macroeconomics unit 3 review (college board questions)
If a nation's government cuts income taxes, how will consumption spending, real output, and unemployment change in the short run? A) Consumption spending will increase, real output will increase, and unemployment will decrease. B) Consumption spending will increase, real output will decrease, and unemployment will decrease. C) Consumption spending will decrease, real output will decrease, and unemployment will increase. D) Consumption spending, real output, and unemployment will all decrease. E) Consumption spending, real output, and unemployment will all increase.
A) Consumption spending will increase, real output will increase, and unemployment will decrease.
If there is an adverse (negative) short-run aggregate supply shock due to an increase in the price of natural resources and the government pursues no policy to address the supply shock, then which of the following will occur in the long run? A) Nominal wages will fall with no change in the natural rate of unemployment. B) Inflation will rise and nominal wages will fall. C) Deflation will worsen and nominal wages will rise. D) Aggregate demand will increase to restore full employment. E) The long-run aggregate supply curve will shift right and increase unemployment.
A) Nominal wages will fall with no change in the natural rate of unemployment.
Which of the following best explains how income taxes can moderate a business cycle during an expansion? A) Tax revenues increase automatically as gross domestic product (GDP) rises, which dampens consumption spending. B) Tax revenues decrease automatically as GDP rises, which increases short-run aggregate supply. C) Tax revenues increase automatically as GDP falls, which decreases short-run aggregate supply. D) Tax revenues increase automatically as GDP falls, which prevents the economy from experiencing a downturn. E) Tax revenues decrease automatically as GDP falls, which dampens consumption spending.
A) Tax revenues increase automatically as gross domestic product (GDP) rises, which dampens consumption spending.
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 long-run aggregate supply curve is vertical and there is no trade-off between inflation and unemployment in the long run.
How will automatic stabilizers affect the economy during a recession? A) They will shift the aggregate demand curve to the right, increasing real output. B) They will shift the aggregate demand curve to the left, decreasing real output. C) They will shift the long-run aggregate supply curve to the right, increasing potential output. D) They will shift the short-run aggregate supply curve to the left, increasing real output. E) They will shift the short-run aggregate supply curve to the right, decreasing real output.
A) They will shift the aggregate demand curve to the right, increasing real output.
Assume the economy of Country A is in long-run equilibrium. Which of the following will happen in the short run in Country A if one of its major trading partners, Country B, experiences a recession? A) Aggregate demand will increase and the price level will increase. B) Aggregate demand will decrease and the price level will decrease. C) Short-run aggregate supply will decrease and the price level will decrease. D) Short-run aggregate supply will increase and the price level will increase. E) Short-run aggregate supply will decrease and the price level will increase.
B) Aggregate demand will decrease and the price level will decrease.
Which of the following will result in a rightward shift of the aggregate demand curve? A) An increase in the income tax rate B) An increase in exports C) A decrease in the price D) A decrease in household income E) A decrease in government spending
B) An increase in exports
Which of the following is an example of an expansionary fiscal policy? A) An increase in income tax rates B) An increase in government expenditures C) A decrease in transfer payments D) An increase in the price level E) An increase in consumption
B) An increase in government expenditures
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)(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)(LRAS) curve would shift to the left, and the production possibilities curve would shift to the right.
B) Both curves would shift to the right.
What is an automatic stabilizer? A) It is a program or policy that counteracts the business cycle with discretionary fiscal policy. B) It is a program or policy that counteracts the business cycle without any new government action required. C) It is a tax or spending program that is enacted to balance the federal budget. D) It is the change in consumption spending resulting from a given change in disposable income. E) It is a part of a market economic system that ensures that markets achieve equilibrium in the long run.
B) It is a program or policy that counteracts the business cycle without any new government action required.
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) The maximum sustainable capacity
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 and real output will decrease. B) There will be an upward movement along the short-run aggregate supply curve and real output will increase. 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) There will be an upward movement along the short-run aggregate supply curve and real output will increase.
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) An increase in energy prices
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) An increase in real output due to an increase in the price level
An economy is in long-run macroeconomic equilibrium. What will be the short-run effects of an increase in investment spending? A) An increase in real output, an increase in unemployment, and a decrease in the price level B) An increase in real output, an increase in unemployment, and an increase in the price level C) An increase in real output, a decrease in unemployment, and an increase in the price level D) A decrease in real output, a decrease in unemployment, and a decrease in the price level E) A decrease in real output, a decrease in unemployment, and no change in the price level
C) 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? A) An increase in investment spending B) An increase in government spending C) An increase in taxes D) An increase in exports E) An increase in transfer payments
C) An increase in taxes
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) At a lower price level, domestic goods will become less expensive compared to foreign goods, which causes an increase in spending on domestic goods.
