AP Econ Unit 3 Test

Assume a closed economy with no government and a marginal propensity to consume of 0.80. Disposable Income/Consumption $620/$624 $640/$640 $660/$656 $680/$672 $700/$688 $720/$704 $740/$720 $760/$736 Dissaving occurs when disposable income is A) $620 B) $640 C) $660 D) $700 E) $1,000

A

If at full employment the government wants to increase its spending by $100 billion without increasing inflation in the short run, it must do which of the following? A) Raise taxes by more than $100 billion B) Raise taxes by $100 billion C) Raise taxes by less than $100 billion D) Lower taxes by $100 billion E) Lower taxes by less than $100 billion

A

If purchases of eduction and medical care were counted as investment rather than consumption, GDP would A) not change, because there is no change in total expenditures B) increase, because investment is included in GDP but consumption is not C) increase, because consumption is included in GDP, but investment is not D) decrease, because investment is weighed more heavily than consumption in GDP E) decrease, because consumption is weighed more heavily in calculating GDP

A

In an economy at full employment, a presidential candidate proposes cutting the government debt in half in four years by increasing income tax rates and reducing government expenditures. According to Keynesian theory, implementation of these policies is most likely to increase A) unemployment B) consumer prices C) aggregate demand D) aggregate supply E) the rate of economic growth

A

The short-run aggregate supply curve is likely to shift to the left when there is an increase in A) the cost of productive resources B) productivity C) the money supply D) the federal budget deficit E) imports

A

Which of the following is an example of fiscal policy? A) Increasing government expenditures to build highways B) Increasing the money supply to increase income C) Decreasing the discount rate to lower unemployment and inflation D) Decreasing the federal funds to stimulate investment E) Decreasing the reserve ration to increase bank reserves

A

34. If private investment of $100 is added to the economy, the equilibrium levels of income and consumption will change in which of the following ways? Equilibrium Level of Income/Equilibrium Level of Consumption A) Increase/Decrease B) Increase/Increase C) Increase/No change D) No change/Increase E) No change/No change

B

39. The graph above indicates equilibrium E for a close economy without government spending. If the addition of government spending results in equilibrium F, which of the following is true? A) Government spending is $300 and the multiplier is 5 B) Government spending is $100 and the multiplier is 5 C) Government spending is $100 and the consumption increase by $500 D) Government spending and GDP increase by $500 each E) Consumption and GDP increase by $500 each

B

62. The economy is currently experiencing A) inflation B) recession C) expansion D) stagflation E) rapid growth

B

A country's government runs a budget deficit when which of the following occurs in a given year? A) The amount of new loans to developing nations exceeds the amount of loans paid off by developing nations B) Government spending exceeds tax revenue C) The debt owed to foreigners exceeds the debt owed to the country's citizens D) The amount borrow exceeds the interest payment on the national debt E) Interest payments on the national debt exceed spending on goods and services

B

An increase in energy costs will most likely cause the price level and rGDP to change in which of the following ways? Price Level/Real GDP A) Increase/Increase B) Increase/Decrease C) Increase/No change D) Decrease/Increase E) Decrease/Decrease

B

An increase in the MPC causes an increase in which of the following? A) MPS B) spending multiplier C) savings rate D) exports E) aggregate supply

B

An increase in which of the following will increase aggregate demand? A) Taxes B) Government spending C) The federal funds rate D) Reserve requirements E) The discount rate

B

Assume that Jane's marginal propensity to consume equals 0.8, and that in 2004 Jane spent $36,000 from her disposable income of $40,000. If her disposable income in 2005 increased to $50,000, her consumption spending increased by A) $4,000 B) $8,000 C) $9,000 D) $10,000 E) $14,000

B

Crowding out is best described as which of the following? A) The decrease in full employment output caused by an increase in government spending B) The decrease in consumption of private investment spending caused by an increase in government spending C) The decrease in government spending caused by a decrease in taxes D) The increase in the amount of capital outflow caused by the increase in government spending E) The increase in the amount of capital inflow caused by the increase in government spending

