AP Macro Unit 5

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

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

• A decrease in government spending and open-market purchases

• An increase in income taxes and open-market sales

An economy is in a recessionary output gap. Which of the following combinations of policy actions would definitely move the economy toward long-run equilibrium?

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

• A decrease in the money supply and an increase in income taxes

• A decrease in income taxes and an increase in the money supply

An open-market purchase of government bonds accompanied by a decrease in income taxes will result in which of the following in the short run?

• A decrease in real output

• A decrease in the price level

• A decrease in unemployment

Use the graph of a Phillips Curve to answer the question. Which of the following points illustrates an inflationary gap?

• X

• Y

• Z

An increase in the the aggregate costs of production will cause which of the following?

• A rightward shift in the short-run Phillips curve

• A rightward movement along the short-run Phillips curve

• A leftward shift in the short-run Phillips curve

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?

• Real output falls.

• Real output is unchanged.

• Real output rises.

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?

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

• Real output will exceed full employment in the long run.

• The actual unemployment rate will exceed the natural rate of unemployment.

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

• The spending multiplier will increase.

• The national debt will increase.

• The government budget will be in surplus.

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

• Crowding out effect

• Multiplier effect

• Interest rate effect

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?

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

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

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