Unit 3 Retake / Practice Test AP Macroeconomics Krugman ...



Unit 3 Practice Test AP Macroeconomics Krugman Text

Multiple Choice

Identify the choice that best completes the statement or answers the question.

____ 1. The marginal propensity to consume is:

|A. |increasing if the marginal propensity to save is increasing. |

|B. |the proportion of total disposable income that the average family consumes. |

|C. |the change in consumer spending divided by the change in aggregate disposable income. |

|D. |the change in consumer spending less the change in aggregate disposable income. |

|E. |equal to 1. |

____ 2. The MPS plus the MPC must equal:

|A. |zero. |

|B. |one. |

|C. |total income. |

|D. |saving. |

|E. |disposable income. |

____ 3. An increase in the MPC:

|A. |increases the multiplier. |

|B. |shifts the autonomous investment line upward. |

|C. |decreases the multiplier. |

|D. |shifts the autonomous investment line downward. |

|E. |decreases the slope of the consumption function. |

____ 4. Suppose the government increases its spending by $100 billion as a stimulus package. If the MPC is 0.6, then equilibrium income will:

|A. |decrease by $250 billion. |

|B. |increase by $250 billion. |

|C. |increase by $600 billion. |

|D. |decrease by $400 billion. |

|E. |increase by $400 billion. |

____ 5. If the size of MPS is decreasing, it will:

|A. |make the multiplier smaller. |

|B. |make the multiplier larger. |

|C. |not affect the value of the multiplier. |

|D. |increase the interest rate. |

|E. |cause the MPC to also decrease. |

____ 6. Suppose the marginal propensity to consume changes from 0.75 to 0.90. How will this affect the consumption function?

|A. |The slope will get steeper. |

|B. |Autonomous consumption will increase. |

|C. |The function will exhibit a parallel shift upward. |

|D. |The slope will get steeper and autonomous consumption will increase. |

|E. |The function will exhibit a parallel shift downward. |

____ 7. According to the table below, the MPC and autonomous consumption are ________ and ________, respectively, for Bob.

|Individual Consumption Function for Bob |

|Disposable Income |Bob’s Consumption |

|$0 |$9,000 |

|$10,000 |13,000 |

|A. |0.6; $10,000 |

|B. |0.4; $13,000 |

|C. |0.6; $9,000 |

|D. |0.4; $9,000 |

|E. |0.4; $22,000 |

____ 8. Other things being equal, investment spending ________ as long as ________.

|A. |decreases; technological innovation develops faster than technological obsolescence |

|B. |increases; sales exceed the existing production capacity |

|C. |increases; the rate of growth of real GDP is lower than the marginal propensity to save |

|D. |decreases; the rate of growth of physical capital is positive |

|E. |increases; market interest rates continue to rise |

____ 9. Positive unplanned inventory investment occurs when:

|A. |actual depreciation is less than expected depreciation. |

|B. |actual sales are less than expected sales. |

|C. |actual depreciation is more than expected depreciation. |

|D. |actual sales are more than expected sales. |

|E. |actual sales exceed expected depreciation. |

Scenario 16-2: Income-Expenditure Equilibrium

Autonomous Consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8.

____ 10. Use Scenario 16-2 above. If GDP is $3,000, how much is unplanned inventory investment?

|A. |0 |

|B. |$600 |

|C. |$100 |

|D. |–$100 |

|E. |$200 |

|GDP |Disposable income |Consumption |Planned Investment |

|(in billions) |(in billions) |(in billions) |(in billions) |

|$0 |$0 |$400 |$600 |

|500 |500 |700 |600 |

|1,000 |1,000 |1,000 |600 |

|1,500 |1,500 |1,300 |600 |

|2,000 |2,000 |1,600 |600 |

|2,500 |2,500 |1,900 |600 |

|3,000 |3,000 |2,200 |600 |

|Table 16-3: The Economy of Albernia |

____ 11. Use Table 16-3 above. If GDP is $1,500 billion, then the level of unplanned inventories will be equal to:

|A. |$400 billion. |

|B. |–$400 billion. |

|C. |$600 billion. |

|D. |–$600 billion. |

|E. |zero. |

____ 12. An increase in the expected future disposable income of households:

|A. |shifts the planned aggregate spending line down. |

|B. |increases the slope of the aggregate spending line. |

|C. |decreases the slope of the aggregate spending line. |

|D. |shifts the planned aggregate spending line up. |

|E. |causes a movement upward along the aggregate spending line. |

Scenario 16-3: Aggregate Consumption Function

Use the following information to answer the next two questions. Suppose the aggregate consumption function is given by the following equation: C = 1,000 + 0.75YD where C stands for consumption and YD stands for disposable income.

