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Test Review AE & Fiscal Policy

Test Review AE & Fiscal Policy. Remember, the next test will be over AD/AS [about half] and AE and Fiscal Policy. Make sure you know these 28 questions on AE and Fiscal Policy. Fiscal Policy Test Review 1-2. 1. Expansionary fiscal policy will be most effective

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Test Review AE & Fiscal Policy

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  1. Test Review AE & Fiscal Policy Remember, the next test will be over AD/AS [about half] and AE and Fiscal Policy. Make sure you know these 28 questions on AE and Fiscal Policy.

  2. Fiscal Policy Test Review 1-2 1.Expansionary fiscal policy will be most effective [increase GDP]when theAS curveis(vertical/horizontal) & (incr/decr) “C” and (incr/decr) unemployment. 2.The paradox of thrift indicates that an increase in saving (matched/unmatched) by an increase in investment will lower equilibrium GDP.

  3. Fiscal Policy Test Review 3-4 [#3 & #4, start from a balanced budget] 3. A contractionary fiscal policy[decr G, incr T] would cause a[an] (incr/decr) in output[GDP] and a[an] (incr/decr) in interest rates. 4. An expansionary fiscal policy[incr G, decr T] would cause a[an] (incr/decr) in output[GDP] and a[an] (incr/decr) in interest rates. 5. In the AE model, if AE[AD]doesn’t buy up FE output(GDP),then the equilibrium output is (less than/more then) full employment output. G $2 Trillion T $2 Trillion [T ; LFM ; In. Rates ] [G ; LFM ; In. Rates ] [T ; LFM ; In. Rates ] [G ; LFM ; In. Rates ] “Inflationary Gap” “Recessionary Gap”

  4. 6. To decrease AD the greatest amount, the government should: (decrease “G” only/increase “T” only/both decr G & incr T) 7. To increase AD the greatest amount, the “G” should: (increase “G” only/decrease “T” only/both incr G and decr T) 8. With a MPC of .5 and current output at $500 billion, but F.E. output is $700 billion, correct fiscal policy would be to (increase G/Decrease T) by $100 billion. 9. If businesses are experiencing an unplanned increase in inventories, AE is (less than/greater than) FE output and spending in the economy will (increase/decrease). 10. If businesses are experiencing an unplanned decrease in inventories[disinvestment]AE is (less than/greater than) FE output & spending in the economy will (increase/decrease).

  5. 500 500 11. If “C” equals income at $500 billion, & MPC is .9, then an increase in Ig of $10 billion will change equilibrium GDP to ($400/$490/$510/$600) billion. 12. A conservative economistwould want tax (incr/decr) during a recession & (incr/decr) in “G” during inflationary times. 13. A liberal economistwould want tax (incr/decr) during an inflation & (incr/decr) in “G” during recessionary periods. 14. An inflationary gap indicates AE[actual GDP] (exceeds/falls short of) FE GDP. 15. A recessionary gapindicates AE[actual GDP] (exceeds/falls short of) FE GDP. 16. To increase GDP [but reduce military spending], we would combine two (domestic/overseas) bases into one (domestic/overseas) base. 17. A tax cut to expand the economywould (incr/decr) Y & (incr/decr) in. rates. 18. A tax increase to contract the economywould(incr/decr) Y & (incr/decr) IR.

  6. Test Review 19-22 19. To increase equilibrium GDP by $400,000, with a MPC of .5, a Keynesian economist would (decrease “T”/increase “G”) by $200,000. 20. Equilibrium GDP is $500 billionand MPS is .4. Now “G” collects taxes of $22 billion and spends the entire amount. As a result, equilibrium GDP will change to: ($445/$478/$522/$555). 21. With a MPC of .5, a $12 billion increase in “G” will increase “C”by($12/$24/$36) bil. 22. With a MPC of .5 and the economy in a recessionaryspending gapof $12 billion, we may conclude that the equilibrium is ($12/$24/$36) billion short of FE GDP.

