AP Macroeconomics: Chapter 10 & 11 Review Questions
At a particular price level, domestic output demanded is greater than that produced resulting in a shortage causing the price level to _______________________.
Provide an example of contractionary fiscal policy that would satisfy a conservative.
Less government spending
When both AD and AS shift to the right, how will the equilibrium price and the equilibrium quantity be affected?
Output increases, price is indeterminate
In the AS-AD model, what shift illustrates cost-push inflation?
AS goes to the left
Tax structure in which the percent of one’s income taxed increases as their income increases.
If the MPC is 2/3 and there is a negative GDP gap of $27 billion, what could Congress do to close the gap?
Increase government spending by 9 million
Type of lag that occurs as Congress decides how to best address recessionary symptoms.
When the standardized surplus increases from year 1 to year 2, fiscal policy must be _______________________.
Vertical line at full employment output symbolizes _______________________.
Long-run AS Curve
If I have 7 employees, pay them $5 a day, and their total output is 14 pairs of shoes, what is per-unit production cost? What is productivity?
What type of budget measures taxing and government spending when the economy is at full-employment?
Expectations, household debt, and personal taxes all affect which component of AD?
1 of 3 reasons for downsloping AD curve; assets return less at higher price level.
Real Balances Effect
When the economy is significantly below full employment output what does the AS curve look like?
Government spending during a recession causes internet rates to rise and private investment to decline. This concept is known as ______________________.
Menu costs, efficiency wages, minimum wage, and fear of price wars are all explanations for what belief?
A sharp rise in the stock market leads to an increase in spending; what determinant of consumption does this effect?
Portion of GDP that goes to foreigners as interest payments; burden on future generations?
External Public Debt
Why is the aggregate-demand curve down sloping?
– Real-balances effect
– Interest-rate effect
– Foreign purchases effect
What are the determinants of AD?
1) Consumer Spending: consumer wealth, consumer expectations, household debt, personal taxes
2) Investment Spending: real interest rates, expected returns
3) Government Spending
4) Net Export Spending: national income abroad, exchange rates
Why is aggregate supply upsloping in the short-run?
Nominal wages and input prices adjust only slowly to changes in the price level
What are the determinants of AS?
– Changes in the price of inputs for production
– Changes in productivity
– Changes in the legal and institutional environment in the economy: decrease in business taxes, increase in business subsidies, decrease in government regulation
Impact of an increase in AD.
An increase in the price level beyond the full-employment level of output; associated with demand-pull
Impact of an increase in AS.
Arising from an increase in productivity has the beneficial effect of improving real domestic output and employment while maintaining a stable price level.
Impact of a decrease in AD.
Reduces real output and increases cyclical unemployment, but it may not decrease the price level.
Impact of a decrease in AS.
There will be a decrease in real domestic output (economic growth) and employment along with a rise in the price level, or cost push inflation.
Why does the economy experience a GDP gap with no deflation?
The price level is inflexible downward
How to enforce expansionary fiscal policy.
Stimulate economy by increasing aggregate demand by either increasing government spending or tax reductions
How to enforce contractionary fiscal policy.
Reduce aggregate demand pressures that increase the price level by either decreased government spending or tax increases.
In the case of a budget deficit, the standardized budget
1) removes the cyclical deficit that is produced by swings in the business cycle
2) reveals the size of the standardized deficit, indicating how expansionary the fiscal policy was that year
The crowding-out effect may be small and can be offset by an expansion in the __________________________.