AP Macroeconomics Unit 3 Test Review

Front

Assume that the marginal propensity to consume is 0.90. As a result of an increase in the tax rates, the government collects an additional $20 million. What will be the impact on gross domestic product (GDP)?

Back

GDP will decrease by a maximum of $180 million.

Answer explanation

With a marginal propensity to consume of 0.90, the multiplier effect is 10. An additional $20 million in taxes leads to a decrease in consumption, resulting in a maximum GDP decrease of $180 million (20 million x 9).

Front

The short-run aggregate supply curve will shift to the right when: energy prices increase, government regulation increases, prices of inputs decrease, productivity rates decrease.

Back

prices of inputs decrease

Answer explanation

The short-run aggregate supply curve shifts to the right when prices of inputs decrease, as lower input costs allow producers to supply more at every price level, increasing overall supply.

Front

If Mr. Woodward's disposable income increases from $600 to $650 and her level of personal consumption expenditures increase from $480 to $520, you may conclude that her marginal propensity to

Back

consume is 0.8

Answer explanation

To find the marginal propensity to consume (MPC), use the formula: MPC = Change in Consumption / Change in Income. Here, MPC = (520 - 480) / (650 - 600) = 40 / 50 = 0.8, confirming the correct choice is that her MPC is 0.8.

Front

An increase in personal income taxes will most likely result in which of the following changes in real GDP and the price level in the shortrun?

Back

Decrease Real GDP; Decrease Price Level

Answer explanation

An increase in personal income taxes reduces disposable income, leading to lower consumer spending. This decrease in demand results in a decrease in real GDP and a decrease in the price level in the short run.

Front

Contractionary fiscal policy would most likely be used during...

Back

periods of sustained, demand pull inflation

Answer explanation

Contractionary fiscal policy is used to reduce inflation. During periods of sustained, demand-pull inflation, the economy is overheating, necessitating a decrease in government spending or an increase in taxes to cool down demand.

Front

If an economy experiences a dramatic rise in prices, which fiscal policy action could be taken? Options: Selling securities on the open market, Raising interest rates, Reducing government spending, Raising reserve requirements

Back

Reducing government spending

Answer explanation

Reducing government spending can help lower demand in the economy, which may alleviate inflationary pressures caused by rising prices. This fiscal policy action directly addresses the issue of high inflation.

Front

According to the graph above, which of the following is true about the long-run equilibrium of the economy depicted? Options: Without a fiscal policy stimulus, the economy will remain in a recession. The long-run aggregate supply curve will shift to the right to restore long-run equilibrium. As wages increase, the short-run aggregate supply curve will shift to the left to restore long-run equilibrium. The aggregate demand curve will shift to the left to restore long-run equilibrium. The economy is in long-run equilibrium.

Back

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

Answer explanation

As wages increase, production costs rise, leading to a leftward shift in the short-run aggregate supply curve. This adjustment helps restore long-run equilibrium by reducing output and increasing prices.

Front

If the government does nothing and wages are flexible, which of the following will most likely occur in the long run? Falling wages will shift the aggregate demand curve to the right, producing full employment. Rising wages will shift the aggregate demand curve to the right, producing full employment. The economy will remain at point A. Rising wages will shift the aggregate supply curve to the right, producing full employment. Falling wages will shift the aggregate supply curve to the right, producing full employment.

Back

Falling wages will shift the aggregate supply curve to the right, producing full employment.

Answer explanation

Falling wages reduce production costs, shifting the aggregate supply curve to the right. This leads to increased output and ultimately full employment, making this the most likely long-run outcome.

Front

If disposable income is $1,000, consumption is $700, and the marginal propensity to consume (MPC) is 0.6, what will consumption and savings equal if disposable income increases by $100? Consumption     Savings

Back

$760 $340

Answer explanation

With an MPC of 0.6, a $100 increase in income leads to a $60 increase in consumption (0.6 * $100). Thus, new consumption is $700 + $60 = $760. Savings is then $1,100 - $760 = $340. Therefore, the answer is $760 consumption and $340 savings.

Front

Which of the following changes will have the smallest expansionary effect on aggregate demand in the short run? A decrease in savings of $20 million, A decrease in imports of $20 million, An increase in exports of $20 million, An increase in government spending of $20 million, A decrease in taxes of $20 million

Back

A decrease in taxes of $20 million

Answer explanation

A decrease in taxes of $20 million has a smaller immediate effect on aggregate demand compared to the other options, as it relies on consumer behavior to increase spending, while the others directly inject money into the economy.