AP Macroeconomics Test 5

Stagflation is most likely to be caused by

A decrease in aggregate supply

When an economy is at full employment, which of the following will most likely create demand-pull inflation in the short run?

A decrease in the real rate of interest.

An increase in personal income taxes will most likely cause aggregate demand and aggregate supply to change in which of the following ways in the short run?

AGGREGATE DEMAND: Decrease. AGGREGATE SUPPLY: No Change.

If marginal business tax rates are decreased, how will aggregate supply and employment change in the short-run?

AGGREGATE SUPPLY: Increase. EMPLOYMENT: Increase.

Suppose the government decreases taxes and at the same time the central bank decreases the discount rate. the combined action will result in

An increase in the Real Gross Domestic Product and an indeterminate change in the interest rate.

If the economy was in a sever recession, the most expansionary fiscal policy would be to

Decrease personal income taxes and increase government by equal amounts.

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

Government Spending

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

Government spending

An increase in government spending with no change in taxes leads to a

Higher interest rate

Which of the following is an example of fiscal policy?

Increasing government expenditures to build highways.

Which of the following policy choices represents a combination of fiscal and monetary policies designed to bring the economy out of a recession?

Increasing government spending and decreasing the federal funds rate.

If the federal government reduces its budget deficit when the economy is close to full employment, which of the following will most likely result?

Interest rates will decrease

An increase in which of the following is most likely to promote economic growth

Investment tax credits

When the United States engages in deficit spending, that spending is primarily financed by

Issuing new bonds.

Which of the following is true about the national debt of the United States?

It is the accumulation of past and current budget deficits and surpluses.

Assume 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 polices would best achieve this goal?

MONETARY: Expansionary. FISCAL: Contractionary.

An economy is in short-run equilibrium at a level of output that is less than full-employment output. If there were no fiscal or monetary policy interventions, which of the following changes in output and the price level would occur in the long run?

OUTPUT: Increase. PRICE LEVEL: Decrease.

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.

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.

Federal budget deficit occurs when

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

When the federal reserve increases the money supply to stimulate aggregate demand, workers believe that this action will cause inflation in the future and ask for higher wages to offset the expected increase in inflation. This is an example of

The real balance effect

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