AP Macroeconomics

Unit 2: Practice Test

Circle the letter of each correct answer.

  1. Which of the following best describes aggregate supply?
  2. The amount buyers plan to spend on output.
  3. A schedule showing the relationship between inputs and outputs.
  4. A schedule showing the trade-off between inflation and unemployment.
  5. A schedule indicating the level of real output that will be purchased at each possible price level.
  6. A schedule indicating the level of real output that will be produced at each possible price level.
  1. The short-run aggregate supply curve will shift to the right when
  2. Energy prices increase.
  3. Government regulation increases.
  4. Prices of inputs decrease.
  5. Investment spending decreases.
  6. Productivity rates decrease.
  1. A rightward shift in the aggregate demand curve with horizontal aggregate supply curve will cause employment and the price level to change in which of the following ways?

EmploymentPrice Level

  1. Increase Increase
  2. IncreaseDecrease
  3. Increase No change
  4. DecreaseNo change
  5. No changeNo change
  1. An increase in the capital stock will cause the
  2. Aggregate demand curve to shift leftward.
  3. Production possibilities curve will shift in.
  4. Phillips curve to shift out.
  5. Long-run aggregate supply curve to shift rightward.
  6. Consumption function to shift down.
  1. A change in which of the following will cause the aggregate demand curve to shift?
  2. Energy prices.
  3. Productivity rates.
  4. Consumer wealth.
  5. Prices of inputs.
  6. Prices of consumer goods.
  1. An increase in labor productivity would most likely cause real gross domestic product and the price level to change in which of the following ways?

Real GDPPrice Level

  1. IncreaseIncrease
  2. IncreaseDecrease
  3. IncreaseNo change
  4. DecreaseIncrease
  5. DecreaseNo change
  1. If Maria Escalera’s disposable income increases from $600 to $650 and her level of personal consumption expenditures increase from $480 to $520, you may conclude that her marginal propensity to
  2. Consume is 0.8.
  3. Consume is 0.4.
  4. Consume is 0.25.
  5. Save is 0.8.
  6. Save is 0.25.
  1. In which of the following ways will increases in short-run aggregate supply change the price level and unemployment?

Price Level Unemployment

  1. IncreaseNo change
  2. DecreaseDecrease
  3. DecreaseIncrease
  4. DecreaseNo change
  5. No changeIncrease
  1. Assume the aggregate supply curve is upward sloping and the economy is in a recession. If the government increases both taxes and government spending by $25 billion, the price level and real GDP will most likely change in which of the following ways?

Price LevelReal GDP

  1. IncreaseIncrease
  2. IncreaseDecrease
  3. IncreaseNo change
  4. DecreaseDecrease
  5. DecreaseNo change
  1. Which of the following fiscal policy actions would be most effective in combating a recession?

Government

_____Taxes______Spending_____

  1. $25 billion decrease$25 billion decrease
  2. $25 billion decrease$25 billion increase
  3. $25 billion decreaseNo change
  4. $25 billion increase$25 billion decrease
  5. $25 billion increase$25 billion increase
  1. If the primary goal is to reduce inflation, which of the following fiscal policy actions would be appropriate during a period of a rapidly increasing consumer price index?

I.Reduce government expenditures for defense and space research.

II.Increase transfer payments to those most severely affected by the rising price index.

III.Increase personal income tax rates.

  1. I only.B. II only.C. III only.D. I and III only.E. II and III only.
  1. If there is a decrease in the short-run aggregate supply curve and no changes in monetary and fiscal policies are implemented, the economy over time will
  2. Remain at the new price and output level.
  3. Continue to have rising prices and decreasing real GDP.
  4. Experience increasing nominal wages.
  5. Return to the original output and price level.
  6. Experience a leftward shift in the aggregate demand curve.
  1. A decrease in personal income taxes will most likely result in an increase in real GDP because which of the following occurs?

I.Government spending decreases to maintain a balanced budget.

II.Consumption spending increases because disposable personal income increases.

III.Investment spending decreases because disposable personal income increases.

  1. I only.
  2. II only.
  3. III only.
  4. I and III only.
  5. I, II and III.
  1. If the marginal propensity to consume is two-thirds, then an increase in personal income taxes of $100 will most likely result in
  2. A decrease in consumption of $100.
  3. A decrease in autonomous investment of $100.
  4. A decrease in consumption of $67 and an increase in savings of $33.
  5. A decrease in consumption of $67 and a decrease in savings of $33.
  6. An increase in government spending of more than $100.
  1. A serve, sustained increase in oil prices would most likely cause short-run and long-run aggregate supply curves and the production possibilities curve to change in which of the following ways?

Short-RunLong-Run Production

Aggregate Aggregate Possibilities

Supply Curve Supply Curve ___Curve___

  1. Decrease No change Shift outward
  2. Decrease Decrease Shift outward
  3. Decrease Decrease Shift inward
  4. Increase No change No change
  5. Increase Increase Shift inward
  1. A rapid increase in successful research and development projects for the nation will most likely result in which of the following changes in the short-run and the long-run aggregate supply curves and the production possibilities curve?

Short-Run Long-Run Production

Aggregate Aggregate Possibilities

Supply Curve Supply Curve ___Curve___

  1. Decrease No change No change
  2. Decrease Decrease Shift inward
  3. Increase No change Shift inward
  4. Increase Increase No change
  5. Increase Increase Shift outward
  1. An increase in personal income taxes will most likely result in which of the following changes in real GDP and the price level in the short-run?

Real GDPPrice Level

  1. Decrease Decrease
  2. Decrease Increase
  3. IncreaseNo change
  4. IncreaseIncrease
  5. IncreaseNo change

Free Response Section

1. Assume the economy is in long run equilibrium at full employment.

A.Draw the following graphs

  1. An aggregate demand / aggregate supply (AS/AD) illustrating the initial equilibrium

B.Beneath the graph, show and explain the impact of a sudden, large decrease in private investment on each of the following.

i.OutputOutput will decrease due to a leftward shift in AD.

ii.Price levelPrice level will decrease due to a leftward shift in AD.

C.In the absence of any fiscal policy, describe and illustrate the expected long run changes in the AS/AD model. SRAS increase, price level decrease, output increase to equilibrium.

D. Assume now that the fiscal policy makers deal with the decrease in investment by promoting changes in spending and taxes so as to maintain a balanced budget.

  1. Explain specifically what this policy would entail increase taxes and Govn’t spending.
  2. Explain how the policy would affect aggregate demand, output and the price level Shift AD right, increase price level and output.

2. Assume that a country’s economy is operating at less than full employment.

(a) Draw a correctly labeled graph of aggregate demand and aggregate supply, and show each of the following.

(i) Long-run aggregate supply curve

(ii) Current output and price level

(b) Assume that policy makers take no policy action and the economy is allowed to “self correct”. Explain what will happen to each of the following.

(i) Short-run aggregate supply

(ii) Employment

(iii) price level and output

(c) Now assume that instead of taking no policy action, the government implements a special tax incentive to encourage individuals to increase spending. Show how the following will be affected:

(i) aggregate demand

(ii) price level and output

(iii) employment

Problem 2

A)

One point for correctly labeled AS/AD graph

One point for showing a LRAS

One point for showing current output at AS=AD < LRAS

B)

SRAS will shift to the right

SRAS increases (shift right) because there will be a decrease in the wage rate as a result of the unemployment

Unemployment will be restored to its natural rate with lower price levels.

C)
LRAS will shift to the right
Investment increase; increases capital stock