____ 13. Use Scenario 16-3. Suppose disposable income increases by $100, this means aggregate consumption will increase by _________ and autonomous consumption _______________.

|A. |$75; remains at $1000 |

|B. |$1000; remains at $75 |

|C. |$100; increases by $100 |

|D. |$175; increases by $100 |

|E. |$400; remains at $1000 |

____ 14. If the government lowers taxes in response to a recession, the government is engaging in what economists call:

|A. |monetary policy. |

|B. |investment policy. |

|C. |consumption policy. |

|D. |fiscal policy. |

|E. |foreign exchange policy. |

_____ 15. A cut in taxes ________, therefore shifting the aggregate demand curve to the ________.

|A. |decreases government transfers and consumption; right |

|B. |increases disposable income and consumption; right |

|C. |decreases the marginal propensity to save and consumption; left |

|D. |increases corporate profits and investment; left |

|E. |increases disposable income and investment; left |

____ 16. The short run in macroeconomic analysis is a period:

|A. |in which many production costs can be assumed to be fixed. |

|B. |in which wages become fully flexible. |

|C. |of 2 months, and the long run is a period greater than 12 months. |

|D. |in which interest rates are fixed. |

|E. |in which the unemployment rate is assumed constant. |

____ 17. Changes in short-run aggregate supply can be caused by changes in:

|A. |wages. |

|B. |wealth. |

|C. |government spending. |

|D. |consumption spending. |

|E. |investment spending. |

Figure 19-1: Shifts of the AD–AS Curves

[pic]

____ 18. Use the “Shifts of the AD–AS Curves” Figure 19-1. In the short run, an increase in net exports is illustrated by:

|A. |Panel (A). |

|B. |Panel (B). |

|C. |Panel (C). |

|D. |Panel (D). |

|E. |Panels (A) and (C). |

____ 19. In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of:

|A. |LRAS and SRAS. |

|B. |LRAS and aggregate demand. |

|C. |SRAS and aggregate demand. |

|D. |potential output and LRAS. |

|E. |potential output and aggregate demand. |

____ 20. A natural disaster that destroys part of a country's infrastructure is a type of _________ and therefore shifts the _________ to the _________.

|A. |negative demand shock; aggregate demand curve; right |

|B. |negative supply shock; aggregate demand curve; left |

|C. |negative supply shock; short-run aggregate supply curve; left |

|D. |negative demand shock; long-run aggregate supply curve; left |

|E. |negative supply shock; short-run aggregate supply curve; right |

____ 21. Suppose the equilibrium aggregate price level is rising and the equilibrium level of real GDP is falling. Which of the following most likely caused these changes?

|A. |An increase in short-run aggregate supply. |

|B. |An increase in aggregate demand. |

|C. |A decrease in short-run aggregate supply. |

|D. |A decrease in aggregate demand. |

|E. |An increase in short-run aggregate supply and an increase in aggregate demand. |

____ 22. Inflationary and recessionary gaps are closed by self-correcting adjustments that shift:

|A. |the SRAS curve. |

|B. |the AD curve. |

|C. |the LRAS curve. |

|D. |both the SRAS curve and the LRAS curve. |

|E. |both the AD curve and LRAS curve. |

____ 23. A recessionary gap will be eliminated because there is _______ pressure on wages, causing the _______ .

|A. |downward; short-run aggregate supply curve to shift rightward. |

|B. |downward; short-run aggregate supply curve to shift leftward. |

|C. |downward; aggregate demand curve to shift rightward. |

|D. |upward; aggregate demand curve to shift to leftward. |

|E. |upward; short-run aggregate supply curve to shift rightward. |

Figure 19-7: AD–AS Model II

[pic]

____ 24. Use the “AD–AS Model II” Figure 19-7 above. As the size of the labor force increases over time, which of the following will take place?