B

Crowding out occurs when A) increases in government spending become ineffective because tax revenues increase as income increases B) government borrowing to finance its spending decrease private sector investment C) monetary policy actions decrease the effectiveness fiscal policy D) restrictive monetary policy causes the interest rate to increase E) government spending and private sector spending increase by the same percentage

B

If the aggregate supply curve is the horizontal an increase in government spending will result in which of the following? Real Output/Price Level A) Increase/Increase B) Increase/No change C) Increase/Decrease D) No change/Increase E) No change/No change

B

If the marginal propensity to consume is 0.9, the government purchases by $100, and net exports decline by $60, the equilibrium level of real gross domestic product will A) decrease by up to $400 B) increase by up to $400 C) increase by up to $600 D) decrease by up to $1,000 E) increase by up to $1,600

B

In an economy with lump-sum taxes and no international sector, assume that the aggregate supply curve is horizontal. If the MPC is equal to 0.8 which of the following will necessarily be true? A) The average propensity to consume will be less than the marginal propensity to consume B) The government expenditure multiplier will be equal to 5 C) A $10 increase in consumption spending will bring about an $80 increase in disposable income D) Wealth will tend to accumulate in the hands of a few people E) The economy will be running a deficit

B

In the simple Keynesian aggregate expenditure model of an economy, changes in investment or government spending will lead to a change in which of the following? A) the price level B) the level of output and employment C) interest rates D) the aggregate supply E) the demand for money

B

The aggregate demand curve is downward sloping because an increase in the general price level will cause the demand for money, interest rates, and investment to change in which of the following ways? Demand for Money/Interest Rates/Investment A) Increase/Increase/Increase B) Increase/Increase/Decrease C) Increase/Decrease/Increase D) Decrease/Increase/Decrease E) Decrease/Decrease/Increase

B

Under which of the following conditions would consumer spending most likely increase? A) Consumers have large unpaid balances on their credit cards B) Consumers' wealth is increased by changes in the stock market C) The government encourages consumers to increase their savings D) Social security taxes are increased E) Consumers believe they will not receive pay increases next year

B

Which of the following best explains why equilibrium income will rise by more than $100 in response to a $100 increase in government spending? A) incomes will rise resulting in a tax decrease B) incomes will rise resulting in higher consumption C) The increased spending raises the aggregate price level D) The increased spending increases the money supply, lowering interest rates E) The higher budget deficit reduces investment

B

Which of the following changes would cause an economy's AD curve to shift to the right? A) An increase in spending on imports B) An increase in autonomous consumption spending C) An increase in interest rates D) A decrease in the money supply E) A decrease in the overall price level in the economy

B

Which of the following is true about the MPC? A) It is the percentage of total income that is spent on consumption B) It determines the size of the simple spending multiplier C) In increases as income increases because increases in income cause people to spend more D) It is the same as the money multiplier E) It is equal to the average propensity to consume for people with low incomes

B

60. The minimum increase in government spending necessary to reach full employment is A) $2,000 B) $1,000 C) $500 D) $200 E) $100

C

According to Keynesian theory, decreasing taxes and increasing government spending will most likely change consumption expenditures and unemployment in which of the following ways? Consumption Expenditures/Unemployment A) Decrease/Increase B) Decrease/No change C) Increase/Decrease D) Increase/Increase E) No change/Decrease

C

According to Keynesian theory, the most important determinant of saving and consumption is the A) interest rate B) price level C) level of income D) level of employment E) flexibility of wages and prices

C

Aggregate demand may be measured by adding A) consumption, investment, savings, and imports B) savings, government spending, and business inventories C) consumption, investment, government spending, and net exports D) domestic private expenditures and government spending E) domestic expenditures and imports

C

An increase in the government budget deficit is most likely to result in an increase in which of the following? A) The marginal propensity to consume B) Exports C) The real interest rate D) The money supply E) The simple multiplier

