AP Macroeconomics Unit 5 Review - All AP Classrooms

An increase in government spending with no change in taxes leads to a

A) lower income level

B) lower price level

C) smaller money supply

D) higher interest rate

E) higher bond price

D) higher interest rate

Assume that the government implements a deficit-reduction policy that results in changes in aggregate income and output. Then the Federal Reserve engages in monetary policy actions that reverse the changes in income and output caused by fiscal policy action. Which of the following sets of changes in taxes, government spending, and administered interest rates is most consistent with these policies?

A) Taxes Increase, Government Spending Increase, Administered Interest Rates Decrease

B) Taxes Increase, Government Spending Decrease, Administered Rates Decrease

C) Taxes Increase, Government Spending Decrease, Administered Interest Rates Increase

D) Taxes Decrease, Government Spending Increase, Administered Interest Rates No change

E) Taxes Decrease, Government Spending Decrease, Administered Interest Rates Decrease

B) Taxes Increase, Government Spending Decrease, Administered Rates Decrease

A stimulative fiscal policy combined with a restrictive monetary policy will necessarily cause

A) gross domestic product to increase

B) gross domestic product to decrease

C) interest rates to fall

D) interest rates to rise

E) the federal budget deficit to decrease

D) interest rates to rise

If investors feel that business conditions will deteriorate in the future, the demand for loans and real interest rate in the loanable funds market will change in which of the following ways in the short run?

A) Demand for Loans Increase, Real Interest Rate Increase

B) Demand for Loans Increase, Real Interest Rate Decrease

C) Demand for Loans Decrease, Real Interest Rate Increase

D) Demand for Loans Decrease, Real Interest Rate Decrease

E) Demand for Loans Decrease, Real Interest Rate Not change

D) Demand for Loans Decrease, Real Interest Rate Decrease

An increase in the demand for loanable funds could be best explained by which of the following?

A) There is a decrease in investment spending.

B) There is an increase in the government's budget surplus.

C) Firms are optimistic about the future performance of the country's economy.

D) Domestic investors seek higher returns by investing in foreign financial assets.

E) The economy is facing political instability.

C) Firms are optimistic about the future performance of the country's economy.

If both contractionary monetary policy and contractionary fiscal policy are carried out, what will most likely happen to interest rates and real gross domestic product (GDP) in the short run?

A) Both interest rates and real GDP will increase.

B) Both interest rates and real GDP will decrease.

C) Interest rates will decrease, and real GDP will stay the same.

D) Interest rates will increase, and real GDP will decrease.

E) Real GDP will decrease, and the change in interest rates will be indeterminate.

E) Real GDP will decrease, and the change in interest rates will be indeterminate.

If the government simultaneously engages in expansionary monetary and fiscal policies, which of the following is the effect on interest rates and unemployment?

A) Interest Rates Increase, Unemployment Indeterminate

B) Interest Rates Increase, Unemployment Decrease

C) Interest Rates Decrease, Unemployment Decrease

D) Interest Rates Indeterminate, Unemployment Decrease

E) Interest Rates Indeterminate, Unemployment Increase

D) Interest Rates Indeterminate, Unemployment Decrease

If the Federal Reserve wishes to use monetary policy to reinforce Congress' fiscal policy changes, it should

A) decrease its administered interest rates when government spending is increased

B) decrease its administered interest rates when government spending is decreased

C) increase its administered interest rates when government spending is increased

D) increase its administered interest rates when income taxes are decreased

E) decrease its administered interest rates when income taxes are increased

A) decrease its administered interest rates when government spending is increased

Suppose that the Federal Reserve is committed to keeping the nominal interest rate fixed. To maintain the interest rate target in the face of an expansionary fiscal policy, the Federal Reserve can do which of the following?

A) Increase the prime rate

B) Increase the discount rate

C) Increase the federal funds rate

D) Decrease its administered interest rates

E) Decrease income tax rates

D) Decrease its administered interest rates

Which of the following policy combinations is most likely to cure a severe recession?

