AP Economics Unit 3 - AP Classroom Questions

An economy is currently producing $250 billion of output. The full-employment output is $260 billion, and the marginal propensity to consume is 0.75. Assuming no crowding out and a horizontal aggregate supply curve, what level of additional spending is necessary to achieve full employment? A) $2.5 billion B) $5 billion C) $10 billion D) $25 billion E) $40 billion

A

Assume that the economy is at full-employment equilibrium in the diagram shown above. Which of the following would lead to stagflation? A) A leftward shift of the short-run aggregate supply curve only B) A rightward shift of the short-run aggregate supply curve only C) A leftward shift of the aggregate demand curve only D) A rightward shift of the aggregate demand curve only E) A rightward shift in both the short-run aggregate supply curve and the aggregate demand curve

A

If a large increase in total spending has no effect on real gross domestic product, it must be true that A) the price level is rising B) the economy is experiencing high unemployment C) The spending multiplier is equal to 1 D) the economy is in short-run equilibrium E) aggregate supply has increased

A

If the marginal propensity to save is 0.25, a $15 billion increase in government spending will lead to an increase in national income by a maximum of A) $60 billion B) $45 billion C) $15 billion D) $11.25 billion E) $3.75 billion

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

An increase in energy costs will most likely cause the price level and real gross domestic product to change in which of the following ways? A) Price Level - Increase, Real Gross Domestic Product - Increase B) Price Level - Increase, Real Gross Domestic Product - Decrease C) Price Level - Increase, Real Gross Domestic Product - Not change D) Price Level - Decrease, Real Gross Domestic Product - Increase E) Price Level - Decrease, Real Gross Domestic Product - Decrease

B

An inflationary gap could be reduced by A) an increase in government spending B) an increase in the supply of money C) an increase in the income tax rate D) a decrease in the discount rate E) a decrease in the reserve requirement

C

Assume that the marginal propensity to consume is 0.75, net exports decline by $10 billion, and government spending increases by $20 billion. Given that there is no crowding out, the equilibrium gross domestic product can increase by a maximum of A) $7.5 billion B) $15.5 billion C) $40 billion D) $80 billion E) $120 billion

C

Use the graph to answer the question. Which of the following accurately describes the state of the macro-economy if it is operating at the intersection of the AD1 and SRAS2 curves? A) It is operating at full employment and is in both a short-run and long-run equilibrium. B) It is operating above full employment and is in both a short-run and long-run equilibrium. C) It is operating below full employment and is in a short-run but not a long-run equilibrium. D) It is not in short-run equilibrium because output is below full employment. E) It is in long-run equilibrium because the economy is at full employment.

C

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 passage of new legislation E) automatically reduce the inflation rate

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

An unanticipated decrease in aggregate demand when the economy is in equilibrium will result in A) a decrease in voluntary unemployment B) a decrease in the natural rate of unemployment C) a decrease in aggregate supply D) an increase in unplanned inventories E) an increase in the rate of inflation

D

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

D

Assume that the marginal propensity to consume is 0.8. If the government increases its purchases of goods and services by $200 and exports decline by $50, at most the equilibrium level of income will A) decrease by $250 B) decrease by $1,000 C) increase by $150 D) increase by $750 E) increase by $1,250

D

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) ? A) GDP will increase by a maximum of $200 million. B) GDP will increase by a maximum of $180 million. C) GDP will decrease by a maximum of $200 million. D) GDP will decrease by a maximum of $180 million. E) GDP will decrease by a maximum of $20 million.

D

Given the graph of the short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) curves above, which of the following is true? A) At point Z, the economy has cyclical unemployment. B) At point Z, the economy is in long-run equilibrium but not in short-run equilibrium. C) At point Y, the natural rate of unemployment is zero. D) At point X, the economy is experiencing a recessionary gap. E) At point X, there is no frictional unemployment.