C

As a component of aggregate demand, investment refers to the A) purchase of raw land for later resale B) purchase of stocks and bonds C) purchase of new equipment and additional inventories D) difference between people's income and spending E) dividends paid out to shareholders

C

If the federal government reduces its budget deficits when the economy is close to full employment, which of the following will most likely result? A) Inflation will increase B) Tax revenues will increase C) Interest rates will decrease D) Unemployment will decrease E) The international value of the dollar will increase

C

In a closed economy with no taxes in which the average MPC is 0.75, which of the following is true? A) If income is $100 the savings is $75 B) If income is #100 then consumption is $50 C) If income is $200 then saving is $50 D) If income is $200 then consumption is $75 E) If income is $500 then saving is $100

C

In the short run, the government deficit spending will most likely A) raise the unemployment rate B) lower the inflation rate C) raise real interest rates D) lower private savings E) raise net exports

C

The intersection of the aggregate supply curve and the aggregate demand curve occurs at the economy's equilibrium level of A) real investment and interest rate B) real disposable income and unemployment C) real national output and the price level D) government expenditures and taxes E) imports and exports

C

When the US government engages in deficit spending, the spending is primarily financed by A) increasing the required reserve ratio B) borrowing from the World Bank C) issuing new bonds D) appreciating the value of the dollar E) depreciating the value of the dollar

C

Which changes will have the smallest expansionary effect on AD in the short run? A) An increase in exports of $100 B) An increase in government spending of $100 C) A decrease in taxes of $100 D) A decrease in imports of $100 E) A decrease in savings of $100

C

Which of the following are the most likely short-run effects of an increase in government expenditures? Unemployment Rate/Inflation Rate/Real GDP A) Increase/Increase/Increase B) Increase/Increase/Decrease C) Decrease/Increase/Increase D) Decrease/Decrease/Increase E) No change/Decrease/Increase

C

Which of the following would directly increase the capital stock of an economy? A) An individual purchases shares of corporate stock B) An individual purchases high-risk corporate bonds C) A business firm expands its production facilities D) A bank uses cash reserves to purchase shorthand long-term government securities E) The government implements a spending program to cover prescription drugs for Medicare reciepts

C

An increase in government spending with no change in taxes leads to a A) lower income level B) lower price level C) smaller money supply D) higher interest rate E) higher bond price

D

An increase in spending in an economy will cause a multiplied increase in gross domestic product because A) government spending is greater than zero B) investment is greater than zero C) investment increases as income decreases D) consumption increases as income increases E) taxes increase as income increases

D

An increase in which of the following will increase the value of the spending multiplier? A) The supply of money B) Equilibrium output C) Personal income tax rates D) The marginal propensity to consume E) The required reserve ratio

D

If investors feel that business conditions will deteriorate in the future, the demand for loans and the real interest rate in the loanable funds market will change in which of the following ways in the short run? Demand for loans/Interest Rate A) Increase/Increase B) Increase/Decrease C) Decrease/Increase D) Decrease/Decrease E) Decrease/No change

D

If the marginal propensity is 0.75, then a $100 increase in investment will result in a maximum increase in equilibrium real gross domestic product of A) $40.00 B) $100.00 C) $133.33 D) $400.00 E) $500.00

D

Which of the following most likely occurs if a government adopts an annually balanced budget rule that requires the government to eliminate any deficits or surpluses? A) Unemployment will be eliminated and prices will be stable B) The national debt will increase C) Business cycles will become more stable D) The automatic stabilizing effect of fiscal policy will be eliminated E) The government will be forced to spend less when there are surpluses

D

With an increase in the real interest rate, consumption and real gross domestic product will most likely change in which of the following ways? Real Gross Domestic Product/Consumption A) Increase/Increase B) Increase/Decrease C) Decrease/Increase D) Decrease/Decrease E) No change/Increase

D

The value of the spending multiplier decreases when A) tax rates are reduced B) exports decline C) imports decline D) government spending increases E) the MPS increases

