Inflationary expectations E. The shutdown of plants and movement of production of goods abroad

C. An across-the-board reduction of wages in the manufacturing sector

Stagflation might be caused by: A. Increase in technology B. Decrease in the price of raw materials C. Increase in the price of raw materials D. Decrease in the money supply E. Increase in the money supply

C. Increase in the price of raw materials

Federal budget deficits occur when: A. More money is being spent on Social Security and Welfare programs than last year B. The FED spends more than it collects in debt repayment in a given year C. The federal government spends more than it collects in taxes in a given year D. High levels of retirements use up tax social security contributions E. Interest payments on the national debt increase from one year to the next

C. The federal government spends more than it collects in taxes in a given year

According to Keynesian analysis, if government expenditures and taxes are increased by the same amount, which of the following will occur? A. Aggregate supply will decrease B. Aggregate supply will increase C. Aggregate demand will be unaffected D. Aggregate demand will increase E. Unemployment will increase

D. Aggregate demand will increase

A positive supply shock, such as a decrease in the price of oil, is most likely to have which of the following short-run effects on the price level and output? (Price Level / Output) A. Increase / Indeterminate B. Increase / Decrease C. Decrease / Decrease D. Decrease / Increase E. Indeterminate / Decrease

D. Decrease / Increase

A decrease in the wages and production cost will most likely cause the price level and real GDP to change in which of the following ways in the short-run? (Price Level / Real GDP) A. Increase / increase B. Increase /decrease C. Increase/ not change D. Decrease / increase E. Decrease / decrease

D. Decrease / increase

A major advantage of automatic stabilizers in fiscal policy is that they: A. Reduce private debt B. They require a balanced budget C. Keep unemployment at zero percent D. Go into effect without passage of new legislation E. Will decrease the price level and prevent inflation

D. Go into effect without passage of new legislation

Crowding out due to government borrowing occurs when: A. Lower interest rates decrease private sector investment B. Lower interest rates increase private sector investment C. Higher interest rates increase private sector investment D. Higher interest rates decrease private sector investment E. There is a trade deficit with other countries

D. Higher interest rates decrease private sector investment

Which of the following would cause a leftward shift in aggregate demand? I. Congress increases personal income taxes II. An increase in government spending on public goods III. A recession in another country that is a close trading partner A. I only B. II only C. III only D. I and III only E. I, II, and III

D. I and III only

Suppose that from 2014 to 2015, unemployment fell from 7.2% to 5.6% and inflation fell from 2.17% to 1.1%. An explanation of these changes might be that the: A. The aggregate demand curve shifted to the left B. Increase in the interest rates C. The government ran a budget deficit D. The aggregate supply curve shifted to the right E. The long-run aggregate supply curve shifted to the left.

D. The aggregate supply curve shifted to the right

If an increase in government spending of $100 billion increases equilibrium output by a total of $500 billion, then the marginal propensity to consume must be at least: A. 0.2 B. 0.5 C. 0.75 D. 0.8 E. 0.9

E. 0.9

12. If Congress wants to close a recessionary gap, which policy is matched to the change in policy, output and price level? (Policy / Price Level / Output) A. Decrease Spending / Increase / Increase B. Increase Spending / Decrease / Increase C. Decrease Spending / Decrease / Decrease D. Increase Taxes / Increase / Decrease E. Decrease Taxes / Increase / Increase

E. Decrease Taxes / Increase / Increase

The intersection of the aggregate demand and aggregate supply curve occurs at the economy's equilibrium level of: A. Nominal investment and the interest rate B. Government taxes and employment C. Real disposable income and unemployment D. Imports and Net exports E. Real domestic output and the price level

E. Real domestic output and the price level

Economic growth can be represented graphically by: A. Shifting the short-run aggregate supply curve to the right B. Shifting the aggregate demand curve to the right C. Shifting the long-run aggregate supply curve to the left D. Shifting the short-run Phillips curve to the right E. Shifting the production possibilities curve outward

E. Shifting the production possibilities curve outward

Which of the following is true regarding the Short-Run Phillips Curve (SRPC)? A. A rightward shift in aggregate demand will cause the SRPC to shift leftward B. The SRPC is upward sloping showing the positive relationship between price and output C. The SRPC shows the inverse relationship between interest rates and unemployment D. The SRPC is vertical when the economy has no cyclical unemployment E. The SRPC shows the inverse relationship between inflation and unemployment

E. The SRPC shows the inverse relationship between inflation and unemployment

The value of the simple spending multiplier (ME) decreases when: A. Tax rates are increased B. Government spending increases C. Exports increase D. Imports increase E. The marginal propensity to save increases

E. The marginal propensity to save increases

According to the long-run Phillips curve, which of the following is true? A. Unemployment increases with an increase in inflation. B. Unemployment decreases with an increase in inflation. C. Increased automation leads to lower levels of frictional unemployment in the long run. D. Changes in the composition of the overall labor force tend to be deflationary in the long run. E. The natural rate of unemployment is independent of inflation

E. The natural rate of unemployment is independent of inflation

Which of the following would best explain a decline in full-employment (potential) GDP? A. A decrease in investment and capital stock B. A decrease in the adult mortality rate C. The discovery of vast new energy deposits D. No cyclical unemployment E. A lower price level

A. A decrease in investment and capital stock

If Congress wants to close an inflationary gap, which policy is matched to the change in policy, output and price level? (Policy / Price Level / Output) A. Decrease Spending / Decrease / Decrease B. Increase Spending / Decrease / Increase C. Increase Taxes / Increase / Decrease D. Decrease Taxes / Increase / Increase E. Decrease Spending / Increase / Increase

A. Decrease Spending / Decrease / Decrease

The income that households have after taxes is called: A. Disposable income B. Rental income C. Deferrable income D. Profitable income E. National income

A. Disposable income

An increase in consumer spending will most likely cause the price level and real GDP to change in which of the following ways in the short-run? (Price Level / Real GDP) A. Increase / increase B. Increase /decrease C. Increase/ not change D. Decrease / increase E. Decrease / decrease

A. Increase / increase

How will a decrease in personal income taxes and an increase in government spending affect consumer spending and unemployment in the short-run? (Consumption / Employment) A. Decrease / Decrease B. Increase / Increase C. Decrease / Increase D. Increase / Decrease E. Increase / No Change

B. Increase / Increase

If the economy is operating in the intermediate range of the aggregate supply curve and if aggregate demand increases due to an increase in net exports, then the price level, output, & the unemployment rate are most likely to change in which of the following ways? (Price Level / Output / Unemployment Rate) A. Increase / increase / increase B. Increase / increase / decrease C. Increase / decrease / increase D. Increase / decrease / decrease E. Decrease / decrease / increase

B. Increase / increase / decrease

If exports from the US increased, what would most likely happen to real gross domestic product and price level? (Real GDP / Price Level) A. Decrease / Decrease B. Increase/ Increase C. Decrease / Increase D. Increase / Decrease E. Increase / No change

B. Increase/ Increase

Which of the following will occur if the federal government runs a budget deficit? A. The spending multiplier will decrease. B. The size of the national debt will increase. C. The economy's output will remain unchanged. D. State governments will run a budget surplus to offset the federal deficit. E. Interest rates will tend to be stabilized.

B. The size of the national debt will increase.