AP Macroeconomics



AP Macroeconomics Unit 4 Practice Test: National Income and Price DeterminationThe slope of a country’s consumption function is equal toThe real interest rateThe inflation rateThe marginal propensity to consumeThe rate of increase in disposable incomeThe tax rateThe level of planned investment spending is negatively related to theRate of return on investmentLevel of consumer spendingLevel of actual investment spendingInterest rateAll of the aboveActual investment in any period of time is equal toPlanned investment spending + unplanned inventory investmentPlanned investment spending – unplanned inventory investmentPlanned investment spending + inventory decreasesUnplanned inventory investment + inventory increasesUnplanned inventory investment – inventory increasesThe ultimate effect on Real GDP of a $100 million increase in government purchases of goods and services will beAn increase of $100 millionAn increase of more than $100 millionAn increase of less than $100 millionAn increase of either more than or less than $100 million, depending on the MPCA decrease of $100 millionA graphical representation of how consumption spending varies with changes in disposable income is called theAggregate demand curveIncome-expenditure scheduleConsumption functionPhillips curveWealth effectA change in all but which one of the following would be associated with a shift in the consumption function?WealthInterest ratesCurrent disposable incomePossible future levels of disposable incomeThe price levelIf MPC is 0.7, then a $100 billion change in disposable income will be associated with what change in savings?$15 billionb. $25 billionc. $30 billiond. $70 billione. $100 billionIf a $100 billion increase in disposable income results in a $75 billion increase in consumption, then the multiplier is0.25b. 0.75c. 1.33d. 2e. 4If MPC is 0.8, what decrease in taxes will initially increase consumption spending by $16 billion?$8 billion$12.8 billionc. $16 billiond. $20 billione. $64 billionIf consumption spending declines by $45 billion when disposable income declines by $50 billion, what is MPC?1b. 0.9c. 0.1d. -0.1e. -0.9Which of the following will not cause an upward shift in the aggregate expenditures curve?An increase in investment spendingAn increase in government spendingA decrease in taxesAn increase in exportsAn increase in importsThe multiplier formula is1/MPCb. 1/(MPC-1)c. MPC x (1-MPS)d. 1/(1-MPC)e. 1/(1-MPS)The actual multiplier will be less than the theoretical multiplier because of all of the following exceptInflationTax increasesAn increase in importsAn increase in exportsAn autonomous change in spending can be modeled asA horizontal shift in the expenditure scheduleAn induced increase in consumption spendingA vertical shift in the expenditure scheduleAn increase in MPCA decrease in MPSIf MPC were 0.6, the multiplier would be1/0.6 = 1.67b. 0.6c. 1/(1 - 0.6) = 2.5d. 1/(1 + 0.6) = 0.63e. 0.6/0.4 = 1.5The multiplier would be largest if MPC is0.73b. 0.89c. 0.45d. 0.67e. 0.35 If 100 percent of any change in income is spent, the multiplier will be: A) equal to the MPC. B) 1. C) zero. D) infinitely large.The practical significance of the multiplier is that it: A) equates the real interest rate and the expected rate of return on investment.B) magnifies initial changes in spending into larger changes in GDP. C) keeps inflation within tolerable limits. D) helps to stabilize the economy.19. The consumption schedule shows: A)that the MPC increases in proportion to GDP. B)that households consume more when interest rates are low. C)that consumption depends primarily on the level of business investment. D) the amounts households plan to consume at various possible levels of disposable income.The slope of the short-run aggregate supply curve reflects the fact thatInflation reduces the value of the oversimplified multiplierThe costs of important inputs, such as labor, are relatively fixed in the short runThe marginal propensity to consume is less than 1.0Recessionary gaps take a long time to self-correctThe aggregate supply curve will shift following changes in all but which of the following?The price levelWage ratesTechnology and productivityAvailable supplies of factories and machinesThe equilibrium price level and the equilibrium level of real GDPAre determined by the intersection of the AD and AS curvesWill always occur at full employmentCan be found in the income-aggregate expenditure diagramDo not change unless the aggregate demand curve shiftsAn inflationary gap occursWhen the equilibrium level of GDP exceeds potential GDPWhenever there is an upward shift in the expenditure scheduleWhenever aggregate supply exceeds aggregate demandDuring periods of high unemploymentFrom an initial position of full employment, which one of the following will NOT lead to a recessionary gap?A shift in the aggregate supply curve in the response to an increase in energy pricesA reduction in investment spending due to an increase in business taxesA reduction in consumer spending due to an adverse shift in consumer expectationsAn increase in exports that follows a business expansion in EuropeWhich of the following is most likely to lead to an