|A. |LRAS will shift to the right. |

|B. |LRAS will shift to the left. |

|C. |AD curve will shift to the left. |

|D. |AD curve will shift to the right. |

|E. |SRAS curve will shift to the right. |

____ 25. Stagflation occurs when:

|A. |the aggregate price level and the aggregate output level both fall. |

|B. |the aggregate price level falls and the aggregate output level rises. |

|C. |the aggregate price level rises and the aggregate output level falls. |

|D. |the aggregate price level and the aggregate output level both rise. |

|E. |the aggregate price level rises and the nominal interest rate falls. |

____ 26. If there is a sudden increase in commodity prices, this will lead to a shift in the:

|A. |SRAS curve to the right resulting in higher aggregate output. |

|B. |AD curve to the right resulting in higher aggregate price levels. |

|C. |SRAS curve to the left resulting in lower aggregate output. |

|D. |AD curve to the left resulting in lower aggregate price levels. |

|E. |LRAS curve to the right resulting in higher aggregate output. |

____ 27. The current level of real GDP lies above potential GDP. An appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.

|A. |decrease government purchases; AD; right. |

|B. |increase government purchases; AD; left. |

|C. |decrease government purchases; AD; left. |

|D. |increase tax rates; AD; right. |

|E. |increase the federal funds rate; AD; left |

Figure 20-2: North-West Government

[pic]

____ 28. Use the “North-West Government” Figure 20-2. Using the accompanying figure, which of the following would be the appropriate response of the North-West government?

|A. |Expand aggregate demand by increasing taxes to close the inflationary gap. |

|B. |Reduce aggregate demand by cutting taxes to close the inflationary gap. |

|C. |Expand aggregate demand by decreasing taxes to close the recessionary gap. |

|D. |Reduce aggregate demand by increasing taxes to close the recessionary gap. |

|E. |Expand aggregate demand by increasing taxes to close the recessionary gap. |

____ 29. An expansionary fiscal policy:

|A. |typically decreases a government budget deficit or increases a government budget surplus. |

|B. |may include decreases in government spending. |

|C. |may include increases in the money supply. |

|D. |may include decreases in taxes. |

|E. |may include a reduction in transfer payments. |

Figure 20-6: Fiscal Policy II

[pic]

____ 30. Use the “Fiscal Policy II” Figure 20-6. Suppose that this economy is in equilibrium at E2. If there is an increase in government transfers, then:

|A. |AD2 will shift to the right, causing an increase in the price level and an increase in real GDP. |

|B. |AD2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. |

|C. |AD1 will shift to the right, causing an increase in the price level and an increase in real GDP. |

|D. |AD1 will shift to the left, causing a decrease in the price level and a decrease in real GDP. |

|E. |AD2 will shift to the right, causing an increase in the price level and a decrease in real GDP. |

Figure 20-7: Fiscal Policy Choices

[pic]

____ 31. Use the “Fiscal Policy Choices” Figure 20-7. In Panel (a), the economy is initially at output level Y1 and there is:

|A. |an inflationary gap. |

|B. |a recessionary gap. |

|C. |equilibrium at full employment. |

|D. |A budget gap. |

|E. |a foreign exchange gap. |

Scenario 20-1: Fiscal Policy

Consider the economy of Arcadia. The households of Arcadia spend 75% of their income. There are no taxes and no foreign trade. The currency of Arcadia is called “Arcs”. The level of potential output in Arcadia is 600 billion arcs.

____ 32. Use Scenario 20-1. Refer to the information provided. Suppose the actual real GDP in Arcadia is 500 billion arcs. Then, the economy has:

|A. |a recessionary gap. |

|B. |production at the full-employment level. |

|C. |an inflationary gap. |

|D. |a liquidity trap. |

|E. |an unemployment rate that is higher than the natural rate of unemployment. |

____ 33. Suppose an economy is producing real GDP of $300 billion. The potential output is equal to $400 billion, and the MPC is equal to 0.80. Then the government should follow a policy of:

|A. |raising taxes by $25 billion to take the economy back to potential output. |

|B. |cutting taxes by $33.33 billion to take the economy back to potential output. |

|C. |raising taxes by $33.33 billion to take the economy back to potential output. |

|D. |cutting taxes by $25 billion to take the economy back to potential output. |

|E. |cutting taxes by $20 billion to take the economy back to potential output. |

____ 34. Assume that the MPC = 0.8 and the government increases spending by $100 billion, financing this spending with a $100 billion tax increase. Which of the following will be the likely effect of this action?

