AP Macroeconomics Unit 5 Review

Assume that the velocity of money in Theopolis is 3 and the aggregate supply curve is vertical at $100 million.

What impact will an increase in the money supply have on real output?

• Real output will increase by 30%

• Real output will increase by 10%

• Real output will increase by 3%

• Real output will increase by 3/10%

• There will be no impact on real output

Which of the following would cause the long-run Phillips curve to shift to the right?

• A decrease in frictional unemployment

• An increase in cyclical unemployment

• An increase in structural unemployment

• An increase in aggregate demand (AD)

• A decrease in aggregate demand (AD)

The natural rate of unemployment in Mithrim is 5%, and the current rate of unemployment is 2%. Also, the consumer price index (CPI) has been increasing rapidly.

Which of the following combinations of monetary and fiscal policy would be appropriate to return this economy to full employment?

• Increasing taxes; lower the discount rate

• Decreasing taxes; buy bonds

• Increase government spending; sell bonds

• Increasing taxes; increasing government spending

• Increasing taxes; open market sales

The current state of the economy of Te Rehunga is represented in the graph shown above.

Let point B in the options below represent the current combination of inflation and the unemployment rate.

Which of the following graphs best depicts the Phillips curve model of Te Rehunga based on this AD-AS model?

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In the graph of the Phillips curve above, an economy moved from point 1 to point 2 to point 3.

Which of the following would be the most likely reason for the movement from point 2 to point 3 shown in this graph?

• A change in the natural rate of unemployment

• An increase in aggregate demand

• A decrease in aggregate demand (AD)

• A decrease in short-run aggregate supply (SRAS)

• An increase in short-run aggregate supply (SRAS)

The economy of Burginville has experienced high rates of inflation over the past 10 years.

According to the quantity theory of money, which of the following is the most likely explanation for the sustained inflation during this period?

• Better banking technology that has decreased the velocity of money

• Contractionary monetary policy

• Expansionary monetary policy

• Strong economic growth

• A money supply that has increased at the same pace as real output

What is the primary cause of deflation according to monetarist theory?

• A stable quantity velocity of money

• Any decrease in the money supply.

• A rapidly changing velocity of money

• The money supply decreases faster than real output decreases.

• The money supply increases too rapidly for a long time.

The economy of Rivendell experienced the AD shock shown in this graph.

Which of the following combinations of monetary and fiscal policy would be appropriate to combat the effect on the price level shown in this graph?

• Increase taxes; open market sales

• Sell bonds; increase the reserve requirement

• Decrease taxes; increase government spending

• Decrease taxes; decrease the reserve requirement

• Increase taxes; decrease the reserve requirement

The economy of Mithrim is experiencing a severe recession. As a result, the government is conducting expansionary fiscal policy. The central bank of Mithrim is considering expansionary monetary policy to aid in the recovery efforts.

Which of the following is an example of a monetary policy action that would work with the expansionary fiscal policy to close the output gap?

• Increasing government spending

• Increasing the discount rate

• Increase taxes

• Selling bonds

• Open market purchases

King Thranduil of the Woodland Realm is trying to rescue the kingdom from a severe recession by engaging in expansionary fiscal policy. As a result of the expansionary fiscal policy, the Woodland Realm now has a budget deficit. Meanwhile, the president of the central bank is Smaug, who wants to maintain a steady interest rate.

What is the appropriate action for the central bank to take in order to reduce the impact of the expansionary fiscal policy on interest rates?

• Increase taxes

• Decrease taxes

• Increase the reserve requirement

• Buy bonds

• Sell bonds