  7. Test Review 23-26 [Incr T or Decr G] 23. An increase in Ig of $25 billionresulted in an increase in equilibrium income (GDP) of $50B, so the MPS was? 24. A contractionary fiscal policyresults in a(n) (incr/decr) in output, and a(n) (incr/decr) in interest rates. 25. Increasing T or decreasing Gwill (increase/decrease) consumption, and (increase/decrease) unemployment. 26. With a MPC of .5, and the economy with an inflationaryGDP Gapof $50 billion, G could eliminate this inflationaryGDP by reducing government spendingby? $25 billion

  8. Test Review 27-28 27. An increase in Igin an economy (increase)/decrease)GDP & (increase/decrease) C. 28. If there is an equal increase in G and T of $25 billion in the horizontal range of AS, then output will (increase/decrease/stay the same). PL AD1 AD2 PL RGDP

  9. [Public Sector] [No Public Sector] 250 1,200 GDP[bil] • From the above graph, moving from equilibrium “E” to • “F”,what can we conclude about the following: • A. How much is G? • B. The increase in Y? • C. The ME [Chg in Y/Chg in Expenditures = ME]?

  10. 2. Know what these do to the AD[C+Ig+G+Xn] or AS[REP] curves. A. Trade partners incomes increase? ___ decrease?___ B. Availability of land, labor, & capital increase?__ decrease?__ C. Productivity increases? ___ D. Resource[input] cost increases? ___ decreases? ___ E. Government spending increases? ___ decreases? ___ F. Stock Market drastically increases? ___ decreases? ___ E. A strong dollar’s impact on net exports. ___ F. A strong dollar’s impact on resource cost. ___

  11. 3. Know the above on a graph like this: A. At “K”, we have a [recessionary/inflationary] output gap? B. At “J”, we have a [recessionary/inflationary] output gap? C. The recessionarySPENDINGgapis [KH/EI/JG] D. The inflationarySPENDINGgapis [KH/ED/EI] C. Correct fiscal policy if we are at “C+Ig1” if “0B” is FE Y would be to [increase/decrease] Gand [increase/decrease] T.

  12. AS AS AD2 PL PL AD2 PL AD2 AD1 AD1 AD1 AS PL RGDP Y* RGDP RGDP (a.) (c.) (b.) 4. Which of the following would be the A. Classical AS curve B. Keynesian AS curve C. Supply-side AS curve 5. If there is an increase in AD in each one of these, what happens to PL, Output & Employment? PL - ; Y/Empl. – (a.) (b.) PL – ; Y/Empl. - (c.) PL – ; Y/Empl. –

  13. 6. Paradox of Thrift applies in the Keynesian range or Classical range? 7. Ratchet effect – are prices and wages “sticky” up or down? 8. Crowding out - An increase in government spending causes the interest rate to (increase/decrease) &, Ig to (increase/decrease)? 9. If MPS is .50 and we have a recessionary spending gap of $10billion, how short are we of FE GDP? 10. What is a political business cycle? 11. What triggers the wealth effect, interest rate effect, and the foreign purchase effect? 12. Know how to figure productivity and per unit production cost. 13. Know the difference between a A. “Change in AQD or AQS” B. “Change in AD or AS”

  14. 14. If income increases from $500 B to $600 B, and Ig of $25 B caused the $100 B increase in Y, then the ME and MPS were? 15. The MPS is .50, and “C” = “Y” at $600 billion. Now Ig is increased by $50 billion, therefore the new equilibrium Y is? 16.Now G increases G&T by 50 bil., then the new equilibrium Y would be? AE[C+Ig] Consumption $600 B $50 B $700 $600 RGDP [billions]