D

If AD and AS represent aggregate demand and aggregate supply curves, respectively, and the arrows indicate the movement of the curves, which of the following graphs best illustrates long-run economic growth? A) Graph A B) Graph B C) Graph C D) Graph D E) Graph E

D

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 A) $40.00 B) $100.00 C) $133.33 D) $400.00 E) $500.00

D

REAL DISPOSABLE INCOME $18,000; $22,000; $26,000 CONSUMPTION $19,000; $22,000; $25,000 According to the income and consumption schedules shown above, the marginal propensity to consume is A) 1.33 B) 0.90 C) 0.80 D) 0.75 E) decreasing as real disposable income increases

D

Refer to the income and consumption data presented in the table below. Assume a closed economy with no government and a marginal propensity to consume of 0.80. DISPOSABLE INCOME $620, $640, $660, $680, $700, $720, $740, $760 CONSUMPTION $624, $640, $656, $672, $688, $704, $720, $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

Stagflation is caused by A) an increase in imports B) an increase in aggregate demand C) a decrease in aggregate demand D) a decrease in aggregate supply E) an increase in aggregate supply

D

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 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

When an economy is in equilibrium at potential gross domestic product, the actual unemployment rate is A) equal to the cyclical rate B) greater than the natural rate C) less than the natural rate D) equal to the natural rate E) equal to zero

D

If the economy is in a severe recession, which of the following is the fiscal policy most effective in stimulating production? A) Government spending increases. B) Government spending decreases. C) Personal income taxes are increased. D) The Federal Reserve sells bonds on the open market. E) The Federal Reserve buys bonds on the open market.

A

In the measurement of gross domestic product, investment includes spending by A) businesses on capital goods and changes in inventories B) businesses on stocks, bonds, and other financial assets C) individual households on stocks, bonds, and other financial assets D) the federal government to purchase bonds issued by the Federal Reserve E) the Federal Reserve to buy government bonds

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) Aggregate Demand - Decrease, Output - Decrease, Price Level - Decrease B) Aggregate Demand - Decrease, Output - Increase, Price Level - Increase C) Aggregate Demand - Increase, Output - Decrease, Price Level - Decrease D) Aggregate Demand - Increase, Output - Increase, Price Level - Increase E) Aggregate Demand - Not change, Output - Not change, Price Level - Not change

A

Refer to the income and consumption data presented in the table below. Assume a closed economy with no government and a marginal propensity to consume of 0.80. DISPOSABLE INCOME $620, $640, $660, $680, $700, $720, $740, $760 CONSUMPTION $624, $640, $656, $672, $688, $704, $720, $736 Dissaving occurs when disposable income is A) $620 B) $640 C) $660 D) $700 E) $1,000

A

Suppose that the prices of labor and inputs to production are fixed in the short run but not in the long run. What is a consequence of this flexibility in the long run? A) The long-run aggregate supply curve is vertical and there is no trade-off between inflation and unemployment in the long run. B) The long-run aggregate supply curve is vertical and there is a trade-off between inflation and unemployment in the long run. C) The long-run aggregate supply curve is horizontal and there is a trade-off between inflation and unemployment in the long run. D) Real output is always greater than full employment in the long run. E) Real output is always less than full employment in the long run.

A

The short-run aggregate supply curve would be vertical if A) nominal wages adjust immediately to changes in the price level B) nominal wages adjust slowly when there is unemployment C) both nominal wages and prices adjust slowly to changes in aggregate demand D) the spending multiplier is very low E) investment demand is very responsive to changes in interest rates

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 the 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 increases in government spending.

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 policy rate to stimulate investment E) Decreasing the reserve ratio to increase bank reserves

A

Which of the following is true of supply shocks? A) They tend to change both relative prices and the general price level in the economy. B) They affect only the general price level. C) They can be anticipated and offset with appropriate fiscal policy. D) They can be anticipated and offset with appropriate monetary policy. E) They make the aggregate supply curve vertical.

A

Which of the following statements about the simple circular flow model of a market economy is correct? A) Households are on the demand side of the product market and the supply side of the resource market. B) Business firms are on the supply side of both the product market and the resource market. C) Households receive income in the form of wages, and business firms receive income in the form of investment. D) Exports and investment expenditures are examples of leakage from the circular flow, whereas imports and savings are injections. E) Circular flow models are used primarily to explain why money is necessary in any economic system.

