AP Macroeconomics Unit 3 Test Review

If the marginal propensity to consume is .75 then a $100 increasein investment will result in a maximum increase in equilibrium real gross dometic product of

$400

Assume that the marginal propensity to consume out of disposable income .8 and that the governemtn taxes all income at a constant rate of 30 precent. If gross income increases by $100, consumption wil initially increase by

$56

Assume a closed economy with no government and a marginal propensity to consume of .8. Dissaving occurs when disposable income is

$620

An increase in which of the following will most likely increase productivity?

Capital stock

Rational expectations theory suggests that people

Use all available information in forming their expectations about future inflation

An increase in government spending will affect the demand for money and nominal interest rates in which of the following ways?

Demand for Money- Increase Nominal INterest rates- Decrease

An increase in which of the following is most likely to cause the short-run aggregate supply curve to shift to the left? A) Consumers' income B) The money supply C) Government spending D) The optimism of business firms E) The per unit cost of production

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

Suppose that Country A is experiencing high inflation relative to Country B, whihc is enjoying the following would occur in the foreign exchange market?

A depreciation of Country A's currency

For an economy that is operating inside its production possibiliities curve, whic of the following is true?

It can increase the production of both goods

Which of the follwong is true of the opportunity costs of holding cash?

It increases as the interest rate rises

Which of the following statements best describes the concept of an automatic stabilizer?

It is discretionary fiscal policy that increases government spending during recessions and decreases government spending during expansions.

Which of the following is true of the Phillips curve?

It is the downward sloping in the shortrun, but is vertical in the long run

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

Lbaor- force participation rate

If the central bank raises the equired reserve ratio, the money multiplier and the money supply will change in which of the following ways?

Money multiplier- Decrease Money supply- Decrease

The diagram above shows the production possibilities curve (PPCs) If the current PPC is PPC1 wich of the follrong changes indicates a recession

Movement from point Y to point Z

Follow a decrease in the real interest rate, there is an increase in financial capital outflows from Country A. The increas in capital outflows will most likely have which of the following effects on Country A's net exports and aggregate demand?

Net Exports- Increase Aggregate Demand- Increase

A decrease in taxes will necessarily result in an increase in which of the following?

Nominal gross domestic product

If contractionaty fiscal policy is followed by an expansion monetary policy, nominal interest rate and employment would most likely be affectedin which of the following ways in the short run.

Nominal interest rate- Decrease Employment- Intermediate

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

In the long run, an increase in aggregate demand due to an expansion in te money supply will increase

Nominal output and price level

The short-run- aggregate supply curve would be vertical if

Nominal wages adjust immediately to changes in the price level

Aggregate demand may be measured by adding...

consumption, investment, government spending, and net exports

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

go into effect without passage of new legislation

Which of the following will most likely cause the short-run aggregate supply curve to shift to the left?

An increase in energy prices

The marginal propensity to save for this economy is

.2

If the required reserve ratio is 10 percent, actual reserves are 10 million and currency in circulation is equal to 20 million, M1 will at most be equal to

120 million

Assume a closed economy with no government and a marginal propensity to consume of 0.80. Disposable Income/Consumption $620/$624 $640/$640 $660/$656 $680/$672 $700/$688 $720/$704 $740/$720 $760/$736 Dissaving occurs when disposable income is A) $620 B) $640 C) $660 D) $700 E) $1,000

A

Assume that the economy is in long-run equilibrium. A shift in the aggregate demand curve will change A) only the price level in the long run B) only the output level in the long run C) both the price level and the output level in the long run D) neither the price level nor the output level in the short run E) only the price level in the short run and only the output level in the long run

A

Which of the following policies if appropriately sized, would provide expansion during a recession with the smallest change in interest rates?