  15. AP Practice Quiz 3 AE (C+Ig2) F AE (C+Ig1) Consumption D E C AE (C+Ig) A B G 11. Going from “OV” to “OU”, what is the ME? +25 B 45 WVU T Real GDP 0 500 400 1. At income level “OT”,the volume of consumption is _____. 2. At income level “OT”,the volume of saving is _____ 3. The “APC” is equal to “1”at income level ___. 4. If Ig is Ig1, then “equilibrium GDP”is _____. 5. If Ig is Ig2, then “equilibrium GDP”is _____. 6. If Ig increases from Ig1 to Ig2, equilibrium GDP increases by _____. 7. If Ig increases from Ig1 to Ig2, the “MPC” is equal to __________. 8. As we move from income level OV to OU, the “MPS” is ________. 9. The economy is “dissaving” at income level _____. 10. Consumption will be equal to income at income level___.

  16. Test Review 1-5 1.Anincrease in Ig of $75Bresults in an increase inequilibrium income(GDP) of$300billion, so the MPS is? 2.Anexpansionary fiscal policyresults in a(n) (incr/decr) in output, & a(n) (incr/decr) in interest rates. 3.Increasing T or decreasing Gwill (increase/decrease) consumption, and (increase/decrease) unemployment. 4.With aMPC of .75, & the economy with aninflationaryGDP Gap of $80B, G could eliminate this $80 billioninflationaryGDP Gap by reducing government spendingby? 5.With aMPC of .60 & current output at $650 bil. but FE output is $700billion, correct fiscal policy would be to (increase G/decrease T) by $20 billion. $2 Tr. $2 Tr. T G .

  17. Test Review 6-9 6.An increase in Igin an economy will(incr)/decr)GDP& (incr/decr)C. 7. In aninflationary economy, (actual Y/potential Y) exceeds (actual Y/potential Y). 8.In thecomplex economy(C+Ig+G+Xn), theleakagesare? &theinjectionsare? 9. If there is anequal increase in G&T of $10 billion, then output will (increase/decrease). [S, T, & M] [G,Ig,X]

  18. Practice Quiz AE3[C+Ig+G+Xn] A $2,200 AE2[C+Ig+G] B AE1[C+Ig] G $1,600 C Consumption F D AE[C+Ig+G+Xn] +300 H E $1,000 $800 +300 I $700 J $500 P +300 Inflat. Gap $400 Recess. Gap $200 200400 1,0001,6002,200bil. 0 N QK LM Real GDP 1. The APC is “one”at letter: (J/H/G/A). 2. Consumption will be equal toincome(GDP) at (200/400/1000). 3. A shift from AE2toAE3would be caused by a[an] (appreciation/depreciation) of the dollar. 4. If there is a shift from JtoH, the simple multiplieris: (2/3/4/5) 5. With an MPC of .75, an increase in G of $200 billion, would increase “C” [not income] by: a. $800 billion b. $600 billion c. $150 billion 6. If the FE GDP is OL & we are at AE1, the (recess./inflat.) gap is (AB/BC).

  19. Practice Quiz AE3[C+Ig+G+Xn] A $2,200 AE2[C+Ig+G] B AE1[C+Ig] G $1,600 C Consumption F D AE[C+Ig+G+Xn] E H +300 $1,000 $800 I +300 $700 J $500 P +300 Inflat. Gap $400 Recess. Gap $200 2004001,0001,6002,200bil. 0 NQK LM Real GDP 7. If the FE GDP is OL [$1,600]and we are at AE3, the (recessionary/inflationary) gap is: (BC or AB). 8. The equilibriumlevel of GDP at AE3 is ($1,000/$1,600/$2,200). 9. If FE is OL [$1,600] & we are at AE1, correct fiscal policy would be to (increase/decrease) “G” &/or (increase/decrease) “T”. 10. If FE is OL [$1,600] & we are at AE3, correct fiscal policy would be to (increase/decrease) “G” &/or (increase/decrease) “T”. 11. At income level OK, the volume of saving is: ($300/$700/$1,000). 12. The economy is dissaving GDP level: ($200/$400/$600).