A

Which of the following will most likely occur as a result of an increase in labor productivity in an economy? A) An increase in output and a decrease in inflation B) An increase in interest rates and a decrease in investment C) A decrease in both money demand and money supply D) A decrease in exports and an increase in unemployment E) A leftward shift in the short-run aggregate supply curve and a decrease in output

A

An increase in the marginal propensity to consume causes an increase in which of the following? A) Marginal propensity to save 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

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 A) $44 B) $56 C) $70 D) $80 E) $100

B

If the central bank holds interest rates constant, an autonomous decrease of $10 million in investment spending will most likely result in A) a decrease of exactly $10 million in gross domestic product B) a decrease of more than $10 million in gross domestic product C) an increase of $10 million in taxes to offset the decrease in investment D) an increase of $10 million in aggregate supply to offset the decrease in investment E) an increase in the cost of loans for investment purposes

B

If the government increases expenditures on goods and services and increases taxation by the same amount, which of the following will occur? A) Aggregate demand will be unchanged. B) Aggregate demand will increase. C) Interest rates will decrease. D) The money supply will decrease. E) The money supply will increase.

B

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 A) decrease by up to $400 B) increase by up to $400 C) increase by up to $600 D) decrease by up to $1,600 E) increase by up to $1,600

B

In a closed economy with lump sum taxes, if the marginal propensity to consume increased from 0.5 to 0.75, the simple spending multiplier and the marginal propensity to save (MPS) would change in which of the following ways? A) Multiplier - Increase, MPS - Increase B) Multiplier - Increase, MPS - Decrease C) Multiplier - No change, MPS - Decrease D) Multiplier - Decrease, MPS - Increase E) Multiplier - Decrease, MPS - Decrease

B

In an economy where wages and prices are sticky, which of the following will happen as a result of an increase in the price level? A) There will be a downward movement along the short-run aggregate supply curve to a lower real output level. B) There will be an upward movement along the short-run aggregate supply curve to a higher real output level. C) The short-run aggregate supply curve will shift to the right and real output will increase. D) The short-run aggregate supply curve will shift to the left and real output will decrease. E) The aggregate demand curve will shift to the right and real output will increase.

B

Suppose a nation opened its borders to the free flow of workers from other nations. How would this event likely affect the long-run aggregate supply (LRAS) curve and the production possibilities curve of the nation? A) The LRAS curve would shift to the right, and the production possibilities curve would not shift. B) Both curves would shift to the right. C) Neither curve would shift. D) Both curves would shift to the left. E) The LRAS curve would shift to the left, and the production possibilities curve would shift to the right.

B

The graph above depicts an economy's aggregate demand and aggregate supply curves. If aggregate demand remains constant, the equilibrium price levels in the short run and in the long run will be which of the following? A) Short Run - 0A, Long Run - 0A B) Short Run - 0B, Long Run - 0A C) Short Run - 0B, Long Run - 0C D) Short Run - 0C, Long Run - 0A E) Short Run - 0C, Long Run - 0C

B

What would be the effect of a large increase in labor productivity on the real gross domestic product and the price level? A) Real Gross Domestic Product - Increase, Price Level - Increase B) Real Gross Domestic Product - Increase, Price Level - Decrease C) Real Gross Domestic Product - No effect, Price Level - Increase D) Real Gross Domestic Product - Decrease, Price Level - Increase E) Real Gross Domestic Product - Decrease, Price Level - Decrease

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 is illustrated by the long-run aggregate supply (LRAS) curve and the production possibilities curve (PPC)? A) The multiplier effect B) The maximum sustainable capacity C) The trade-off between inflation and unemployment D) Sticky wages and prices E) Business cycles

B

Which of the following is true about the marginal propensity to consume? A) It is the percentage of total income that is spent on consumption. B) It determines the size of the simple spending multiplier. C) It increases as incomes increase 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

Which of the following statements concerning economic growth is true? A) If the population is growing faster than potential output, real gross domestic product per capita will definitely increase. B) With long-run economic growth, there is an increase in aggregate supply. C) The gap between rich and poor must widen with long-run economic growth. D) Increasing potential output necessarily increases the economic welfare of the average citizen. E) Long-run economic growth is only possible with demand management policies.