inflationary gap?An increase in government purchases of goods and services to fight a recessionAn increase in exports that occurs when unemployment rates are highA significant reduction in energy pricesAny increase in spending that shifts the aggregate demand curve to the right when GDP is at or beyond potential GDPWhich of the following is most likely to lead to stagflation?An increase in aggregate demand that comes from an increase in government spendingAn increase in exports that occurs when unemployment rates are highA significant increase in energy pricesA technological breakthrough that lowers production costsThe economy will experience increases in output with little inflation wheneverThe aggregate supply curve shifts to the leftThe aggregate demand curve shifts to the rightBoth the aggregate demand and supply curves shift to the right in a similar fashionThe expenditure schedule becomes steeperWhich of the following statements is true?AD and AS determine the equilibrium price and quantity of a single goodThe AD curve indicates a positive relationship between the price level and GDPOther things equal, a downward shift of the AD curve implies that the economy enters an expansionary phaseMacroeconomic equilibrium occurs at the intersection of the AD and AS curvesThe AS curve is identical to the supply curve for a particular goodThe aggregate demand curveShows the various levels of expenditures that the economy will engage in at alternate price levelsImplies a positive relationship between inflation and unemploymentIs identical to the aggregate expenditures curveHas the same slope as the AS curveRelates relative prices to the quantity demanded of a particular goodThe aggregate supply curveIs irrelevant for determining macroeconomic equilibriumShows the various amounts of real output that the economy will produce of a particular goodHas a negative slopeShifts with changes in consumer spending, investment, government spending, and net exportsRelates total output in the economy to alternative price levelsOther things equal, a decrease in aggregate demand will result inAn economic expansionLower unemployment and a higher equilibrium price levelAn economic recessionAn increase in equilibrium real GDP and a decrease in the equilibrium level of pricesIncreased economic welfareOther things equal, an increase in aggregate demand tends to be associated withCost-push inflationAn economic depressionA lower level of equilibrium real GDPDemand-pull inflationAn increase in the quality of goods and services producedA reduction in resource prices tends to be associated with a Rightward shift of the AS curveMovement up the AS curveRightward shift of the AD curveMovement up the AD curveLeftward shift of the AS curveOther things equal, investment spending will decline whenInterest rates are loweredFirms operate at full capacityProfit expectations are risingCapacity utilization is lowThe cost of capital fallsWhich of the following will NOT cause net exports to decline?An appreciation of the domestic currencyA fall in foreign incomeHigher foreign tariffs on domestic goodsLower foreign pricesAn appreciation of the foreign currencyA leftward shift of the AD curve can be explained byAn increase in raw material pricesAn increase in foreign incomeA decline in foreign price levelsInefficient production technologyHigher investor optimismIn the short run, an increase in the average price level will causeProfits to fall, thus total production to declineProfits to rise, thus total production to increaseProfits to rise, thus total production to declineInput costs to fall, thus total production to riseInput costs to fall, thus total production to declineThe upward-sloping AS curve representsIncreases in national output that are accompanied by decreases in the average price levelIncreases in national output but a fixed price levelIncreases in the average price level but fixed national outputIncreases in the national output that are accompanied by increases in the average price levelFixed national output and a fixed price levelThe long-run AS curve at the potential level of real GDP isA horizontal lineAn upward-sloping curveA downward-sloping curveA vertical lineA combination of a horizontal line, an upward-sloping line, and a vertical lineWhy is the long-run AS curve vertical at potential real GDP?Resource costs adjust fully to price changesProducers’ profits are increasing at this pointUnemployment equals zeroThere is a very strong relationship between further price changes and output producedProduction costs are at the lowest possible levelConsider the following statement: “If the government attempts to raise employment through increased fiscal spending, all it will end up doing will be to drive up the price level.” The proponent of this statement assumes that theAD is a horizontal lineAS curve is a vertical lineAS curve is upward-slopingAS is downward-slopingAS curve is flatThe short-run AS curve shifts to the left whenProduction technology increasesEquipment prices risePeople expect lower inflation ratesProductivity increasesWages are reducedLong-run AS increases asNew production technology is introducedThe quality of labor declinesThe