Unit 3 Practice Test AP Macroeconomics Krugman Text
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____1.The marginal propensity to consume is:
A. / increasing if the marginal propensity to save is increasing.B. / the proportion of total disposable income that the average family consumes.
C. / the change in consumer spending divided by the change in aggregate disposable income.
D. / the change in consumer spending less the change in aggregate disposable income.
E. / equal to 1.
____2.The MPS plus the MPC must equal:
A. / zero.B. / one.
C. / total income.
D. / saving.
E. / disposable income.
____3.An increase in the MPC:
A. / increases the multiplier.B. / shifts the autonomous investment line upward.
C. / decreases the multiplier.
D. / shifts the autonomous investment line downward.
E. / decreases the slope of the consumption function.
____4.Suppose the government increases its spending by $100 billion as a stimulus package. If the MPC is 0.6, then equilibrium income will:
A. / decrease by $250 billion.B. / increase by $250 billion.
C. / increase by $600 billion.
D. / decrease by $400 billion.
E. / increase by $400 billion.
____5.If the size of MPS is decreasing, it will:
A. / make the multiplier smaller.B. / make the multiplier larger.
C. / not affect the value of the multiplier.
D. / increase the interest rate.
E. / cause the MPC to also decrease.
____6.Suppose the marginal propensity to consume changes from 0.75 to 0.90. How will this affect the consumption function?
A. / The slope will get steeper.B. / Autonomous consumption will increase.
C. / The function will exhibit a parallel shift upward.
D. / The slope will get steeper and autonomous consumption will increase.
E. / The function will exhibit a parallel shift downward.
____7.According to the table below, the MPC and autonomous consumption are ______and ______, respectively, for Bob.
Individual Consumption Function for BobDisposable Income / Bob’s Consumption
$0 / $9,000
$10,000 / 13,000
A. / 0.6; $10,000
B. / 0.4; $13,000
C. / 0.6; $9,000
D. / 0.4; $9,000
E. / 0.4; $22,000
____8.Other things being equal, investment spending ______as long as ______.
A. / decreases; technological innovation develops faster than technological obsolescenceB. / increases; sales exceed the existing production capacity
C. / increases; the rate of growth of real GDP is lower than the marginal propensity to save
D. / decreases; the rate of growth of physical capital is positive
E. / increases; market interest rates continue to rise
____9.Positive unplanned inventory investment occurs when:
A. / actual depreciation is less than expected depreciation.B. / actual sales are less than expected sales.
C. / actual depreciation is more than expected depreciation.
D. / actual sales are more than expected sales.
E. / actual sales exceed expected depreciation.
Scenario 16-2: Income-Expenditure Equilibrium
Autonomous Consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8.
____10.Use Scenario 16-2 above. If GDP is $3,000, how much is unplanned inventory investment?
A. / 0B. / $600
C. / $100
D. / –$100
E. / $200
GDP
(in billions) / Disposable income
(in billions) / Consumption
(in billions) / Planned Investment
(in billions)
$0 / $0 / $400 / $600
500 / 500 / 700 / 600
1,000 / 1,000 / 1,000 / 600
1,500 / 1,500 / 1,300 / 600
2,000 / 2,000 / 1,600 / 600
2,500 / 2,500 / 1,900 / 600
3,000 / 3,000 / 2,200 / 600
Table 16-3: The Economy of Albernia
____11.Use Table 16-3 above. If GDP is $1,500 billion, then the level of unplanned inventories will be equal to:
A. / $400 billion.B. / –$400 billion.
C. / $600 billion.
D. / –$600 billion.
E. / zero.
____12.An increase in the expected future disposable income of households:
A. / shifts the planned aggregate spending line down.B. / increases the slope of the aggregate spending line.
C. / decreases the slope of the aggregate spending line.
D. / shifts the planned aggregate spending line up.
E. / causes a movement upward along the aggregate spending line.
Scenario 16-3: Aggregate Consumption Function
Use the following information to answer the next two questions. Suppose the aggregate consumption function is given by the following equation: C = 1,000 + 0.75YD where C stands for consumption and YD stands for disposable income.
