AP MACROECONOMICS Test Booklet

Unit 3 Retake

1.

Assume the economy is in a short-run equilibrium at point L. In the absence of any fiscal or monetary policy
actions, what will happen in the long run?
(A) The curve will shift to the right, and the economy will be in long-run equilibrium at point J.
(B) The curve will shift to the right, and the economy will be in long-run equilibrium at point M.
The curve will shift to the right, the curve will shift to the left, and the economy will be in long-
(C)
run equilibrium at point M.
(D) The curve will shift to the left, and the economy will be in long-run equilibrium at point M.
(E) The curve will shift to the right, and the economy will be in long-run equilibrium at point K.

2.

The economy of a country is currently in equilibrium at point A in the diagram above. If the government does
nothing and wages are flexible, which of the following will most likely occur in the long run?

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(A) Falling wages will shift the aggregate demand curve to the right, producing full employment.
(B) Rising wages will shift the aggregate demand curve to the right, producing full employment.
(C) The economy will remain at point A.
(D) Rising wages will shift the aggregate supply curve to the right, producing full employment.
(E) Falling wages will shift the aggregate supply curve to the right, producing full employment.

3.

Assume that the economy is at full-employment equilibrium in the diagram shown above. Which of the following
would lead to stagflation?
(A) A leftward shift of the short-run aggregate supply curve only
(B) A rightward shift of the short-run aggregate supply curve only
(C) A leftward shift of the aggregate demand curve only
(D) A rightward shift of the aggregate demand curve only
(E) A rightward shift in both the short-run aggregate supply curve and the aggregate demand curve

4. Which of the following describes the impact of an automatic stabilizer during an economic contraction?
As incomes rise, more individuals move up to higher income tax brackets, causing an automatic tax increase
(A)
and reducing consumption.
(B) As prices fall, workers accept lower wages, causing short-run aggregate supply to increase.
(C) As unemployment falls, fewer individuals receive unemployment benefits, reducing consumption.
(D) As unemployment rises, the government implements a tax decrease, stimulating consumption.
(E) As unemployment rises, more individuals receive unemployment benefits, stimulating consumption.

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5. 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

(A) I only
(B) II only
(C) III only
(D) I and II only
(E) I, II, and III

6. Which of the following changes in aggregate demand and aggregate supply will cause an increase in both the price
level and unemployment?
(A) An increase in aggregate demand, and an increase in aggregate supply
(B) An increase in aggregate demand, and no change in aggregate supply
(C) No change in aggregate demand, and a decrease in aggregate supply
(D) A decrease in aggregate demand, and no change in aggregate supply
(E) A decrease in aggregate demand, and an increase in aggregate supply

7. Which of the following changes would cause an economy’s aggregate demand curve to shift to the right?
(A) An increase in spending on imports
(B) An increase in autonomous consumption spending
(C) An increase in interest rates
(D) A decrease in the money supply
(E) A decrease in the overall price level in the economy

8. A contractionary supply shock would most likely result in

(A) an increase in aggregate demand
(B) an increase in national income
(C) an increase in gross domestic product
(D) a decrease in the general price level
(E) a decrease in employment

9. An unanticipated decrease in aggregate demand when the economy is in equilibrium will result in

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(A) a decrease in voluntary unemployment

(B) a decrease in the natural rate of unemployment
(C) a decrease in aggregate supply
(D) an increase in unplanned inventories
(E) an increase in the rate of inflation

10. Which of the following statements best describes the long-run aggregate supply curve?
(A) It is vertical because wages and input prices are fixed in the long run.
(B) It is vertical because wages and input prices are fully flexible in the long run.
(C) It is vertical because potential output is determined by a country’s central bank.
(D) It is upward sloping because wages and input prices are fixed in the long run.
(E) It is upward sloping because savings increase as interest rates rise.

11. Which of the following is an example of fiscal policy?

(A) Increasing government expenditures to build highways
(B) Increasing the money supply to increase income
(C) Decreasing the discount rate to lower unemployment and inflation
(D) Decreasing the policy rate to stimulate investment
(E) Decreasing the reserve ratio to increase bank reserves

12. Which of the following will most likely result from a decrease in government spending?
(A) An increase in output
(B) An increase in the price level
(C) An increase in employment
(D) A decrease in aggregate supply
(E) A decrease in aggregate demand

13. Which of the following is a possible limitation of fiscal policy?

(A) It affects only interest-sensitive spending.
(B) Its outcome could be delayed because of implementation lags.
(C) It is more effective during inflationary periods than during recessionary periods.
(D) It is less effective in reducing the natural rate of unemployment than monetary policy.
(E) It does not affect discouraged workers.