E

Which of the following will result in the greatest increase in aggregate demand? A) A $100 increase in taxes B) A $100 decrease in taxes C) A $100 increase in government expenditures D) A $100 increase in government expenditures, coupled with a $100 increase in taxes E) A $100 increase in government expenditures, coupled with a $100 decrease in taxes

E

Assume that the economy is in long-run equilibrium. A shift in the aggregate demand curve will change A) only the price level in the long run B) only the output level in the long run C) both the price level and the output level in the long run D) neither the price level nor the output level in the short run E) only the price level in the short run and only the output level in the long run

A

If crowding out only partially offsets the effects of a tax cut, which of the following changes in interest rates and gross domestic product are most likely to occur? Interest rates/GDP A) Increase/Increase B) Increase/remain unchanged C) Increase/Decrease D) remain unchanged/Increase E) decrease/decrease

A

In the short run, a restrictive fiscal policy will cause aggregate demand, output, and the price level to change in which of the following ways? A) Decrease/Decrease/Decrease B) Decrease/Increase/Increase C) Increase/Decrease/Decrease D) Increase/Decrease/Increase E) No change/No change/No change

A

One explanation for the downward slope of the aggregate demand curve is that when the price level increase, which of the following will decrease? A) Real value of assets B) Price of foreign goods C) Prices of substitute goods D) Expectations of future prices E) Government deficits

A

The aggregate demand curve is downward sloping because as the price level increase the A) purchasing power of wealth decreases B) demand for imports decreases C) demand for interest-sensitive expenditures increases D) demand for domestically produced substitute goods increases E) real value of fixed assets increases

A

Which of the following arguments is typically associated with classical economists? A) A market economy is self-correcting and thus will not remain in a recession indefinitely B) A market economy has stable prices and thus is usually free from inflation C) A market economy requires a strong government to ensure that the market meets the needs of the people D) A market economy needs only moderate assistance from the government to avoid an extended recession E) A market economy eventually results in monopolies in both the input and output markets

A

Which of the following best explains the increase in national income that results from equal increases in government spending and taxes? A) Consumers do not reduce their spending by full amount of the tax increase B) The government purchases some goods that consumers would have purchased on their own anyway C) Consumers believe all tax cuts are transitory D) The increase in government spending causes a decrease in investment E) Consumers are aware of tax increases but not of increase in government spending

A

Which of the following would best explain a decline in potential GDP? A) Negative net investment B) The discovery of vast new oil reserves C) a lower price level D) a decrease in the infant mortality rate E) decrease in wages and profits

A

Assume that a perfectly competitive financial market for loanable funds is in equilibrium. Which of the following is most likely to occur to the quantity demanded and quantity supplied of loanable funds if the government imposes an effective interest rate ceiling? Quantity demanded/supplied A) Increase/Increase B) Increase/Decrease C) No change/No change D) Decrease/Increase E) Decrease/Decrease

B

Assume that the marginal propensity to consume out of disposable income is 0.8 and that the government taxes all income at a constant rate of 30%. If the gross income increases by $100, consumption will initially increase by A) $44 B) $56 C) $70 D) $80 E) $100

B

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 than the price level, output, and the unemployment rate are most likely to change in the following ways Price level/Output/Unemployment A) Increase/Increase/Increase B) Increase/Increase/Decrease C) Increase/Decrease/Increase D) Increase/Decrease/Decrease E) Decrease/Decrease/Increase

B

Which of the following combinations of changes in government spending and taxes in necessarily expansionary? Government Spending/Taxes A) Increase/Increase B) Increase/Decrease C) Decrease/No change D) Decrease/Increase E) Decrease/Decrease

B

Which of the following events will most likely cause an increase in both the price level and rGDP? A) The prime rate increases B) Exports increase C) Income taxes increase D) Crude oil prices decrease E) Inflationary expectations decrease

B

Which of the following will occur if the federal government runs a budget deficit? A)The expenditure multiplier will increase B) The size of the national debt will increase C) The economy's output will decrease D) State government will run a budget surplus to offset the federal deficit E) Interest rates will tend to decline