____13.Use Scenario 16-3. Suppose disposable income increases by $100, this means aggregate consumption will increase by ______and autonomous consumption ______.
A. / $75; remains at $1000B. / $1000; remains at $75
C. / $100; increases by $100
D. / $175; increases by $100
E. / $400; remains at $1000
____14.If the government lowers taxes in response to a recession, the government is engaging in what economists call:
A. / monetary policy.B. / investment policy.
C. / consumption policy.
D. / fiscal policy.
E. / foreign exchange policy.
_____ 15.A cut in taxes ______, therefore shifting the aggregate demand curve to the ______.
A. / decreases government transfers and consumption; rightB. / increases disposable income and consumption; right
C. / decreases the marginal propensity to save and consumption; left
D. / increases corporate profits and investment; left
E. / increases disposable income and investment; left
____16.The short run in macroeconomic analysis is a period:
A. / in which many production costs can be assumed to be fixed.B. / in which wages become fully flexible.
C. / of 2 months, and the long run is a period greater than 12 months.
D. / in which interest rates are fixed.
E. / in which the unemployment rate is assumed constant.
____17.Changes in short-run aggregate supply can be caused by changes in:
A. / wages.B. / wealth.
C. / government spending.
D. / consumption spending.
E. / investment spending.
Figure 19-1: Shifts of the AD–AS Curves
____18.Use the “Shifts of the AD–AS Curves” Figure 19-1. In the short run, an increase in net exports is illustrated by:
A. / Panel (A).B. / Panel (B).
C. / Panel (C).
D. / Panel (D).
E. / Panels (A) and (C).
____19.In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of:
A. / LRAS and SRAS.B. / LRAS and aggregate demand.
C. / SRAS and aggregate demand.
D. / potential output and LRAS.
E. / potential output and aggregate demand.
____20.A natural disaster that destroys part of a country's infrastructure is a type of ______and therefore shifts the ______to the ______.
A. / negative demand shock; aggregate demand curve; rightB. / negative supply shock; aggregate demand curve; left
C. / negative supply shock; short-run aggregate supply curve; left
D. / negative demand shock; long-run aggregate supply curve; left
E. / negative supply shock; short-run aggregate supply curve; right
____21.Suppose the equilibrium aggregate price level is rising and the equilibrium level of real GDP is falling. Which of the following most likely caused these changes?
A. / An increase in short-run aggregate supply.B. / An increase in aggregate demand.
C. / A decrease in short-run aggregate supply.
D. / A decrease in aggregate demand.
E. / An increase in short-run aggregate supply and an increase in aggregate demand.
____22.Inflationary and recessionary gaps are closed by self-correcting adjustments that shift:
A. / the SRAS curve.B. / the AD curve.
C. / the LRAS curve.
D. / both the SRAS curve and the LRAS curve.
E. / both the AD curve and LRAS curve.
____23.A recessionary gap will be eliminated because there is ______pressure on wages, causing the ______.
A. / downward; short-run aggregate supply curve to shift rightward.B. / downward; short-run aggregate supply curve to shift leftward.
C. / downward; aggregate demand curve to shift rightward.
D. / upward; aggregate demand curve to shift to leftward.
E. / upward; short-run aggregate supply curve to shift rightward.
Figure 19-7: AD–AS Model II
____24.Use the “AD–AS Model II” Figure 19-7 above. As the size of the labor force increases over time, which of the following will take place?
A. / LRAS will shift to the right.B. / LRAS will shift to the left.
C. / AD curve will shift to the left.
D. / AD curve will shift to the right.
E. / SRAS curve will shift to the right.
____25.Stagflation occurs when:
A. / the aggregate price level and the aggregate output level both fall.B. / the aggregate price level falls and the aggregate output level rises.