A decrease in taxes and an open market purchase of governement securities by the central bank

One explanation for the downward slope of the aggregate demand curve is that when the price level increase, which of the following will decrease? A) Real value of assets B) Price of foreign goods C) Prices of substitute goods D) Expectations of future prices E) Government deficits

A

Which of the follwing will cause an increase

A decrease in income taxes

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

A decrease in the costs of production

The graph above shows two aggregate demand curves AD1 and AD2, and aggregate supply curves,AS. The shift in the aggregate demand curves from AD1 to AD2 could be caused by

A decrease in the money supply

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

On the graph, stagflation will be caused by

A letward shift in the short-run aggregate supply curve only

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

A low marginal propensity to save

Frictional unemployment occurs when which of the following happens?

A worker voluntarily quits a job to search for a better one

If the value of the United States dollar increases on the foreign exchange market, which of the following is most likely to occur in the short run

Aggregate demand will decrease

An economy is at full-employment equilibrium. If consumers and firms become more optimistic about future income and profits, which of the following will occur in the short run?

Aggregate demand will shift rightward, increasing real output and the price level.

Which of the following will result in a rightward shift of the aggregate demand curve?

An increase in exports

If wages are sticky, which of the following policies will be the most effective in raising real gross domestic product to the full employment level?

An increase in governemtn spending

Which of the following will most likely cause an increase in real outpiut in the long run?

An increase in immigration from abroad

An increase in the price level will most likely cause which of the following?

An increase in the demand for money

A rightward shift of the short- run Phillips curve is most likely due to

An increase in the expected rate of inflation

An inflationary gap could be reduced by...

An increase in the income tax rate

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

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%. If the gross income increases by $100, consumption will initially increase by A) $44 B) $56 C) $70 D) $80 E) $100

B

If the aggregate supply curve is the horizontal an increase in government spending will result in which of the following? Real Output/Price Level A) Increase/Increase B) Increase/No change C) Increase/Decrease D) No change/Increase E) No change/No change

B

If the marginal propensity to consume is 0.9, the government 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 $1,000 E) increase by up to $1,600

B

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/Interest Rates/Investment A) Increase/Increase/Increase B) Increase/Increase/Decrease C) Increase/Decrease/Increase D) Decrease/Increase/Decrease E) Decrease/Decrease/Increase

B

Public policy that generats an unexpected increase in consumer prices will inflict short- run costs on all of the following EXCEPT

Borrowers

Which of the following actions by the Federal Reserve of United States increases the money supply?

Buying government bonds on the open market

As a component of aggregate demand, investment refers to the A) purchase of raw land for later resale B) purchase of stocks and bonds C) purchase of new equipment and additional inventories D) difference between people's income and spending E) dividends paid out to shareholders

C

Crowding out is most likely to occur with which of the following changes? A) Decrease in government spending B) Increase in budget surplus C) Increase in budget deficit D) Decrease in the real interest rate E) Decrease in trade deficit

C

Expansionary fiscal policy will most likely result in A) a decrease in the money supply B) an increase in the marginal propensity to consume C) an increase in the nominal interest rates D) a decrease in the level of output E) a decrease in the price level

C

In the short run, the government deficit spending will most likely A) raise the unemployment rate B) lower the inflation rate C) raise real interest rates D) lower private savings E) raise net exports

C

Which of the following would directly increase the capital stock of an economy? A) An individual purchases shares of corporate stock B) An individual purchases high-risk corporate bonds C) A business firm expands its production facilities D) A bank uses cash reserves to purchase shorthand long-term government securities E) The government implements a spending program to cover prescription drugs for Medicare reciepts

C

An increase in spending in an economy will cause a multiplied increase in gross domestic product because

Consumption increases as income decreases because it is a factor in GDP

Of the following, the most liquid asset is

Currency

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

Assume a closed economy with no government and a marginal propensity to consume of 0.80. Disposable Income/Consumption $620/$624 $640/$640 $660/$656 $680/$672 $700/$688 $720/$704 $740/$720 $760/$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

If the marginal propensity 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

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

Which of the following will shift the aggregate demand curve to the right? A) A report that corporate earnings were lower than expected B) An increase in interest rates caused by a tightening of monetary policy C) Increased imports caused by appreciation of the dollar D) Increased spending by businesses on computers E) An increase in the government's budget surplus

D

Assume that the reserve requirement for demand deposits is 20 percent, that banks hold in excess reserves, and that the public holds no currency. If the central bank sells $100,000 worth of governemtn securities to commercial banks, the total money supply will

Decrease by 50,000

Which of the following will lead to a depreciation of a nation's currency?

