AP Economics Ch. 3

In a closed economy with only lump-sum taxation, if the marginal propensity to consume is equal to 0.75, a $70 billion increase in government spending could cause a maximum increase in output of

$280 billion

If the marginal propensity to consume is 0.75, then a $100 increase in investment will result in a maximum increase in equilibrium real gross domestic product of

$400.00

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 percent. If gross income increases by $100, consumption will initially increase by

$56

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

$8,000

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

$8.0 million

Suppose that autonomous consumption is $400 and that the marginal propensity to consume is 0.8. If disposable income increases by $1,200, consumption spending will increase by

$960

According to the income and consumption schedules shown above, the marginal propensity to consume is

0.75

Which of the following will most likely result from a decrease in government spending?

A decrease in aggregate demand

Which of the following will cause an increase in aggregate demand?

A decrease in income taxes

Which of the following changes will have the smallest expansionary effect on aggregate demand in the short run?

A decrease in taxes of $100

Which of the following will cause a rightward shift of the short-run aggregate supply curve?

A decrease in the costs of production

Which of the following would cause the short-run aggregate supply curve to shift to the right?

A decrease in the expected price level

Which of the following will cause an increase in real output in the short run?

A decrease in wages

Assume that the economy is at full-employment equilibrium in the diagram shown above. Which of the following would lead to stagflation?

A leftward shift of the short-run aggregate supply curve only

A high marginal propensity to consume implies which of the following?

A low marginal propensity to save

An increase in consumer confidence will result in which of the following in the short run?

A rightward shift of the aggregate demand curve

Which of the following statements best describes the impact of a decrease in Japanese income on aggregate demand in the United States?

Aggregate demand will decrease because the demand for United States exports decreases.

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.

If the government increases expenditures on goods and services and increases taxation by the same amount, which of the following will occur?

Aggregate demand will increase.

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?

Aggregate income will decrease by up to $10 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 changes would cause an economy's aggregate demand curve to shift to the right?

An increase in autonomous consumption spending

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

Which of the following is an example of an expansionary fiscal policy?

An increase in government expenditures

Following a decrease in exports, what fiscal policy would restore the economy to the original equilibrium?

An increase in government transfer payments

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 there is an inflationary gap, which of the following changes will move the economy back toward full employment?

An increase in taxes

Assume that an economy is currently in long-run equilibrium and the short-run aggregate supply curve is upward sloping. An adverse supply shock, such as a drought, will most likely cause which of the following to the economy in the short run?

An increase in the price level and a decrease in the real wage

A decrease in the prices of inputs will cause which of the following to occur in the short run?

An increase in the short-run aggregate supply and a decrease in the price level

In the graph above, AD denotes the aggregate demand curve, SRAS the short-run aggregate supply curve, and LRAS the long-run aggregate supply curve. If no policy action were taken, which of the following changes would move the economy to its long-run equilibrium?

An increase in wages

According to the graph above, which of the following is true about the long-run equilibrium of the economy depicted?

As wages increase, the short-run aggregate supply curve will shift to the left to restore long-run equilibrium.

A decrease in business taxes would lead to an increase in national income by increasing which of the following?

Both aggregate demand and aggregate supply

Automatic stabilizers can do which of the following?

Cause tax revenues to decrease when gross domestic product (GDP) decreases and to increase when GDP increases

Which of the following best explains the increase in national income that results from equal increases in government spending and taxes?

Consumers do not reduce their spending by the full amount of the tax increase.

Which of the following events will most likely cause an increase in both the price level and real gross domestic product?

Exports increase.

The economy of a country is currently in equilibrium at point A in the diagram above. If the government does nothing and wages are flexible, which of the following will most likely occur in the long run?

Falling wages will shift the aggregate supply curve to the right, producing full employment.

Assume that the marginal propensity to consume is 0.90. As a result of an increase in the tax rates, the government collects an additional $20 million. What will be the impact on gross domestic product (GDP) ?

GDP will decrease by a maximum of $180 million.

An appropriate fiscal policy to combat a recession would be to increase which of the following?

Government spending

An increase in which of the following will increase aggregate demand?

Government spending

The graph above shows the macroeconomic conditions of Wattsonia. Many economists estimate that the natural rate of unemployment is 6 percent. If this is true and the current rate of unemployment is 5.1 percent, in what range of real gross domestic product is the economy currently producing?

Greater than Y2

According to the graph above, which of the following will necessarily result in a decrease in output?

II and IV only

A change in which of the following will cause the short-run aggregate supply curve to shift?

III only

An increase in which of the following would most likely cause the gross domestic product of a country to decrease in the short run?

Imports

An increase in which of the following would cause the aggregate demand curve to shift to the left?

Income taxes

Suppose that the economy is in the midst of a recession and government policy makers want to increase aggregate demand by $600 billion.If the economy's marginal propensity to consume is 0.75 and there is no crowding out, the government should do which of the following?

Increase spending by $150 billion.

Which of the following is an example of fiscal policy?

Increasing government expenditures to build highways

A simultaneous increase in inflation and unemployment could be explained by an increase in which of the following?

Inflationary expectations

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 of a horizontal aggregate supply curve?

It suggests that increases in output can occur without increases in price levels.

An increase in which of the following would cause an increase in aggregate supply?

Labor productivity

An increase in which of the following would most likely result in an increase in aggregate supply?

Labor-force participation rate

In an economy with a horizontal aggregate supply curve, an increase in government spending will cause output and the price level to change in which of the following ways?

Output: increase price level: no change

Which of the following is an example of an automatic stabilizer?