C. / the aggregate price level rises and the aggregate output level falls.
D. / the aggregate price level and the aggregate output level both rise.
E. / the aggregate price level rises and the nominal interest rate falls.
____26.If there is a sudden increase in commodity prices, this will lead to a shift in the:
A. / SRAS curve to the right resulting in higher aggregate output.B. / AD curve to the right resulting in higher aggregate price levels.
C. / SRAS curve to the left resulting in lower aggregate output.
D. / AD curve to the left resulting in lower aggregate price levels.
E. / LRAS curve to the right resulting in higher aggregate output.
____27.The current level of real GDP lies above potential GDP. An appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.
A. / decrease government purchases; AD; right.B. / increase government purchases; AD; left.
C. / decrease government purchases; AD; left.
D. / increase tax rates; AD; right.
E. / increase the federal funds rate; AD; left
Figure 20-2: North-West Government
____28.Use the “North-West Government” Figure 20-2. Using the accompanying figure, which of the following would be the appropriate response of the North-West government?
A. / Expand aggregate demand by increasing taxes to close the inflationary gap.B. / Reduce aggregate demand by cutting taxes to close the inflationary gap.
C. / Expand aggregate demand by decreasing taxes to close the recessionary gap.
D. / Reduce aggregate demand by increasing taxes to close the recessionary gap.
E. / Expand aggregate demand by increasing taxes to close the recessionary gap.
____29.An expansionary fiscal policy:
A. / typically decreases a government budget deficit or increases a government budget surplus.B. / may include decreases in government spending.
C. / may include increases in the money supply.
D. / may include decreases in taxes.
E. / may include a reduction in transfer payments.
Figure 20-6: Fiscal Policy II
____30.Use the “Fiscal Policy II” Figure 20-6. Suppose that this economy is in equilibrium at E2. If there is an increase in government transfers, then:
A. / AD2 will shift to the right, causing an increase in the price level and an increase in real GDP.B. / AD2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP.
C. / AD1 will shift to the right, causing an increase in the price level and an increase in real GDP.
D. / AD1 will shift to the left, causing a decrease in the price level and a decrease in real GDP.
E. / AD2 will shift to the right, causing an increase in the price level and a decrease in real GDP.
Figure 20-7: Fiscal Policy Choices
____31.Use the “Fiscal Policy Choices” Figure 20-7. In Panel (a), the economy is initially at output level Y1 and there is:
A. / an inflationary gap.B. / a recessionary gap.
C. / equilibrium at full employment.
D. / A budget gap.
E. / a foreign exchange gap.
Scenario 20-1: Fiscal Policy
Consider the economy of Arcadia. The households of Arcadia spend 75% of their income. There are no taxes and no foreign trade. The currency of Arcadia is called “Arcs”. The level of potential output in Arcadia is 600 billion arcs.
____32.Use Scenario 20-1. Refer to the information provided. Suppose the actual real GDP in Arcadia is 500 billion arcs. Then, the economy has:
A. / a recessionary gap.B. / production at the full-employment level.
C. / an inflationary gap.
D. / a liquidity trap.
E. / an unemployment rate that is higher than the natural rate of unemployment.
____33.Suppose an economy is producing real GDP of $300 billion. The potential output is equal to $400 billion, and the MPC is equal to 0.80. Then the government should follow a policy of:
A. / raising taxes by $25 billion to take the economy back to potential output.B. / cutting taxes by $33.33 billion to take the economy back to potential output.
C. / raising taxes by $33.33 billion to take the economy back to potential output.
D. / cutting taxes by $25 billion to take the economy back to potential output.
E. / cutting taxes by $20 billion to take the economy back to potential output.
____34.Assume that the MPC = 0.8 and the government increases spending by $100 billion, financing this spending with a $100 billion tax increase. Which of the following will be the likely effect of this action?