average price level increasesNatural resources depleteCorporate wage rates increaseTo determine short-run equilibrium in the economy, we use an AS curve that isDownward-slopingVerticalUpward-slopingHorizontalCircularWhen we consider an upward-sloping AS curve and a downward-sloping AD curve, a decrease in aggregate expenditures is reflected as a Leftward shift in the AS curve, which increases the equilibrium price level and decreases equilibrium incomeRightward shift in the AS curve, which increase both the equilibrium price level and incomeRightward shift in the AD curve, which increases both the equilibrium price level and incomeLeftward shift in the AD curve, which decreases both the equilibrium price level and incomeLeftward shift in the AD curve, which increases the equilibrium price level and decreases equilibrium incomeA simultaneous increase in both unemployment and inflation would most likely be the result ofAn increase in long-run ASAn increase in shirt-run ASA decrease in the AD curveAn increase in the long-run AS curve and an increase in the AD curveA decrease in the short-run AS curveWhich of the following statements concerning the long-run AD / AS model is true?An increase in AD increase real GDP only temporarilyAn increase in AD increase real GDP by a multiple of the initial increase in expendituresPrices are fixedOutput change that results from a change in AD is a permanent effectA change in AD leads to a permanent change of higher output.Which of the following is the most correct statement about the relationship between inflation and unemployment?In the short run, reducing inflation is associated with falling unemploymentIn the short run, reducing inflation is associated with rising unemploymentIn the long run, reducing inflation is associated with falling unemploymentIn the long run, reducing inflation is associated with rising unemployment49. Which of the following is a true statement?A)There is a long-run tradeoff between inflation and unemployment.B)There is no tradeoff between inflation and unemployment in the long run.C)The short-run Phillips Curve is horizontal.D)The long-run Phillips Curve is horizontal.50. A rightward shift of the AD curve in the very flat part of the upsloping AS curve will:A)increase real output by more than the price level. B)increase the price level by more than real output.C)reduce real output by more than the price level.D)reduce the price level by more than real output.51. Graphically, the full-employment, low-inflation, rapid-growth economy of the last half of the 1990s is depicted by a:A)rightward shift of the aggregate demand curve along a fixed aggregate supply curve.B)rightward shift of the aggregate supply curve along a fixed aggregate demand curve.C)rightward shift of the aggregate demand curve and a rightward shift of the aggregate supply curve.D)leftward shift of the aggregate demand curve and a leftward shift of the aggregate supply curve.52. An increase in the SRAS curve might be caused by an increase in:A)business taxes and government regulation.C) the prices of domestic resources.B) the prices of imported resources. D) productivity.53. The basic problem portrayed by the traditional Phillips Curve is: A)that a level of aggregate demand sufficiently high to result in full employment may also cause inflation. B)that changes in the composition of total labor demand tend to be deflationary. C)that unemployment rises at the same time the general price level is rising. D)the possibility that automation will increase the level of noncyclical unemployment.54. Other things equal, appreciation of the dollar: A)increases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources. B)increases aggregate demand in the United States and may decrease aggregate supply by reducing the prices of imported resources. C)decreases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources. D) decreases aggregate demand in the United States and may reduce aggregate supply by increasing the prices of imported resources.Free Response QuestionsThe economy is experiencing a recessionary gap of $100 million due to a decline in investment spending of $20 million. Show the recessionary gap using an Aggregate Expenditures graphWhat is the value of the multiplier?What is the value of the MPC and the MPS?The government wants to close the recessionary gap by either lowering taxes or increasing government spending. Show how much the government would need to lower taxes / increase spending in order to close the $100 million gap. Why do taxes have a lesser effect than government spending on GDP?The U.S. dollar appreciates against the Japanese yen. Explain what will happen to U.S. GDP AND show the effect on an Aggregate Expenditures graph.During the 2012 campaign, all candidates announce that they support tougher regulations and higher taxes for businesses. Draw and label the current investment demand curve and an AE curve.Show what happens to each graph once campaigning begins. Draw a new investment demand curve and show what happens if the real interest rate decreases. Draw a new AE graph and show the result of this change. ................
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