14. If AD and AS represent aggregate demand and aggregate supply curves, respectively, and the arrows indicate the
movement of the curves, which of the following graphs best illustrates long-run economic growth?

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(A)

(B)

(C)

(D)

(E)

15. Which of the following best explains how an economy could simultaneously experience high inflation and high
unemployment?
(A) The government increases spending without increasing taxes.
(B) The government increases taxes without increasing spending.
(C) Inflationary expectations decline.
(D) Women and teenagers stay out of the labor force.
(E) Negative supply shocks cause factor prices to increase.

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16. The aggregate demand curve is downward sloping because as the price level increases the
(A) purchasing power of wealth decreases
(B) demand for imports decreases
(C) demand for interest-sensitive expenditures increases
(D) demand for domestically produced substitute goods increases
(E) real value of fixed assets increases

17. Which of the following is true about both the long-run aggregate supply curve and the production possibilities
curve?
(A) Both curves represent unemployment and inflation.
(B) Points to the left of either curve represent efficient use of resources.
(C) Points to the right of either curve represent inefficient use of resources.
(D) Both curves represent the maximum sustainable capacity given the economy’s resources.
(E) Both curves represent fluctuations of real gross domestic product around its potential level over time.

18. If the marginal propensity to consume is , an increase of in government spending will change the real
gross domestic product by a maximum of
(A)
(B)
(C)
(D)
(E)

19.
Disposable Income Consumption
$40,000 $30,000
$50,000 $37,500
$60,000 $45,000
$70,000 $52,500

Based on the information in the table provided, what is the value of the tax multiplier?
(A)
(B)
(C)
(D)
(E)

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20. An economy is currently producing billion of output. The full-employment output is billion, and the
marginal propensity to consume is . Assuming no crowding out and a horizontal aggregate supply curve, what
level of additional spending is necessary to achieve full employment?
(A) billion
(B) billion
(C) billion
(D) billion
(E) billion

21. Which of the following explains why firms choose to produce more output in the short run as the price level
increases?
(A) Flexible input prices
(B) Improved technology
(C) Decreased subsidies
(D) Sticky nominal wages
(E) Increased purchasing power

22. The intersection of the aggregate supply curve and the aggregate demand curve occurs at the economy's equilibrium
level of
(A) real investment and the interest rate
(B) real disposable income and unemployment
(C) real national output and the price level
(D) government expenditures and taxes
(E) imports and exports

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

(A) reduce the public debt
(B) increase the possibility of a balanced budget
(C) stabilize the unemployment rate
(D) go into effect without passage of new legislation
(E) automatically reduce the inflation rate

24. A decrease in the prices of inputs will cause which of the following to occur in the short run?
(A) An increase in the aggregate demand and an increase in the price level
(B) A decrease in the aggregate demand and an increase in the price level
(C) An increase in the short-run aggregate supply and a decrease in the price level
(D) An increase in the short-run aggregate supply and an increase in the price level
(E) A decrease in the short-run aggregate supply and a decrease in the price level

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25. Suppose that disposable income is $1,000, consumption is $700, and the marginal propensity to consume (MPC) is
0.6. If disposable income then increases by $100, consumption and savings will equal which of the following?

Consumption Savings

(A)
$420 $280

Consumption Savings
(B)
$600 $400

Consumption Savings
(C)
$660 $320

Consumption Savings
(D)
$660 $440

Consumption Savings
(E)
$760 $340

26. How is long-run economic growth demonstrated in the aggregate demand–aggregate supply model?
(A) A rightward shift in the short-run aggregate supply curve
(B) A leftward shift in the long-run aggregate supply curve
(C) A rightward shift in the long-run aggregate supply curve
(D) A rightward shift in the aggregate demand curve
(E) A leftward shift in the aggregate demand curve

27. A favorable supply shock, such as a decrease in energy prices, is most likely to have which of the following short-
run effects on the price level and output?

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Price Level Output

(A)
Decrease No effect

Price Level Output

(B)
Decrease Increase

Price Level Output

(C)
Increase Increase

Price Level Output

(D)
Increase Decrease

Price Level Output

(E)
No effect No effect

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