B

Crowding out due to government borrowing occurs when A) lower interest rates increase private sector investments B) lower interest rates decrease private sector investment C) higher interest rates decrease private sector investment D) a smaller money supply increase private sector investment E) a smaller money supply decrease private sector investment

C

Crowding out is most likely to occur with which of the following changes? A) Decrease in government spending B) Increase in budget surplus C) Increase in budget deficit D) Decrease in the real interest rate E) Decrease in trade deficit

C

Crowding out refers to the decrease in A) national output caused by higher taxes B) domestic production by increased imports C) private investment due to increase borrowing by the government D) employment caused by high inflation E) exports caused by an appreciating currency of a country

C

Current equilibrium output equals $2,500,000, potential output equals $2,600,000, and the marginal propensity to consume equals 0.75. Under these conditions, a Keynesian economist is most likely to recommed A) decreasing taxes by $25,000 B) decreasing taxes by $100,000 C) increasing government spending by $25,000 D) increasing government spending by $33,333 E) increasing government spending by $100,00

C

Expansionary fiscal policy will most likely result in A) a decrease in the money supply B) an increase in the marginal propensity to consume C) an increase in the nominal interest rates D) a decrease in the level of output E) a decrease in the price level

C

Federal budget deficits occur when A) more money is being spent on entitlement programs than has been allocated B) the Internal Revenue Service spends more than it collects in taxes in a given year C) the federal government spends more than it collects in taxes in a given year D) high levels of unemployment use up tax collections E) interest payments on the national debt increase from one year to the next

C

If the economy was in a severe recession, the most expansionary fiscal policy would be to A) decrease both personal income taxes and government spending by equal amounts B) decrease both the reserve requirements and government spending by the same proportion C) decrease personal income taxes and increase government spending by equal amounts D) increase the money supply and increase government spending E) increase social security taxes and increase government spending

C

Which of the following would most likely cause a rightward shift in an economy's aggregate supply curve? A) An increase in interest rates B) A tax increase of 50 cents per gallon for gasoline C) An across-the-board reduction of wages in the manufacturing sector D) The passage of legislation mandating a reduction in automobile pollution E) The shutdown of plants and movement of production of goods abroad

C

35. If the MPC increase, the equilibrium levels of income and consumption will change in which of the following ways? Level of income/Level of consumption A) No change/No change B) No change/Increase C) Increase/No change D) Increase/Increase E) Decrease/Decrease

D

A major advantage of automatic stabilizers in fiscal policy is that they A) reduce the public debt B) increase the possibility of a balanced budget C) stabilize the unemployment rate D) go into effect without the passage of new legislation E) automatically reduce the inflation rate

D

According to the Keynesian savings schedule, when aggregate income increases by a given amount, savings will A) remain the same B) decrease by the amount of change in income C) increase by the amount of the change in income D) increase by less than the amount of the change in income E) increase by more than the amount of the change in income

D

An appropriate fiscal policy to combat a recession would be an increase in which of the following? A) interest rates B) the money supply C) taxes D) government spending E) the sales of government bonds

D

As a measure of economic welfare, GDP underestimates a country's production of goods and services when there is an increase in A) the production of military goods B) the productions of antipollution devices C) crime prevention services D) household production E) legal services

D

Assume a closed economy with no government and a marginal propensity to consume of 0.80. Disposable Income/Consumption $620/$624 $640/$640 $660/$656 $680/$672 $700/$688 $720/$704 $740/$720 $760/$736 The marginal propensity to save for this economy is A) 4.0 B) 1.0 C) 0.8 D) 0.2 E) 0

D

Suppose that autonomous consumption if $400 and the the MPC is 0.8. If disposable income increase by $1,200, consumption spending will increase by A) $1,600 B) $1,360 C) $1,200 D) $960 E) $400

