AP Macro Unit 3 Review

How does the automatic adjustment mechanism move the economy to potential real gross domestic product (GDP) in the long run when current real GDP is above potential GDP?

Nominal wages rise, shifting the short-run aggregate supply curve to the left.

Recessions will most likely be less severe if tax revenues and transfer payments automatically change in which of the following ways?

Tax revenues decrease, and transfer payments increase.

Which of the following is an example of an automatic stabilizer?

Progressive income taxes

Which of the following changes will necessarily cause inflation?

An increase in aggregate demand and a decrease in short-run aggregate supply.

If the government implements an expansionary fiscal policy, how will real gross domestic product (GDP) and the price level be affected in the short run?

Real GDP: Increase, Price Level: Increase

Which of the following changes would cause an economys aggregate demand curve to shift to the right?

An increase in autonomous consumption spending

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

It is nondiscretionary fiscal policy that mitigates business cycles by increasing aggregate demand during recessions and decreasing aggregate demand during expansions.

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

An increase in exports

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 consume is 0.8. How will a decrease in taxes of $100 billion and a decrease in government spending $100 billion affect aggregate demand?

Aggregate demand will decrease by $100 billion

An ongoing increase in the price of oil will result in

cost-push inflation

A negative aggregate supply shock will result in which of the following in the short run?

An increase in both the price level and the unemployment rate

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

A decrease in the costs of production

Assume the countries of Ornania and Kumbagi are major trading partners. Ornania is currently in long-run macroeconomic equilibrium. As a result of a recession in its economy, Kumbagi decreases its demand for goods produced in Ornania. Which of the following will occur in Ornania in the short run?

The aggregate demand curve will shift to the left, resulting in a recessionary gap.

During a period of stagflation, a nation is most likely experiencing

a decrease in short-run aggregate supply

If there is an inflationary gap, which of the following changes will move the economy back toward full employment?

An increase in taxes

According to the graph above, an increase in aggregate supply will most likely cause income and employment to change in which of the following ways?

Income: Increase, Employment: Increase

An increase in which of the following would cause the aggregate demand curve to shift to the left?

Income taxes

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

All of the following explain why prices and wages are sticky EXCEPT

competition in the business sector

According to the graph above, which of the following is true about the long-run equilibrium of the economy depicted?

As wages increase, the short-run aggregate supply curve will shift to the left to restore long-run equilibrium

An economy is in long-run macroeconomic equilibrium. What will be the short-run effects of an increase in investment spending?

An increase in real output, a decrease in unemployment, and an increase in the price level

The table below shows the level of household savings at various levels of disposable income in a country.

Based on the level of savings and disposable income data in the table above, which of the following must be true?

The marginal propensity to consume Is 0.9.

Assume the government reduces its spending and raises income taxes in an effort to reduce the budget deficit. The most likely short-run result will be an increase in

unemployment

Which of the following is an example of an expansionary fiscal policy?

An increase in government expenditures