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AP Macroeconomics Unit 3: National Income and Price Determination

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Unit 3: National Income and Price Determination

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Question 1

Which of the following events would shift the Aggregate Demand (AD) curve to the right?

A.A significant increase in personal income taxes.B.A decrease in consumer confidence about the future.C.A decrease in interest rates that stimulates business investment.D.An appreciation of the domestic currency that makes exports more expensive abroad.

Question 2

The marginal propensity to consume (MPC) is 0.75. The government increases spending by $100 billion. By how much does equilibrium GDP increase, assuming no crowding out?

A.$75 billionB.$400 billionC.$100 billionD.$133 billion

Question 3

Automatic stabilizers help smooth the business cycle without new legislative action. Which of the following is the best example of an automatic stabilizer?

A.A government stimulus package passed during a recession.B.A central bank cutting interest rates during a downturn.C.Progressive income taxes and unemployment insurance benefits.D.A balanced-budget requirement that forces spending cuts during recessions.

Question 4

In a closed economy with no government, the equilibrium condition is $Y = C + I$ . If $C = 100 + 0.8 Y$ and $I = 200$ , what is the equilibrium level of income $Y$ ?

A.$1,000B.$1,500C.$3,000D.$300

Question 5

Which of the following best explains why fiscal policy may be less effective when an economy is at or near full employment?

A.The MPC falls to zero at full employment, eliminating the multiplier effect.B.Expansionary fiscal policy primarily raises the price level rather than real output when the economy is at potential.C.The government cannot increase spending when unemployment is low.D.Fiscal policy only works during recessions and has no effect at any other time.

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Question 6

The consumption function is $C = 200 + 0.75 Y_{d}$ . If disposable income $(Y_{d})$ increases by $400 billion, by how much does consumption change?

A.$200 billionB.$300 billionC.$400 billionD.$100 billion

Question 7

In the AD/AS model, a decrease in aggregate demand (AD) with a downward-sticky price level will most likely result in:

A.Lower price level and unchanged real GDP.B.Lower real GDP with the price level unchanged in the short run.C.Higher price level and lower real GDP simultaneously.D.Unchanged real GDP and unchanged price level.

Question 8

In the AD/AS model, an economy is initially at long-run equilibrium. Which combination of events creates an inflationary gap?

A.AD shifts left while SRAS shifts right.B.AD shifts right, moving actual GDP above potential GDP.C.LRAS shifts right, increasing potential GDP above actual GDP.D.SRAS shifts left, reducing real GDP below potential.

Question 9

The multiplier effect on GDP from a change in taxes is different from the multiplier effect from a change in government spending. Given $M P C = 0.75$ , what are the spending multiplier and the tax multiplier, respectively?

A.Spending multiplier = 3; Tax multiplier = −3B.Spending multiplier = 4; Tax multiplier = −3C.Spending multiplier = 4; Tax multiplier = −4D.Spending multiplier = 5; Tax multiplier = −4

Question 10

If the short-run aggregate supply (SRAS) curve shifts left due to a sharp rise in oil prices, the most likely immediate outcome is:

A.Higher price level and higher real GDP.B.Lower price level and lower real GDP.C.Higher price level and lower real GDP (stagflation).D.Higher price level and unchanged real GDP.

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Question 11

An economy is operating below potential GDP (recessionary gap). Using the Keynesian model, which fiscal policy would best restore full employment?

A.Increase taxes and reduce government spending to balance the budget.B.Increase government spending and/or cut taxes to shift AD right.C.Reduce the money supply to raise interest rates and reduce inflation.D.Allow wages and prices to fall until the economy self-corrects.

Question 12

If the MPC is 0.8 and the government simultaneously increases spending by $50 billion AND raises taxes by \$ 50 billion, what is the net change in equilibrium GDP (balanced budget multiplier)?

A.$0 (no net change)B.$50 billion increaseC.$200 billion increaseD.$40 billion decrease

AP Macroeconomics Unit 3: National Income and Price Determination — Free with Answer Explanations | Test Practice Hub