A) Monetary Policy Action - Decrease interest on reserves, Taxes - Increase, Government Spending - Decrease

B) Monetary Policy Action - Decrease interest on reserves, Taxes - Decrease, Government Spending - Increase

C) Monetary Policy Action - Decrease interest on reserves, Taxes - Decrease, Government Spending - Decrease

D) Monetary Policy Action - Increase interest on reserves, Taxes - Decrease, Government Spending - Decrease

E) Monetary Policy Action - Increase interest on reserves, Taxes - Increase, Government Spending - Increase

B) Monetary Policy Action - Decrease interest on reserves, Taxes - Decrease, Government Spending - Increase

To stimulate investment in new plant and equipment without increasing the level of real output, the best policy mix is to

A) increase administered interest rates and increase government spending

B) decrease administered interest rates and decrease government spending

C) increase administered interest rates and increase income taxes

D) decrease administered interest rates and decrease income taxes

E) decrease income taxes and increase government spending

B) decrease administered interest rates and decrease government spending

Which of the following monetary and fiscal policy combinations would most likely result in a decrease in aggregate demand?

A) Central Bank's Administered Interest Rates - Lower, Income Tax Rates - Lower, Government Spending - Increase

B) Central Bank's Administered Interest Rates - Lower, Income Tax Rates - Lower, Government Spending - Decrease

C) Central Bank's Administered Interest Rates - Raise, Income Tax Rates - Raise, Government Spending - Increase

D) Central Bank's Administered Interest Rates - Raise, Income Tax Rates - Lower, Government Spending - Increase

E) Central Bank's Administered Interest Rates - Raise, Income Tax Rates - Raise, Government Spending - Decrease

E) Central Bank's Administered Interest Rates - Raise, Income Tax Rates - Raise, Government Spending - Decrease

According to the long-run Phillips curve, which of the following is true?

A) Unemployment increases with an increase in inflation.

B) Unemployment decreases with an increase in inflation.

C) Increased automation will lead to lower levels of structural unemployment in the long run.

D) Changes in the composition of the overall demand for labor tend to be deflationary in the long run.

E) The natural rate of unemployment is independent of monetary and fiscal policy changes that affect aggregate demand.

E) The natural rate of unemployment is independent of monetary and fiscal policy changes that affect aggregate demand.

According to the short-run Phillips curve, a decrease in unemployment is expected to be accompanied by

A) higher labor-force participation

B) an increase in inflation

C) an increase in the productivity of capital

D) an increase in the government deficit

E) a decrease in real gross domestic product

B

According to the short-run Phillips Curve, there is a trade-off between

A) interest rates and inflation

B) the growth of the money supply and interest rates

C) unemployment and economic growth

D) inflation and unemployment

E) economic growth and interest rates

D

An increase in which of the following will lead to lower inflation and lower unemployment?

A) Exports

B) Aggregate demand

C) Labor productivity

D) Government spending

E) The international value of domestic currency

C

Which of the following could cause simultaneous increases in inflation and unemployment?

A) A decrease in government spending

B) A decrease in the money supply

C) A decrease in the velocity of money

D) An increase in inflationary expectations

E) An increase in the overall level of productivity

D

Which of the following relationships is illustrated by a short-run Phillips curve?

A) A decrease in the rate of inflation is accompanied by an increase in the rate of economic growth.

B) A decrease in the rate of inflation is accompanied by an increase in the rate of unemployment.

C) An increase in the rate of inflation is accompanied by a decrease in the rate of economic growth.

D) An increase in the rate of inflation is accompanied by an increase in the rate of unemployment.

E) A decrease in the rate of economic growth is accompanied by a decrease in the rate of unemployment.

B

Which of the following is true of the long-run Phillips curve?

A) It shows there is a trade-off between unemployment and inflation.

B) It is positively sloped when the inflation rate exceeds the unemployment rate.

C) It is vertical at the natural rate of unemployment.

D) It shifts to the right if aggregate demand increases.

E) It is created by an adverse supply shock.

C

On a short-run Phillips curve, high rates of inflation coincide with

A) high interest rates

B) low interest rates

C) high unemployment rates

D) low unemployment rates

E) low discount rates

D

Suppose that, from 1985 to 1986, unemployment fell from 7.2 to 7.0 percent and inflation fell from 3.8 to 1.1 percent. An explanation of these changes might be that the

A) aggregate demand curve shifted to the left

B) aggregate demand curve shifted to the right

C) aggregate supply curve shifted to the left

D) aggregate supply curve shifted to the right

E) short-run Phillips curve shifted to the right

D

The diagram above shows the short-run Phillips curve (SRPC) and the long-run Phillips curve (LRPC) for an economy. If the inflation rate is currently 6 percent, which of the following is true about the current unemployment rate?

A) The current unemployment rate is 1%.

B) The current unemployment rate is 2%.