D

Suppose that in an economy with lump-sum taxes and no international trade, autonomous investment spending increases by $2 million. If the marginal propensity to consume is 0.75, equilibrium gross domestic product will change by a maximum of A) $0.5 million B) $1.5 million C) $2.0 million D) $8.0 million E) $15.0 million

D

Unexpected increases in inventories usually precede A) increases in inflation B) increases in imports C) stagflation D) decreases in production E) decreases in unemployment

D

Which of the following can be expected to cause an increase in GDP in the short run? A) Increase in the tax rate B) Increase in the interest rate C) Equal increases in both imports and exports D) Equal increase in both taxes and government expenditures E) Equal decreases in both investment and government expenditures

D

Which of the following changes in the aggregate demand and aggregate supply curves in likely to result in stagflation? A) The aggregate demand curve shifts to the left when the economy is in the classical range of the aggregate supply curve B) The aggregate demand curve shifts to the right in classical range C) The aggregate demand curve shifts to the right when the economy is in the Keynesian range of the aggregate supply curve D) The aggregate supply curve shifts left E) The aggregate supply curve shifts right

D

Which of the following will shift the aggregate demand curve to the right? A) A report that corporate earnings were lower than expected B) An increase in interest rates caused by a tightening of monetary policy C) Increased imports caused by appreciation of the dollar D) Increased spending by businesses on computers E) An increase in the government's budget surplus

D

Faced with a large federal budget deficit, the government decides to decrease expenditures and tax revenues by the same amount. This action will affect output and interest rates in which of the following ways? Output/Interest rates A) Increase/Increase B) Increase/Decrease C) no change/Decrease D) Decrease/Increase E) Decrease/Decrease

E

An aggregate supply curve may be horizontal over some range because within that range A) a higher price level leads to higher interest rates, which reduce the money supply and consumer spending B) changes in the aggregate price level do no induce substitution C) output cannot be increase unless prices and interest rates increase D) rigid prices prevent employment from fluctuating E) resources are underemployed and an increase in demand will be satisfied without any pressure on the price level

E

An increase in which of the following is most likely to cause the short-run aggregate supply curve to shift to the left? A) Consumers' income B) The money supply C) Government spending D) The optimism of business firms E) The per unit cost of production

E

A contractionary supply shock would most likely result in A) an increase in aggregate demand B) an increase in national income C) an increase in GDP D) a decrease in the general price level E) a decrease in employment

E

A high marginal propensity to consume implies which of the following? A) A small change in consumption when income changes B) A high savings rate C) A high marginal tax rate D) An equilibrium level of income near full employment E) A low marginal propensity to save

E

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 decrease E) Aggregate demand will increase

E

If the federal government decreases its expenditures on goods and services by $10 billion and decreases taxes on personal incomes by $10 billion, which of the following will occur in the short run? A) The federal budget deficit will increase by $10 billion B) The federal budget deficit will decrease by $10 billion C) Aggregate income will remain the same D) Aggregate income will increase by up to $10 billion E) Aggregate income will decrease by up to $10 billion

E

In a closed economy with only lump-sum taxation, if the MPC is equal to 0.75, a $70 billion increase in government spending could cause a maximum increase in output of A) $ 52.5 billion B) $70 billion C) $122.5 billion D) $210 billion E) $280 billion

E

Suppose that disposable income is $1,000 consumption is $700 and the MPC is 0.6. If the disposable income increases by $100, consumption and savings will equal which of the following? Consumption/Savings A) $420/$280 B) $600/$400 C) $660/$320 D) $660/$440 E) $760/$340

E

Which of the following best explains how an economy could simultaneously experience high inflation and high unemployment? A) The government increases spending without increasing taxes B) The government increase taxes without increasing spending C) Inflationary expectations decline D) Women and teenagers stay out of the labor force E) Negative supply shocks cause factor prices to increase

E

Which of the following will most likely result from a decrease in government spending? A) An increase in output B) An increase in the price level C) An increase in employment D) A decrease in aggregate supply E) A decrease in aggregate demand

E