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AP Macroeconomics Unit 5: Long-Run Consequences of Stabilization Policies

12 questions

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Unit 5: Long-Run Consequences of Stabilization Policies

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Question 1

When an economy has an inflationary gap, the long-run self-correction mechanism works through:

A.Workers demanding higher wages as the labor market tightens, causing SRAS to shift left.B.The government automatically cutting spending to reduce AD.C.The Fed automatically raising the money supply to lower interest rates.D.Firms reducing output due to falling demand as consumers cut back on spending.

Question 2

If expected inflation increases while the nominal interest rate is unchanged, which of the following is most likely to occur in the loanable funds market?

A.Borrowers demand more loanable funds, and lenders supply more, raising the nominal rate.B.Lenders demand a higher nominal rate to preserve the real return; the equilibrium nominal rate rises.C.Real interest rates rise because expected inflation raises the cost of borrowing.D.Both supply and demand for loanable funds shift right by equal amounts, leaving the rate unchanged.

Question 3

A positive supply shock (e.g., a dramatic fall in energy prices) shifts SRAS to the right. What are the short-run and long-run effects on the price level and real GDP?

A.Short run: lower price level and higher real GDP. Long run: price level and real GDP return to original levels.B.Short run: lower price level and higher real GDP. Long run: wages fall, SRAS shifts further right, permanently raising potential GDP.C.Short run: lower price level and higher real GDP above potential. Long run: wages and input costs adjust upward, returning output to potential at a lower price level than before the shock.D.Short run: higher price level and higher real GDP. Long run: price level falls back to original.

Question 4

Economic growth in the long run is best represented graphically by:

A.A rightward shift of the AD curve.B.A rightward shift of the LRAS curve.C.A movement along the SRAS curve from left to right.D.A leftward shift of the LRAS curve.

Question 5

The short-run Phillips curve shows a trade-off between inflation and unemployment. If the government pursues expansionary fiscal policy, where does the economy move along the short-run Phillips curve?

A.Toward higher inflation and lower unemployment.B.Toward lower inflation and higher unemployment.C.Along the long-run Phillips curve toward lower unemployment.D.Upward along the long-run Phillips curve.

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Question 6

Stagflation is most directly caused by which of the following?

A.A rapid increase in aggregate demand that outpaces productive capacity.B.A negative supply shock that shifts SRAS to the left.C.A large increase in government spending that crowds out private investment.D.A decrease in the money supply that reduces both output and prices.

Question 7

The long-run Phillips curve (LRPC) is vertical at the natural rate of unemployment (NRU). This vertical shape implies that:

A.Higher inflation permanently reduces unemployment below the NRU.B.In the long run, there is no trade-off between inflation and unemployment.C.The short-run Phillips curve is also vertical.D.Any level of inflation is consistent with the natural rate of unemployment.

Question 8

In the long run, an increase in aggregate demand with an economy already at full employment will result in which of the following, according to classical macroeconomic theory?

A.Higher real GDP and a higher price level.B.Higher price level only; real GDP returns to potential.C.Lower price level and lower real GDP.D.Permanently higher real GDP with no change in the price level.

Question 9

According to the quantity theory of money ( $M V = P Q$ ), if the velocity of money (V) and real output (Q) are constant, a 5% increase in the money supply (M) will cause:

A.A 5% increase in real output (Q).B.A 5% increase in the price level (P).C.A 5% increase in velocity (V).D.No change in any variable, as the equation must always balance.

Question 10

An economist argues that expansionary fiscal policy in the long run primarily increases the price level rather than real GDP. This position is most consistent with which framework?

A.The Keynesian model, which emphasizes the multiplier effect.B.The classical/monetarist model, which holds that LRAS is vertical and real GDP returns to potential.C.The short-run AD/AS model without crowding out.D.The Phillips curve, which predicts that lower unemployment always reduces inflation.

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Question 11

Crowding out occurs when expansionary fiscal policy leads to:

A.Lower private investment because government borrowing raises interest rates.B.Higher private investment because government spending raises incomes.C.Lower price levels because increased supply of goods reduces inflation.D.Lower government spending in future periods to balance the budget.

Question 12

The short-run Phillips curve shifts upward (worsens the trade-off) primarily because of:

A.An increase in the labor force participation rate.B.Rising inflation expectations or an adverse supply shock.C.A decrease in aggregate demand that reduces inflation.D.A decrease in the money supply engineered by the Fed.

AP Macroeconomics Unit 5: Long-Run Consequences of Stabilization Policies — Free with Answer Explanations | Test Practice Hub