C) The current unemployment rate is 3%.

D) The current unemployment rate is 4%.

E) The current unemployment rate is 5%.

B

Which of the following will most likely occur if a government adopts an annually balanced budget rule that requires the government to eliminate any deficits or surpluses?

A) Unemployment will be eliminated and prices will be stable.

B) The national debt will increase.

C) Business cycles will become more stable.

D) The automatic stabilizing effect of fiscal policy will be eliminated.

E) The government will be forced to spend less when there are surpluses.

D

Which of the following is true about the national debt of the United States?

A) It is the debt owed to foreign investors.

B) It is the accumulation of past and current budget deficits and surpluses.

C) It increases when gross domestic product increases.

D) It increases when exports decrease, and decreases when exports increase.

E) It did not exist before 1980.

B

Which of the following will occur if the federal government runs a budget deficit?

A) The expenditure multiplier will increase.

B) The size of the national debt will increase.

C) The economy's output will decrease.

D) State governments will run a budget surplus to offset the federal deficit.

E) Interest rates will tend to decline.

B

Federal budget deficits occur when

A) more money is being spent on entitlement programs than has been allocated

B) the Internal Revenue Service spends more than it collects in taxes in a given year

C) the federal government spends more than it collects in taxes in a given year

D) high levels of unemployment use up tax collections

E) interest payments on the national debt increase from one year to the next

C

When the United States government engages in deficit spending, that spending is primarily financed by

A) increasing the required reserve ratio

B) borrowing from the World Bank

C) issuing new bonds

D) appreciating the value of the dollar

E) depreciating the value of the dollar

C

Country X's economy is in an inflationary gap. Which of the following combinations of fiscal and monetary policy actions would be most effective to restore full employment in the short run?

A) A decrease in income taxes and a decrease in the required reserve ratio

B) A decrease in income taxes and an increase in the discount rate

C) A decrease in government spending and an open-market purchase of government bonds by the country's central bank

D) An increase in government spending and targeting a lower policy rate

E) An increase in income taxes and an increase in the central bank's administered interest rates

E

An economy with limited reserves in its banking system is in short-run equilibrium as illustrated in the graph provided. Which of the following combinations of policy actions would definitely move the economy toward long-run equilibrium?

A) A decrease in government spending and an increase in income taxes

B) An increase in government spending and a central bank bond sale

C) A central bank bond purchase and an increase in the discount rate

D) A central bank bond sale and an increase in income taxes

E) A decrease in income taxes and a central bank bond purchase

E

A decrease in the policy rate accompanied by a decrease in income taxes will result in which of the following in the short run?

A) A decrease in real output

B) A decrease in the price level

C) A decrease in unemployment

D) A decrease in nominal wages

E) A decrease in the natural rate of unemployment

C

Use the graph below of a long-run Phillips Curve (LRPC) and a short-run Phillips Curve (SRPC) to answer the question.

Which of the following points illustrates an inflationary gap?

A) X

B) Y

C) Z

D) K

E) J

A

An increase in the expected inflation rate will cause which of the following?

A) A rightward shift in the aggregate demand curve

B) A rightward shift in the short-run Phillips curve

C) A rightward shift in the short-run aggregate supply curve

D) A leftward shift in the long-run Phillips curve

E) A leftward shift in the long-run aggregate supply curve

B

Use the graph below of the long-run Philips Curve (LRPC) and the short-run Phillips Curve (SRPC) to answer the question.

Assume the economy is in long-run equilibrium. A decrease in net exports will result in which of the following in the short run?

A) The SRPC will shift to the left.

B) The SRPC will shift to the right.

C) The LRPC will shift to the right.

D) There will be a movement from point B to point C.

E) There will be a movement from point B to point A.

D

Suppose that an economy with flexible wages and prices is in long-run equilibrium when the central bank contracts the money supply. What is the long-run effect on real output in the economy?

A) Real output falls.

B) Real output is unchanged.

C) Real output rises.

D) Real output falls as price levels fall.

E) Real output rises as price levels fall.

B

Assume an economy is in long-run equilibrium and the central bank engages in an expansionary monetary policy for a prolonged time period. If the velocity of money is constant, which of the following is true according to the quantity theory of money?

A) The government's budget deficit will increase.

B) Price level will increase at the same rate as the money supply.

C) Real output will exceed full employment in the long run.

D) The actual unemployment rate will exceed the natural rate of unemployment.

