Answers and Review for Multiple Choice Practice on Long-Run Consequences of Stabilization Policies

⛔STOP ! ⛔ Before you look at the answers, make sure you gave this practice quiz a try so you can assess your understanding of the concepts covered in Unit 5. Click here for the practice questions: AP Macro Unit 5 Multiple Choice Questions.

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Facts about the test: The AP Macroeconomics exam has 70 multiple choice questions and you will be given 1 hour to complete the section. That means it should take you around 8 minutes to complete 10 questions.

*The following questions were not written by College Board and, although they cover information outlined in the AP Macroeconomics Course and Exam Description, the formatting on the exam may be different.

1. If a government wanted to achieve a reduction in inflation, it should:

A. decrease taxes and sell government bonds

B. increase taxes and buy government bonds

C. increase taxes and sell government bonds

D. decrease taxes and buy government bonds

Answer: Fiscal policy: increasing taxes reduces disposable income, shifting AD to the left; Monetary policy: selling government bonds reduces the money supply, which increases interest rates and shifts AD to the left

📄 Study AP Macroeconomics, Unit 5.1: Fiscal and Monetary Policy Actions in the Short-Run

2. During a severe recession, which combination of government policies would be most effective in correcting economic problems?

A. increase taxes and increase the money supply

B. decrease taxes and decrease the money supply

C. increase taxes and decrease the money supply

D. decrease taxes and increase the money supply

Answer: Decreasing taxes would increase disposable income, shifting AD to the right; increasing the money supply would lower interest rates, encourage investment, and shift AD to the right.

📄 Study AP Macroeconomics, Unit 5.1: Fiscal and Monetary Policy Actions in the Short-Run

3.  If aggregate demand increased, which of the following would occur?

A. movement along the short-run Phillips curve

B. movement along the long-run Phillips curve

C. a leftward shift of the long-run Phillips curve

D. a rightward shift of the long-run Phillips curve

Answer: Shifts of the short-run Phillips curve are only caused by SRAS shifts; a change in AD would cause movement along the short-run Phillips curve.

📄 Study AP Macroeconomics, Unit 5.2: The Phillips Curve

4. The long-run Phillips curve . . .

A. is shifted left only when capital stock increases

B. is horizontal at full employment

C. is vertical at full employment

D. has an inverse relationship with the aggregate demand curve

Answer: The long-run Phillips curve is vertical at full employment because there is no permanent trade-off between inflation and unemployment in the long run.

📄 Study AP Macroeconomics, Unit 5.2: The Phillips Curve

5. The short-run Phillips curve tells us that lower inflation rates are associated with . . .

A. the natural rate of unemployment

B. lower unemployment rates

C. frictional unemployment

D. higher unemployment rates

Answer: In viewing the Phillips curve graphs, at a point where there is lower inflation, unemployment rises.

📄 Study AP Macroeconomics, Unit 5.2: The Phillips Curve

6. Hyperinflation can be caused by:

A. expanding aggregate demand

B. exponential growth of the money supply

C. increased investment

D. sustainable economic growth

Answer: Hyperinflation is a very rapid and uncontrolled rise in the price level, usually measuring more than 50% each month, and usually caused by the continued and unchecked printing of money.

7. If an expansion of the money supply creates an increase in aggregate demand, in the long run, the economy would see:

A. a decrease in nominal output and price level

B. an increase in nominal output and a decrease in price level

C. an increase in nominal output and price level

D. a decrease in nominal output and an increase in price level

Answer: Increasing the money supply lowers interest rates, increases investment, and shifts AD to the right, which would increase both output and price level.

📄 Study AP Macroeconomics, Unit 5.0: Unit 5 Overview

8. The quantity theory of money tells us that if the economy is operating at full employment output, and there is a substantial increase in the money supply, there would also be an increase in:

A. price level

B. nominal interest rates

C. unemployment

D. investment

Answer: The quantity theory of money tells us that there is a fixed proportional relationship between changes in the money supply and the general price level.

📄 Study AP Macroeconomics, Unit 5.0: Unit 5 Overview

9. A budget deficit exists when . . .

A. government spending ceases to occur

B. tax revenue exceeds government spending

C. tax revenue is magnified by the spending multiplier

D. government spending exceeds tax revenue

Answer: If the government is spending money that exceeds what it takes in through tax revenues, it is spending money beyond its budget and creating a deficit.

📄 Study AP Macroeconomics, Unit 5.4: Deficits and the National Debt

10. We can think of the US national debt as:

A. money the US government keeps in required reserves

B. money the US government spends on healthcare and city planning

C. money the US government pays to recipients of transfer payments

D. money the US government owed to holders of US securities

Answer: The US government owes money to those that hold US securities, like US bonds.

📄 Study AP Macroeconomics, Unit 5.4: Deficits and the National Debt

11. Crowding out is when:

A. unemployment of older workers decreases because they are replaced by younger workers

B. there is a decrease in consumption and/or private investment due to an increase in government spending

C. the money supply is pushed to its maximum supply levels

D. businesses refuse to pay for transfer payments

Answer: Government borrowing and spending forces interest rates to rise, which in turn decreases consumption and business investment.

📄 Study AP Macroeconomics, Unit 5.5: Crowding Out

12. Which of the following would have to increase to result in an increase in a country's long-run growth rate of real per-capita income?

A. income taxes

B. citizens' education level

C. population

D. deficit spending

Answer: Education is human capital; improving education is one way we can shift PPC and LRAS to the right eventually, which would increase economic growth and real income over time.

📄 Study AP Macroeconomics, Unit 5.7: Public Policy and Economic Growth

13. The crowding-out scenario would usually occur with:

A. an increase in per-capita income

B. stagflation

C. a decrease in the availability of substitutes

D. government deficit spending

Answer: When the government deficit spends, it shifts the demand for loanable funds right OR the supply of loanable funds left (both answers are accepted on the exam, but pick one, not both).

📄 Study AP Macroeconomics, Unit 5.5: Crowding Out

14. Reducing demand-pull inflation in the short run will likely result in:

A. inflation

B. GDP per-capita

C. investment spending

D. unemployment

Answer: Demand-pull inflation is where there is too much money chasing too few goods; to counteract this, governments would enact tight monetary and fiscal policies, discouraging consumers to continue spending.

📄 Study AP Macroeconomics, Unit 5.1: Fiscal and Monetary Policy Actions in the Short-Run

15. An increase in which of the following would most likely cause an increase in worker productivity in the long run?

A. unemployment

B. capital stock

C. interest rate

D. deficit spending

Answer: Capital stock is machines, tools, and equipment that allows us to produce more (assets that aid in production). With more capital stock, workers become more productive.

📄 Study AP Macroeconomics, Unit 5.6: Economic Growth

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