A. / Real GDP will contract by $200 billion.B. / Real GDP will contract by $100 billion.
C. / Real GDP will expand by $500 billion.
D. / Real GDP will expand by $400 billion.
E. / Real GDP will expand by $100 billion.
Figure 38-1: Productivity
____35.Use the “Productivity” Figure 38-1. Suppose there has been an increase in physical capital per worker with everything else remaining unchanged, then it is shown on the diagram as:
A. / a movement from B to C.B. / a movement from A to C.
C. / a movement from A to B.
D. / a movement from B to A.
E. / a movement from C to B.
Unit 3 Retake / Practice Test AP Macroeconomics Krugman Text 2012
Answer Section
MULTIPLE CHOICE
1.ANS:CPTS:1DIF:EREF:Module 16
SKL:Definitional
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SKL:Concept-Based
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SKL:Critical Thinking
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SKL:Critical Thinking
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SKL:Critical Thinking
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SKL:Critical Thinking
7.ANS:DPTS:1DIF:MREF:Module 16
SKL:Critical Thinking
8.ANS:BPTS:1DIF:MREF:Module 16
SKL:Critical Thinking
9.ANS:BPTS:1DIF:MREF:Module 16
SKL:Concept-Based
10.ANS:DPTS:1DIF:DREF:Module 16
SKL:Analytical Thinking
11.ANS:BPTS:1DIF:MREF:Module 16
SKL:Analytical Thinking
12.ANS:DPTS:1DIF:MREF:Module 16
SKL:Critical Thinking
13.ANS:APTS:1DIF:MREF:Module 16
SKL:Critical Thinking
14.ANS:DPTS:1DIF:EREF:Module 17
SKL:Concept-Based
15.ANS:BPTS:1DIF:MREF:Module 17
SKL:Concept-Based
16.ANS:APTS:1DIF:EREF:Module 18
SKL:Definitional
17.ANS:APTS:1REF:Module 18
18.ANS:APTS:1DIF:MREF:Module 19
SKL:Analytical Thinking
19.ANS:CPTS:1DIF:MREF:Module 19
SKL:Concept-Based
20.ANS:CPTS:1DIF:MREF:Module 19
SKL:Critical Thinking
21.ANS:CPTS:1DIF:MREF:Module 19
SKL:Critical Thinking
22.ANS:APTS:1DIF:MREF:Module 19
SKL:Concept-Based
23.ANS:APTS:1DIF:MREF:Module 19
SKL:Concept-Based
24.ANS:APTS:1DIF:MREF:Module 19
SKL:Critical Thinking
25.ANS:CPTS:1DIF:MREF:Module 19
SKL:Definitional
26.ANS:CPTS:1DIF:EREF:Module 19
SKL:Definitional
27.ANS:CPTS:1DIF:MREF:Module 19
SKL:Critical Thinking
28.ANS:CPTS:1DIF:MREF:Module 20
SKL:Critical Thinking
29.ANS:CPTS:1DIF:MREF:Module 20
SKL:Critical Thinking
30.ANS:BPTS:1DIF:MREF:Module 20
SKL:Critical Thinking
31.ANS:APTS:1DIF:MREF:Module 20
SKL:Critical Thinking
32.ANS:DPTS:1DIF:MREF:Module 20
SKL:Concept-Based
33.ANS:BPTS:1DIF:MREF:Module 20
SKL:Concept-Based
34.ANS:APTS:1DIF:MREF:Module 20
SKL:Concept-Based
35.ANS:DPTS:1DIF:DREF:Module 21
SKL:Analytical Thinking
36.ANS:EPTS:1DIF:DREF:Module 21
SKL:Critical Thinking
37.ANS:CPTS:1DIF:MREF:Module 38
SKL:Analytical Thinking
38.ANS:DPTS:1DIF:MREF:Module 39
SKL:Analytical Thinking