Decrease real interest rates in the nation compared with rest of the world

The main benefit of free trade between two countries is that

Each country can consume beyond its constraints of resources and productivity

The natural rate of unemployment can be defined as the

Economy's long-run equilibrium rate of unemployment

If the production technology of a good improves and at the same time the number of consumers willing and able to buy the goods in the market increases, which of the following will definately occur?

Equilibrium quantity will increase

The purchase of United States government bonds by Japanese investors will be included in Japan's

Financial account (formely called capital account)

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 MPC = .9 MPS = .1 rGDP = (MPC/MPS)change in taxes rGDP = (9)20 = 180

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

Government spending

According to the graph above, which of the following will necessarily result in a decrease in output? I. A rightward shift of the aggregate demand curve II. A leftward shift of the aggregate demand curve III. A rightward shift of the aggregate supply curve IV. A leftward shift of the aggregate supply curve

II and IV 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

Assume that the public holds part of its money in cash and the rest in checking accounts. If the central bank lowers the reserve requirements from 16 percent to 8 percent, the money supply will

Increase be less than double

Which of the follwong is least likely to promote economics growth?

Increase in the consumption of nondurable goods

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

Increase taxes or decrease government spending

If the economy is in a severe recession, which of the following policy actions is most appropriate?

Increaseing the both the money supply and government spending

If unemployed workers become discouraged and give up trying to find work, the number of workers emplyed and the unemployment rate would change in which of the follwoing ways?

Number of workers employed- No change Unemployment Rate- Decrease

A change in which of the following will cause the short-run aggregate supply curve to shift? I. The price level II. Government spending III. The cost of all inputs

Only III. The cost of all inputs

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

The consumer price index is critisized for

Overstating the true burden of inflation because it does not recognize consumers ability to substitute goods and services as prices change

Increases in the real per capita income of a country are most closely associated with increases in which of the following?

Productivity

As a component of aggregate demand, investment refers to the

Purchase of new equipment and additional inventories

In the short run, government deficit spending will most likely

Raise nominal interest rate

If wages are prices are perfectly flexible and inflation is correctly anticipated, than an expansionary monetary policy will affect the real output and price level in which of the following ways?

Real output- Not change Price Level- Increase

An increase in the international value of the United States dollar will most likely benefit

Retired United States citizens living overseas on their social security checks

If aggregate demand is growing faster than long- run aggregate supply, the Federeal Reserve is most likely to

Sell securities on the open market

According to the graph above and starting with equilibrium point R, which of the follwong shifts identifies, the short runand the long- runimpact 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

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

Spending multiplier

Inflation occurs when there is sustained inccrease in which of the following?

The average price level

Assume that Country A exports one bushel of wheat in exchange for 2.5 bushels of corn from Counry B. If terms of trade are beneficial to both ocuntries, which of the follwoing must be true?

The cost of producing a bushel of wheat in Country A is less than 2.5 bushels of corn

Potential gross domestic product will decrease under which of the following condidtions?

The country's annual depreciation is greater than its annual gross investment

In the circular flow diagram of a market economy, which of the following supplies the factors of production?

The household sector

Countr A's growth rate in per capita real gross domestic product (GDP) has been consistently higher than that of Country B. Which of the following factors can account for these differences in the per capita GDP growth rates?

The labor force Country A is becoming more skilled than the labor force of Country B

If the velocity of money is constant and the aggregate supply curve is vertical, a doubling of the money suply would most likely result in the doubling of

The price level

Which of the following is the most fundamental issue that economics adresses?

Use of scarce resources