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) Both curves illustrate the maximum sustainable capacity.
Suppose an economy is operating above full employment. Which of the following fiscal policy actions and resulting changes in aggregate demand will move the economy back towards full employment? A) Increasing government spending, which will shift the AD curve rightward. B) Decreasing government spending, which will shift the AD curve rightward. C) Increasing taxes, which will shift the AD curve leftward. D) Decreasing taxes, which will shift the AD curve leftward. E) Increasing transfer payments, which will shift the AD curve leftward.
C) Increasing taxes, which will shift the AD curve leftward.
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) It is a curve that shows the level of spending by consumers, businesses, the government, and the foreign sector at different price levels.
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) It is operating below full employment and is in a short-run but not a long-run equilibrium.
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) Long-run aggregate supply
If the natural rate of unemployment exceeds the actual rate of unemployment, which of the following will occur in the long run in the absence of government intervention? A) There will be cyclical unemployment. B) Input prices will decrease. C) Nominal wages will increase. D) The aggregate demand curve will shift to the left. E) The short-run aggregate supply curve will shift to the right.
C) Nominal wages will increase.
Assume the countries of Ornania and Kumbagi are major trading partners. Ornania is currently in long-run macroeconomic equilibrium. As a result of a recession in its economy, Kumbagi decreases its demand for goods produced in Ornania. Which of the following will occur in Ornania in the short run? A) The aggregate demand curve will shift to the right, causing the actual rate of unemployment to exceed the natural rate of unemployment. B) The aggregate demand curve will shift to the left, resulting in an inflationary gap. C) The aggregate demand curve will shift to the left, resulting in a recessionary gap. D) The short-run aggregate supply curve will shift to the left, resulting in an inflationary gap. E) The short-run aggregate supply curve will shift to the left, resulting in a recessionary gap.
C) The aggregate demand curve will shift to the left, resulting in a recessionary gap.
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 economy is operating above full employment.
Country X is currently in long-run macroeconomic equilibrium. If the country's economy experiences a significant increase in the price of energy, a major input in production, which of the following will occur in the short run? A) The aggregate demand curve will shift to the left, and the actual rate of unemployment will exceed the natural rate of unemployment. B) The aggregate demand curve will shift to the left, and there will be an inflationary gap. C) The short-run aggregate supply curve will shift to the left, and the actual rate of unemployment will exceed the natural rate of unemployment. D) The short-run aggregate supply curve will shift to the left, and the price level will fall. E) The short-run aggregate supply curve will shift to the left and cause an inflationary gap.
C) The short-run aggregate supply curve will shift to the left, and the actual rate of unemployment will exceed the natural rate of unemployment.
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) Aggregate demand will decrease by $100 billion.
Which of the following changes will necessarily cause inflation? A) A decrease in aggregate demand and a decrease in short-run aggregate supply. B) A decrease in aggregate demand and an increase in short-run aggregate supply. C) A decrease in aggregate demand with no change in short-run aggregate supply. D) An increase in aggregate demand and a decrease in short-run aggregate supply. E) An increase in aggregate demand and an increase in short-run aggregate supply.
D) An increase in aggregate demand and a decrease in short-run aggregate supply.
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) An increase in the price level will increase profits and production.
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) At point X, the economy is experiencing a recessionary gap.
Assume that stock prices and home values have increased, raising household wealth. At the same time, productivity increased due to new technology. What is the likely short-run impact on the economy? A) The AD curve shifts right and the SRAS curve shifts left, resulting in a higher price level and no change in the output level. B) The AD curve shifts left and the SRAS curve shifts right, resulting in a lower price level and no change in the output level. C) The AD curve shifts right and the SRAS curve shifts left, resulting in a higher output level and lower price level. D) Both the AD and the SRAS curves shift right, resulting in a higher output level and indeterminate price level. E) Both the AD and the SRAS curves shift right, resulting in a lower output level and indeterminate price level.
D) Both the AD and the SRAS curves shift right, resulting in a higher output level and indeterminate price level.
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 indeterminate.
D) Equilibrium real output can be above, equal to, or below full employment.
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) It will cause the (SRAS) curve to shift leftward.
Assume an economy is currently at full employment. Which of the following best describes the long-run adjustments that will occur in the economy following a negative aggregate demand shock with no government intervention? A) Short-run aggregate supply will decrease, offsetting the initial aggregate demand shock and restoring full employment in the long run. B) The aggregate demand shock will result in a multiplier effect on real output moving the economy farther away from full employment in the long run. C) The price level will decrease and aggregate demand will increase until full employment is restored in the long run. D) Nominal wages will decrease and short-run aggregate supply will increase until full employment is restored in the long run. E) Real income will decrease and consumption spending will decrease moving the economy farther away from full employment in the long run.