Progressive income taxes

One explanation for the downward slope of the aggregate demand curve is that when the price level increases, which of the following will decrease?

Real value of assets

The graph above shows aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply curves for an economy. Based on the graph, cost-push inflation is caused by a movement from

SRAS1 to SRAS2

An increase in the marginal propensity to consume causes an increase in which of the following?

Spending multiplier

Which of the following will most likely occur if a government adopts an annually balanced budget rule that requires the government to eliminate any deficits or surpluses?

The automatic stabilizing effect of fiscal policy will be eliminated.

In an economy with lump-sum taxes and no international sector, assume that the aggregate supply curve is horizontal. If the marginal propensity to consume is equal to 0.8, which of the following will necessarily be true?

The government expenditure multiplier will be equal to 5.

Which of the following would indicate that economic growth has occurred?

The long-run aggregate supply curve shifts to the right.

An increase in which of the following will increase the value of the spending multiplier?

The marginal propensity to consume

An increase in which of the following is most likely to cause the short-run aggregate supply curve to shift to the left?

The per unit cost of production

If a reduction in aggregate supply is followed by an increase in aggregate demand, which of the following will definitely occur?

The price level will increase.

Which of the following is true in the short run if consumers buy more imported goods and fewer domestic goods?

The trade balance moves toward deficit, and equilibrium income decreases.

Assume an economy is in a long-run equilibrium. Following a decrease in aggregate demand, which of the following is true in the short run?

The unemployment rate is greater than the natural rate of unemployment, and the rate of inflation is declining.

Policies intended to reduce demand-pull inflation are most likely to increase which of the following in the short run?

Unemployment

Which of the following are the most likely short-run effects of an increase in government expenditures?

Unemployment Rate: Decrease Inflation Rate: Increase Real Gross Domestic Product: Increase

Which of the following statements concerning economic growth is true?

With long-run economic growth, there is an increase in aggregate supply.

A contractionary supply shock would most likely result in

a decrease in employment

When firms restructure their operations to decrease production costs, the aggregate supply curve, the price level, and real output will change in which of the following ways?

aggregate supply curve: shift to the right price level: decrease real output: increase

An unanticipated decrease in aggregate demand when the economy is in equilibrium will result in

an increase in unplanned inventories

The aggregate demand curve assumes that

changes in the price level affect real wealth

Aggregate demand may be measured by adding

consumption, investment, government spending, and net exports

Suppose that disposable income is $1,000, consumption is $700, and the marginal propensity to consume (MPC) is 0.6. If disposable income then increases by $100, consumption and savings will equal which of the following?

consumption: $760 savings: $340

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: increase interest rates: increase investment: decrease

A major advantage of automatic stabilizers in fiscal policy is that they

go into effect without passage of new legislation

Which of the following combinations of changes in government spending and taxes is necessarily expansionary?

government spending: increase taxes: decrease

According to the graph above, an increase in aggregate supply will most likely cause income and employment to change in which of the following ways?

income: increase employment: increase

If the marginal propensity to consume is 0.9, the government increases purchases by $100, and net exports decline by $60, the equilibrium level of real gross domestic product will

increase by up to $400

With an upward-sloping short-run aggregate supply curve, an increase in government expenditure will most likely

increase real gross domestic product

A discretionary fiscal policy action to reduce inflation in the short run would be to

increase taxes or decrease government spending

On the graph above, stagflation will be caused by a

leftward shift in the short-run aggregate supply curve only

A contraction in the money supply will most likely change the nominal interest rate and aggregate demand in which of the following ways in the short run?

nominal interest rate: increase aggregate demand: decrease

Assume that the economy is in long-run equilibrium. A shift in the aggregate demand curve will change

only the price level in the long run

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: decrease interest rates: decrease

Assume that the aggregate supply curve is upward sloping. If both aggregate supply and aggregate demand increase, what will happen to the equilibrium output and price level?

output: increase price level: intermediate

A favorable supply shock, such as a decrease in energy prices, is most likely to have which of the following short-run effects on the price level and output?

price level: decrease output: increase

If a change in aggregate demand results in a recession, the price level and real output will change in which of the following ways in the short run?

price level: decrease real output: decrease

The aggregate supply and aggregate demand graph above shows the current macroeconomic equilibrium of an economy. How will the price level and real output change if there is a sharp increase in productivity and a simultaneous increase in government purchases?

price level: indeterminate real output: increase

As a component of aggregate demand, investment refers to the

purchase of new equipment and additional inventories

In the long run, if aggregate demand decreases, real gross domestic product (GDP) and the price level will change in which of the following ways?

real GDP: no change price level: decrease

Based on the diagram above, what effect will an increase in the world supply of oil have on real gross domestic product and the price level?

real gross domestic product: increase price level: decrease

What would be the effect of a large increase in labor productivity on the real gross domestic product and the price level?

real gross domestic product: increase price level: decrease

The intersection of the aggregate supply curve and the aggregate demand curve occurs at the economy's equilibrium level of

real national output and the price level

If the aggregate supply curve is horizontal, an increase in government spending will result in which of the following?

real output: increase price level: no change

An aggregate supply curve may be horizontal over some range because within that range

resources are underemployed and an increase in demand will be satisfied without any pressure on the price level

According to the graph above and starting with equilibrium point R, which of the following shifts identifies the short-run and the long-run impact of a demand-pull inflation?

short run: r to m long run: r to n

A decrease in labor productivity will shift the

short-run aggregate supply curve to the left

A rightward shift in the short-run aggregate supply curve will occur when

the stock of physical capital increases

If an economy's aggregate supply curve is upward sloping, an increase in government spending will most likely result in a decrease in the

unemployment rate