|A. |Real GDP will contract by $200 billion. |

|B. |Real GDP will contract by $100 billion. |

|C. |Real GDP will expand by $500 billion. |

|D. |Real GDP will expand by $400 billion. |

|E. |Real GDP will expand by $100 billion. |

Figure 38-1: Productivity

[pic]

____ 35. Use the “Productivity” Figure 38-1. Suppose there has been an increase in physical capital per worker with everything else remaining unchanged, then it is shown on the diagram as:

|A. |a movement from B to C. |

|B. |a movement from A to C. |

|C. |a movement from A to B. |

|D. |a movement from B to A. |

|E. |a movement from C to B. |

Unit 3 Retake / Practice Test AP Macroeconomics Krugman Text 2012

Answer Section

MULTIPLE CHOICE

1. ANS: C PTS: 1 DIF: E REF: Module 16

SKL: Definitional

2. ANS: B PTS: 1 DIF: E REF: Module 16

SKL: Concept-Based

3. ANS: A PTS: 1 DIF: M REF: Module 16

SKL: Critical Thinking

4. ANS: B PTS: 1 DIF: M REF: Module 16

SKL: Critical Thinking

5. ANS: B PTS: 1 DIF: M REF: Module 16

SKL: Critical Thinking

6. ANS: A PTS: 1 DIF: M REF: Module 16

SKL: Critical Thinking

7. ANS: D PTS: 1 DIF: M REF: Module 16

SKL: Critical Thinking

8. ANS: B PTS: 1 DIF: M REF: Module 16

SKL: Critical Thinking

9. ANS: B PTS: 1 DIF: M REF: Module 16

SKL: Concept-Based

10. ANS: D PTS: 1 DIF: D REF: Module 16

SKL: Analytical Thinking

11. ANS: B PTS: 1 DIF: M REF: Module 16

SKL: Analytical Thinking

12. ANS: D PTS: 1 DIF: M REF: Module 16

SKL: Critical Thinking

13. ANS: A PTS: 1 DIF: M REF: Module 16

SKL: Critical Thinking

14. ANS: D PTS: 1 DIF: E REF: Module 17

SKL: Concept-Based

15. ANS: B PTS: 1 DIF: M REF: Module 17

SKL: Concept-Based

16. ANS: A PTS: 1 DIF: E REF: Module 18

SKL: Definitional

17. ANS: A PTS: 1 REF: Module 18

18. ANS: A PTS: 1 DIF: M REF: Module 19

SKL: Analytical Thinking

19. ANS: C PTS: 1 DIF: M REF: Module 19

SKL: Concept-Based

20. ANS: C PTS: 1 DIF: M REF: Module 19

SKL: Critical Thinking

21. ANS: C PTS: 1 DIF: M REF: Module 19

SKL: Critical Thinking

22. ANS: A PTS: 1 DIF: M REF: Module 19

SKL: Concept-Based

23. ANS: A PTS: 1 DIF: M REF: Module 19

SKL: Concept-Based

24. ANS: A PTS: 1 DIF: M REF: Module 19

SKL: Critical Thinking

25. ANS: C PTS: 1 DIF: M REF: Module 19

SKL: Definitional

26. ANS: C PTS: 1 DIF: E REF: Module 19

SKL: Definitional

27. ANS: C PTS: 1 DIF: M REF: Module 19

SKL: Critical Thinking

28. ANS: C PTS: 1 DIF: M REF: Module 20

SKL: Critical Thinking

29. ANS: C PTS: 1 DIF: M REF: Module 20

SKL: Critical Thinking

30. ANS: B PTS: 1 DIF: M REF: Module 20

SKL: Critical Thinking

31. ANS: A PTS: 1 DIF: M REF: Module 20

SKL: Critical Thinking

32. ANS: D PTS: 1 DIF: M REF: Module 20

SKL: Concept-Based

33. ANS: B PTS: 1 DIF: M REF: Module 20

SKL: Concept-Based

34. ANS: A PTS: 1 DIF: M REF: Module 20

SKL: Concept-Based

35. ANS: D PTS: 1 DIF: D REF: Module 21

SKL: Analytical Thinking

36. ANS: E PTS: 1 DIF: D REF: Module 21

SKL: Critical Thinking

37. ANS: C PTS: 1 DIF: M REF: Module 38

SKL: Analytical Thinking

38. ANS: D PTS: 1 DIF: M REF: Module 39

SKL: Analytical Thinking

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