B

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 requirement 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 by the same proportion E) increase social security taxes and increase government spending by equal amounts

C

In an economy the marginal propensity to consume is 0.90, and gross domestic product (GDP) is $100 billion. If gross private domestic investment declines by $2 billion, then GDP will A) decrease by a maximum of $1.8 billion B) decrease by a maximum of $2 billion C) decrease by a maximum of $20 billion D) increase by a maximum of $1.8 billion E) increase by a maximum of $20 billion

C

In an economy with lump-sum taxes and no international trade, if the marginal propensity to consume is 0.8, which of the following is true? A) When consumption increases by $5, investment increases by a maximum of $1. B) When consumption increases by $5, savings increase by a maximum of $1. C) When investment increases by $1, income increases by a maximum of $5. D) When investment increases by $1, consumption increases by a maximum of $5. E) When income increases by $1, investment increases by a maximum of $5.

C

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? A) An increase in aggregate demand B) An increase in exports C) An increase in wages D) A decrease in wages E) A decrease in the expected price level

C

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? A) Increase spending by $2,400 billion. B) Increase spending by $600 billion. C) Increase spending by $150 billion. D) Decrease taxes by $150 billion. E) Decrease taxes by $600 billion.

C

The diagram above shows a nation's short-run aggregate supply curve (SRAS), long-run aggregate supply curve (LRAS), and aggregate demand curve (AD). Based on the diagram above, which of the following describes the short-run equilibrium? A) The economy is operating at full employment. B) The economy is operating below full employment. C) The economy is operating above full employment. D) There will be downward pressure on the price level. E) There is a recessionary gap.

C

The diagram below shows two points on the short-run aggregate supply curve. The movement from point g to point h is best described as which of the following? A) A decrease in full employment output B) A decrease in aggregate demand C) An increase in real output due to an increase in the price level D) An increase in real output due to technological change E) An increase in unemployment

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 the 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

Which of the following best describes the aggregate demand curve? A) It is a curve that shows the relationship between consumer spending and income. B) It is a curve that shows the amount of goods and services domestic consumers will buy from domestic and foreign firms. C) It is a curve that shows the level of spending by consumers, businesses, the government, and the foreign sector at different price levels. D) It is a curve that shows only the level of government spending at different price levels. E) It is a curve that shows the level of spending by all factors of production at different price levels.

C

Which of the following changes will have the smallest expansionary effect on aggregate demand 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 explains the relationship between the price level and real output along the aggregate demand curve? A) At a lower price level, people need more money to spend and therefore deposit less money in banks, which lowers interest rates and increases real output. B) At a lower price level, the real value of savings decreases which causes an increase in spending. C) At a lower price level, domestic goods will become less expensive compared to foreign goods, which causes an increase in spending on domestic goods. D) At a lower price level, real incomes decrease which causes an increase in spending. E) At a lower price level, the purchasing power of consumers' income decreases which causes an increase in spending.

C

Which of the following explains why the long-run aggregate supply curve corresponds to the production possibilities curve? A) Both curves are downward sloping. B) Both curves illustrate flexible wages and prices. C) Both curves illustrate the maximum sustainable capacity. D) Both curves illustrate the trade-off between inflation and unemployment. E) Both curves illustrate short-run macroeconomic equilibrium.

C

Which of the following means of reducing military spending would have the greatest positive impact on gross domestic product for the United States? A) Combining two domestic military bases into one overseas base B) Cutting retirement benefits to military personnel C) Closing overseas military bases and relocating those operations to the United States D) Closing overseas military bases and laying off military personnel E) Canceling contracts with domestic producers for new airplanes

C

Which of the following transactions would represent an addition to a nation's current gross domestic product? A) Ms. Smith purchases a share of stock in an automobile company. B) A retailer increases her stock of imported shoes. C) The government increases its domestic purchases of food for use by the military. D) A corporation sells shoes from last year's inventory. E) A mother sells her car to her daughter.

C

Which of the following will happen if the government raises both taxes and spending by $100 million and the marginal propensity to consume is 0.8? A) Aggregate demand will decrease, and real GDP will decrease by a maximum of $500. B) Aggregate demand will decrease, and real GDP will decrease by a maximum of $400. C) Aggregate demand will increase, and real GDP will increase by a maximum of $100. D) Aggregate demand will increase, and real GDP will increase by a maximum of $400. E) Aggregate demand will increase, and real GDP will increase by a maximum of $500.

