AP Economics - Unit 3

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

an increase in which of the following will cause an increase in aggregate supply

(A) labor productivity

Which of the following best explains how income taxes can moderate a business cycle during an expansion?

(A) tax payments increase automatically as gross domestic product 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

How will automatic stabilizers affect the economy during a recession?

(A) they will shift the AD curve to the right, increasing real output

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

(B) $8,000

What is an automatic stabilizer?

(B) It is a program or policy that counteracts the business cycle without any new government action required.

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?

(B) aggregate demand will decrease and the price level will decrease

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

(B) aggregate demand will increase

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

(B) aggregate demand will increase

which of the following changes would cause an economy's aggregate demand curve to shift to the right?

(B) an increase in autonomous consumption spending

which of the following would result in a rightward shift of the aggregate demand curve?

(B) an increase in exports

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?

(B) both curves would shift to the right

which of the following is true about marginal propensity to consume?

(B) it determines the size of the simple spending multiplier

which of the following is true of a horizontal aggregate supply curve?

(B) it suggests that increases in output can occur without increases in the price level

Which of the following is illustrated by the long-run aggregate supply (LRAS) curve and the production possibilities curve (PPC)?

(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?

(B) there will be an upward movement along the Short run aggregate supply curve and real output will increase

which of the following are most likely short run effects of an increase in govt expenditures?

(C) unemployment rate - DECREASE inflation rate - INCREASE RDGP - INCREASE

Which of the following best describes the aggregate demand curve?

(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 would most likely cause a rightward shift in an economy's aggregate supply curve?

(C) an across the board reduction of wages in the manufacturing center

which of the following explains the relationship between the price level and real output along the aggregate demand curve?

(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

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

(C) increase real gross domestic product

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?

(C) increasing taxes, which will shift the AD curve leftward

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?

(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?

(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?

(C) nominal wages will decrease

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?

(C) the short run aggregate supply will shift to the left, and the actual rate of unemployment will exceed the natural rate of unemployment

suppose that in an economy with lump-sum taxes and no international trade, autonomous investment spending by $2 million. If the marginal propensity to consume is 0.75, equilibrium gross domestic product will change by a maximum of

(D) $8 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 would increase by ...

(D) 960

stagflation is most likely to be caused by

(D) a decrease in aggregate supply

If nominal wages are fixed by labor contracts, then which of the following explains why the aggregate supply curve is upward sloping?

(D) an increase in the price level will increase profits and production

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?

(D) both the aggregate demand (AD) and the short run aggregate supply (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?

(D) equilibrium real output can be above, equal to, or below full employment

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

(D) government spending

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

(D) income taxes

The imposition by the United States of a tariff on imported steel from the European Union will likely have what impact on the short-run aggregate supply (SRAS) curve in the United States?

(D) it will cause the SRAS curve to shift leftward

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

(D) labor force participation rate

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?

(D) nominal wages will decrease and short run aggregate supply will increase until full employment is restored in the long run

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?

(D) the SRAS curve shifts to the right as nominal wages decrease and full employment is restored

which of the following would be the initial impact on an economy if wages were to increase more than worker productivity?

(D) the short run aggregate supply curve would shift to the left, causing the price level to increase

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 govt spending could cause a maximum increase in output of

(E) $280 billion

Which of the following represents an appropriate fiscal policy for the given economic conditions?

(E) a contractionary fiscal policy is appropriate to reduce inflation when there is an inflationary gap

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

(E) a decrease in the expected price level

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?

(E) a greater than one dollar increase in aggregated demand for goods and services

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

(E) a low marginal propensity to save

a higher marginal propensity to consume implies which of the following?

(E) a lower marginal propensity to save

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 (GDP)?

(E) decreasing government spending by $10 billion decreases real GDP by a maximum of $50 billion

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

(E) inflationary expectations

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

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

Which of the following is true when an economy is operating at the intersection of the AD2 and SRAS2 curves?

(E) the economy is in short run and long run equilibrium

assume the marginal propensity to consume is 0.75. What will happen if government spending increases by $100 billion?

(e) real output will increase by a maximum of $400 billion

The government of Euroland is considering increasing government spending to avoid a recession. What is the most likely effect on aggregate demand in Euroland?

(e) there will be a rightward shift in the AD curve

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

INCREASE in aggregate demand NO CHANGE in SRAS

an increase in aggregate supply will most likely cause income and employment to change in which of the following ways

INCREASE in income INCREASE in employment

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

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

govt spending - INCREASE taxes - DECREASE

An advance in technology will cause the

long-run aggregate supply curve to shift to the right

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?

supply curve - shifts to the right price level - decrease real output - increase