AP Econ Unit 3 Quick Review

Which of the following explains why the long-run aggregate supply curve corresponds to the production possibilities curve?

If there is an inflationary gap, which of the following changes will move the economy back toward full employment?

• An increase in transfer payments

• An increase in exports

• An increase in taxes

• An increase in government spending

Assume the countries of Ornania and Kumbagi are major trading partners. Ornania is currently in long-run macroeconomic equilibrium. As a result of a recession in its economy, Kumbagi decreases its demand for goods produced in Ornania. Which of the following will occur in Ornania in the short run?

• The aggregate demand curve will shift to the left, resulting in a recessionary gap.

• The aggregate demand curve will shift to the left, resulting in an inflationary gap.

• The short-run aggregate supply curve will shift to the left, resulting in an inflationary gap.

• The short-run aggregate supply curve will shift to the left, resulting in a recessionary gap.

Which of the following is an example of an automatic stabilizer?

Which of the following statements best describes the concept of an automatic stabilizer?

• It is nondiscretionary fiscal policy that mitigates business cycles by increasing aggregate demand during recessions and decreasing aggregate demand during expansions.

• It is a measure of the effect that a change in government spending and investment has on the gross domestic product.

• It is a description of how total income is always equal to total expenditures as a measure of gross domestic product.

• It is discretionary fiscal policy that increases government spending during recessions and decreases government spending during expansions.

An economy is in long-run macroeconomic equilibrium. What will be the short-run effects of an increase in investment spending?

Assume the marginal propensity to consume is 0.8. How will a decrease in taxes of $100 billion and a decrease in government spending of $100 billion affect aggregate demand?

• Aggregate demand will decrease by $400 billion.

• Aggregate demand will decrease by $100 billion.

• Aggregate demand will decrease by $500 billion.

Which of the following changes will necessarily cause inflation?

An economy is currently in short-run equilibrium, and real output is below the full-employment level of output. Which of the following market adjustments is most likely to occur in the long run?

• The recessionary gap will create upward pressure on prices, shifting the aggregate demand curve to the left.

• Nominal wages will fall, shifting the short-run aggregate supply curve to the right.

• Input prices will increase as firms compete for labor and capital.

Which of the following will result in a rightward shift of the aggregate demand curve?