E) The production possibilities curve will shift inward.

B

Suppose nominal GDP is $25 million, the price level is 1.25, and the money supply is $10 million. What is real GDP and the velocity of money according to the quantity theory of money?

A) Real GDP is $2.5 million, and the velocity of money is 12.5.

B) Real GDP is $10 million, and the velocity of money is 20.

C) Real GDP is $12.5 million, and the velocity of money is 8.

D) Real GDP is $20 million, and the velocity of money is 2.5.

E) Real GDP is $25 million, and the velocity of money is 8.

D

If tax revenues are less than the total of government spending plus government transfer payments, which of the following will happen?

A) The tax multiplier will increase.

B) The spending multiplier will increase.

C) The government budget will be in surplus.

D) There will be an inflationary gap.

E) The national debt will increase.

E

To reduce the size of a country's national debt, a government could potentially take all of the following actions EXCEPT

A) decrease the supply of government bonds

B) decrease borrowing of private loanable funds

C) increase taxes

D) decrease expenditures

E) finance spending by borrowing

E

Which of the following describes a surplus in the government budget?

A) Private savings exceed private investment spending.

B) Private savings exceed consumption spending.

C) Private savings exceed government purchases plus transfer payments.

D) Tax revenues exceed government purchases plus transfer payments.

E) National debt exceeds government purchases plus transfer payments.

D

Assume policy makers increased spending and cut taxes to stimulate the economy. If the government's budget was initially in balance, which of the following will occur?

A) There will be a budget deficit, real interest rates will increase, and investment spending will be crowded out.

B) There will be a budget deficit, real interest rates will decrease, and investment spending will increase.

C) There will be a budget surplus, real interest rates will increase, and investment spending will be crowded out.

D) There will be a budget surplus, real interest rates will decrease, and investment spending will increase.

E) The budget will remain in balance, real interest rates will not change, and investment spending will not change.

A

Which of the following will most likely occur if a country's government is continuously borrowing to finance its spending without changing taxes?

A) The economy will experience an inflationary gap in the long run.

B) The government budget will be in deficit and the national debt will decrease.

C) The government budget will be in surplus and the national debt will increase.

D) Private investment in plant and equipment will decrease, resulting in a lower rate of economic growth in the long run.

E) Private investment in plant and equipment will increase, resulting in a higher rate of economic growth in the long run.

D

Which of the following terms describes the adverse effect that results when private sector investment spending competes with government deficit financing?

A) Crowding out effect

B) Real wealth effect

C) Multiplier effect

D) Exchange rate effect

E) Interest rate effect

A

Which of the following changes is most likely to cause economic growth?

A) A decrease in private savings

B) A decrease in labor productivity

C) A decrease in physical capital

D) An increase in human capital

E) An increase in the price level

D

Steady advances in technological development will result in which of the following?

A) The long-run aggregate supply curve will shift to the right, resulting in a lower full employment level of output.

B) The long-run aggregate supply curve will shift to the left, resulting in a higher natural unemployment rate.

C) The long-run aggregate supply curve will shift to the right, resulting in a higher full employment level of output.

D) The short-run aggregate supply curve will shift to the left, resulting in a lower price level and a higher full employment level of output.

E) The short-run aggregate supply curve will shift to the right, resulting in a higher price level and a higher natural rate of unemployment.

C

How will a nation's production possibilities curve (PPC) and long-run aggregate supply (LRAS) curve change as a result of an increase in both the labor force and productivity?

A) The LRAS curve will shift to the right, and the PPC will shift inward.

B) The LRAS curve will shift to the right, and the PPC will remain unchanged.

C) The LRAS curve will shift to the right, and the PPC will shift outward.

D) The LRAS curve will shift to the left, and the PPC will remain unchanged.

E) The LRAS curve will shift to the left, and the PPC will shift inward.

C

If economic growth through investment in the economy's infrastructure is desirable, which of the following policies will most likely achieve this objective?

A) Reducing income and wealth inequality

B) Increasing government borrowing for transfer payments

C) Decreasing spending on education and training of workers for higher-income jobs

D) Reducing subsidies for business investment in research and development

E) Granting tax credits for businesses in the construction sector

E

Which of the following policies will most likely promote long-run economic growth?

A) Decreasing government spending on infrastructure

B) Increasing funding for research and development

C) Decreasing funding for primary education

D) Decreasing investment tax credits

E) Increasing tax rates on interest earned on savings

B