C

Which of the following will most likely cause the short-run aggregate supply curve to shift to the left? A) A decrease in nominal wages B) A decrease in the expected rate of inflation C) An increase in energy prices D) An increase in the price level E) An increase in the size of the labor force

C

Which of the following will remain unchanged when the price level decreases? A) Inflationary expectations B) Aggregate quantity demanded C) Long-run aggregate supply D) Nominal wages E) Nominal output

C

An increase in taxes on businesses in the United States will likely have what impact on the short-run aggregate supply SRAS curve in the United States? A) It will cause a movement along the SRAS curve to a higher real output. B) It will cause a movement along the SRAS curve to a lower real output. C) It will have no impact on the SRAS curve. D) It will cause the SRAS curve to shift leftward. E) It will cause the SRAS curve to shift rightward.

D

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? A) Aggregate demand will decrease by $900 billion. B) Aggregate demand will decrease by $500 billion. C) Aggregate demand will decrease by $400 billion. D) Aggregate demand will decrease by $100 billion. E) Aggregate demand will not change.

D

If an economy's aggregate supply curve is upward sloping, an increase in government spending will most likely result in a decrease in the A) real level of output B) price level C) interest rate D) unemployment rate E) government's budget deficit

D

If nominal wages are fixed by labor contracts, then which of the following explains why the aggregate supply curve is upward sloping? A) A decrease in the price level will increase profits and production. B) A decrease in the price level will decrease profits and increase production. C) An increase in the price level will increase real wages and production. D) An increase in the price level will increase profits and production. E) An increase in the price level will decrease real wages and decrease production.

D

If the marginal propensity to consume is 0.8, an increase of $20,000 in government spending will change the real gross domestic product by a maximum of A) $16,000 B) $20,000 C) $80,000 D) $100,000 E) $120,000

D

In the AD−AS model, which of the following is true? A) The economy is in an inflationary gap when the short-run equilibrium real output is below the long-run equilibrium real output. B) The economy is in an inflationary gap when the short-run equilibrium real output is at the long-run equilibrium real output. C) The economy is in a recessionary gap when the short-run equilibrium real output is at the long-run equilibrium real output. D) The economy is in a recessionary gap when the short-run equilibrium real output is below the long-run equilibrium real output. E) The economy is in a recessionary gap when the short-run equilibrium real output is above the long-run equilibrium real output.

D

The table below shows the level of household savings at various levels of disposable income in a country. Savings - $2,000; Disposable Income - $10,000 Savings - $2,200; Disposable Income - $12,000 Based on the data on savings and disposable income in the table above, what are the income tax multiplier and the spending multiplier? A) The tax multiplier is −0.1 and the spending multiplier is 0.9. B) The tax multiplier is 0.2 and the spending multiplier is −0.8. C) The tax multiplier is −2 and the spending multiplier is 8. D) The tax multiplier is −9 and the spending multiplier is 10. E) The tax multiplier is 10 and the spending multiplier is −1.

D

Which of the following is true about both the long-run aggregate supply curve and the production possibilities curve? A) Both curves represent unemployment and inflation. B) Points to the left of either curve represent efficient use of resources. C) Points to the right of either curve represent inefficient use of resources. D) Both curves represent the maximum sustainable capacity given the economy's resources. E) Both curves represent fluctuations of real gross domestic product around its potential level over time.

D

Which of the following is true about the equilibrium real output in the aggregate demand-aggregate supply (AD-AS) model in the short run? A) Equilibrium real output is always above full employment. B) Equilibrium real output is always below full employment. C) Equilibrium real output is always equal to full employment. D) Equilibrium real output can be above, equal to, or below full employment. E) Equilibrium real output is always indeterminate.