D) Nominal wages will decrease and short-run aggregate supply will increase until full employment is restored in the long run.
An economy is currently in short-run equilibrium, and real output is below the full-employment level of output. Which of the following market adjustments is most likely to occur in the long run? A) The recessionary gap will create upward pressure on prices, shifting the aggregate demand curve to the left. B) The existence of cyclical unemployment will increase consumption spending and increase real output. C) Full-employment output will fall to equal the short-run equilibrium real output. D) Nominal wages will fall, shifting the short-run aggregate supply curve to the right. E) Input prices will increase as firms compete for labor and capital.
D) Nominal wages will fall, shifting the short-run aggregate supply curve to the right.
Suppose that the economy is in a recession. In the absence of government policy action to restore the economy to full employment, how will the economy adjust in the long run? A) The SRAS1 curve shifts to the left as nominal wages decrease and full employment is restored. B) The SRAS1 curve shifts to the right as nominal wages increase and full employment is restored. C) The SRAS2 curve shifts to the left as nominal wages increase and full employment is restored. D) The SRAS2 curve shifts to the right as nominal wages decrease and full employment is restored. E) The AD2 curve shifts to the left as nominal wages decrease and full employment is restored.
D) The SRAS2 curve shifts to the right as nominal wages decrease and full employment is restored.
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 economy is in a recessionary gap when the short-run equilibrium real output is below the long-run equilibrium real output.
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) The tax multiplier is −9 and the spending multiplier is 10.
Which of the following represents an appropriate fiscal policy for the given economic conditions? A) An expansionary fiscal policy is appropriate to reduce unemployment when there is an inflationary gap. B) An expansionary fiscal policy is appropriate to reduce inflation when there is a recessionary gap. C) An expansionary fiscal policy is appropriate to reduce inflation when there is an inflationary gap. D) A contractionary fiscal policy is appropriate to reduce unemployment when there is a recessionary gap. E) A contractionary fiscal policy is appropriate to reduce inflation when there is an inflationary gap.
E) A contractionary fiscal policy is appropriate to reduce inflation when there is an inflationary gap.
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) A decrease in the costs of production
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) A greater-than-one-dollar increase in aggregate demand for goods and services
Which of the following is a reason why the aggregate demand curve is downward sloping? A) A higher price level decreases savings. B) A higher price level decreases interest rates. C) A higher price level increases exports. D) A higher price level decreases imports. E) A higher price level decreases real wealth.
E) A higher price level decreases real wealth.
The government of Olympia is considering a fiscal policy action to slow the economy and curb inflation. If the marginal propensity to consume is 0.8, which of the following responses correctly identifies a policy action that would help the government achieve its goals and the impact of that action on Olympia's real gross domestic product A) Increasing taxes by $10 billion increases real GDP by a maximum of $50 billion. B) Decreasing taxes by $10 billion decreases real GDP by a maximum of $50 billion. C) Increasing taxes by $10 billion increases real GDP by a maximum of $40 billion. D) Increasing government spending by $10 billion increases real GDP by a maximum of $50 billion. E) Decreasing government spending by $10 billion decreases real GDP by a maximum of $50 billion.
E) Decreasing government spending by $10 billion decreases real GDP by a maximum of $50 billion.
A decrease in the price level will produce a movement between which of the following two points on the diagram above? A) From point X to point Y B) From point W to point Y C) From point W to point Z D) From point Z to point Y E) From point Y to point Z
E) From point Y to point Z
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) MPC = 0.60, MPS = 0.40
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) Prices and wages are flexible.
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) Real output will increase by a maximum of $400 billion.
Which of the following is true when an economy is operating at the intersection of the AD2 and SRAS2 curves? A) The economy is facing a recessionary gap. B) The economy is facing an inflationary gap. C) The natural rate of unemployment is less than the actual unemployment rate. D) The natural rate of unemployment is greater than the actual unemployment rate. E) The economy is in short-run and long-run equilibrium.
E) The economy is in short-run and long-run equilibrium.
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 marginal propensity to consume is 0.9.
The government of Euroland is considering increasing government spending to avoid a recession. What is the most likely effect on aggregate demand 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) There will be a rightward shift in the AD curve.
Based on the diagram above, which of the following describes what will happen in the long-run adjustment process? A) The natural rate of unemployment will increase. B) Potential real GDP will increase. C) Aggregate demand will decrease. D) Short-run aggregate supply will increase. E) Wages and input prices will increase.
E) Wages and input prices will increase.