D

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? 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

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? A) Less than Y1 B) At Y1 C) At Y2 D) Greater than Y1 and less than Y2 E) Greater than Y2

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 gross domestic product 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 the expenditure multiplier, if the marginal propensity to consume is greater than zero, a one-dollar change in autonomous expenditures will result in which of the following? A) A one-dollar increase in government spending B) A greater-than-one-dollar increase in government spending C) A one-dollar increase in the production of goods and services D) A one-dollar increase in aggregate demand for goods and services E) A greater-than-one-dollar increase in aggregate demand for goods and services

E

According to the graph above, which of the following will necessarily result in a decrease in output? A rightward shift of the aggregate demand curve A leftward shift of the aggregate demand curve A rightward shift of the aggregate supply curve A leftward shift of the aggregate supply curve A) I only B) III only C) I and III only D) II and III only E) II and IV only

E

Assume the marginal propensity to consume is 0.75. What will happen if government spending increases by $100 billion? A) Real output will increase by a maximum of $75 billion. B) Real output will increase by a maximum of $100 billion. C) Real output will increase by a maximum of $175 billion. D) Real output will increase by a maximum of $300 billion. E) Real output will increase by a maximum of $400 billion.

E

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? A) Real Gross Domestic Product - Decrease, Price Level - Increase B) Real Gross Domestic Product - Decrease, Price Level - Decrease C) Real Gross Domestic Product - Increase, Price Level - Increase D) Real Gross Domestic Product - Increase, Price Level - No change E) Real Gross Domestic Product - Increase, Price Level - Decrease

E

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? A) Output - Increase, Interest Rates - Increase B) Output - Increase, Interest Rates - Decrease C) Output - No change, Interest Rates - Decrease D) Output - Decrease, Interest Rates - Increase E) Output - Decrease, Interest Rates - Decrease

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 marginal propensity to consume 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 marginal propensity to consume (MPC) is 0.6. If disposable income then increases by $100, consumption and savings will equal which of the following? A) Consumption - $420, Savings - $280 B) Consumption - $600, Savings - $400 C) Consumption - $660, Savings - $320 D) Consumption - $660, Savings - $440 E) Consumption - $760, Savings - $340

E

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? A) Falling wages will shift the aggregate demand curve to the right, producing full employment. B) Rising wages will shift the aggregate demand curve to the right, producing full employment. C) The economy will remain at point A. D) Rising wages will shift the aggregate supply curve to the right, producing full employment. E) Falling wages will shift the aggregate supply curve to the right, producing full employment.

E

The government of Euroland is considering increasing government spending to avoid a recession. What is the most likely effect on aggregate demand (AD) in Euroland? A) There will be a movement along the AD curve to a lower real output. B) There will be a movement along the AD curve to a higher price level. C) There will be no change in the AD curve. D) There will be a leftward shift in the AD curve. E) There will be a rightward shift in the AD curve.

E

The table below shows the level of household savings at various levels of disposable income in a country. Savings - $2,000; Disposable Income - $10,000 Savings - $2,200; Disposable Income - $12,000 Based on the level of savings and disposable income data in the table above, which of the following must be true? A) The marginal propensity to save is 0.2. B) The marginal propensity to save is 0.9. C) When disposable income is $12,000, consumption is $10,000. D) The marginal propensity to consume is 0.1. E) The marginal propensity to consume is 0.9.

E

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 marginal propensity to save increases

E

Use the table to answer the question. Disposable Income - $10,000; Consumption Spending - $6,000 Disposable Income - $11,000; Consumption Spending - $6,600 Using the disposable income and consumption data in the table above, calculate the value of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS). A) MPC = 0.04⁢ , MPS = 0.96 B) MPC = 0.10 , ⁢⁢MPS = 0.90 C) MPC = 0.20 , MPS = 0.80 D) MPC = 0.50 , MPS = 0.50 E) MPC = 0.60, MPS = 0.40

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 increases 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 must be true in the long run? A) Production increases when prices increase. B) An increase in the price level reduces aggregate demand. C) The natural rate of unemployment is not affected by changes in production capacity. D) Full employment increases when price level decreases. E) Prices and wages are flexible.

E

Which of the following will cause a rightward shift of the short-run aggregate supply curve? A) An increase in consumption spending B) An increase in nominal wages C) An increase in income taxes D) A decrease in the price level E) A decrease in the costs of production

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