  20. Practice Quiz AE3[C+Ig+G+Xn] A $2,200 AE2[C+Ig+G] B AE1[C+Ig] G $1,600 C C 13. A shift from “J” to “H” would result in a MPC of: (HK/OK or IP/QK or HI/OK) 14. A shift from “J” to “H” would result in a MPS of: (HK/OK or IP/QK or HI/QK) 15.At AE1, consumptiontotals ($200/$300/$700). F D +300 E $1,000 AE[C+Ig+G+Xn] H $800 +300 I $700 J $500 +300 P Inflat. Gap $400 Recess. Gap $200 2004001,000 1,600 2,200bil. 0 NQK L M 16. At AE1 [$1,000], the G decreases both G & T by $400 billionto balance the budget. With a simple multiplier of 5, the GDP (increases/decreases) to ($600/$1,000/ $1,600/$1,800). 17. At AE1($1,000), the G spends $500billion& increases taxes by $500 billionto balance the budget. With a simple multiplier of 5 the GDP (increases/decreases) to ($500/$1,000/$1,500/$1,800).

  21. The AE Quiz 1.The economy is dissaving at a. 200 b. 400 c. 1,000 2. Aggregate saving will be zero where GDP is a. $200 b. $400 c. $600 3. At AE1, savings totals a. $300 b. $700 c. $1,000 4. If the FE GDP is OL& we are at AE3 the inflationary spending gapis a. BC b. AB c. CD G +300 +300 Hard Quiz $500 +300 $400 $200 5. With an MPC of .60, an increase in G of $100 billion would increase “C”[not income]to: a. $150 B b. $250 B c. $600 B 6. Moving from J to H, the MPC is: a. FE/KL b. IP/OK c. IP/QK 7. A movement from AE2 to AE3 would be caused by a(an) _______ of the dollar? A. appreciation b. depreciation 8. If the FE GDP is OL and we are atAE1 the recessionary spending gap is: a. AB b. BC c. CD 9. Consumption is equal to GDP at: a. 200 b. $400 c. $600 10. At AE1($1,000 GDP),G increases G&T by $100 billion. With a “M” of 2, GDP increases to: a. $1,000 b. $1,100 c. $1,200

  22. a 2. b 3. a 4. b 5. a 6. c 7. b 8. b 9. b 10. b Answers to previous quiz Let’s look at some AE and Fiscal Policy questions asked on previous AP Macro Exams

  23. (64%)1. Crowding out is best described as which of the following? a. The decrease in full-employment output caused by an increase in taxes b. The decrease in private investment spending & consumption caused by an increase in government spending c. The decrease in government spending caused by a decrease in taxes d. The increase in the amount of capital outflow caused by the increase in government spending e. The increase in the amount of capital inflow caused by the increase in government spending (51%) 2. An increase in government spending with no change in taxes leads to a a. lower income level b. lower price level c. smaller money supply d. higher interest rate e. higher bond price (39%)3. If investors feel that business conditions will deteriorate in the future, the demand for loans and real interest ratein theloanable fundsmarket will change in which of the following ways in the short run? Demand for LoansReal Interest Rate a. Increase Increase b. Increase Decrease c. Decrease Increase d. Decrease Decrease e. Decrease Not change Fiscal Policy

  24. AE & Fiscal Policy Questions on 2000 AP Exam 4. (81%) The value of the spending multiplier(ME) decreases when a. tax rates are reduced d. government spending increases b. exports decline e. the marginal propensity to save increases c. imports decline 5. (75%) Which of the following policies would a Keynesian recommend during a period of high unemployment and low inflation? a. decreasing the MS to reduce AD b. decreasing taxes to stimulate AD c. decreasing government spending to stimulate AS d. balancing the budget to stimulate AS 6. (47%) Which of the following best explains why equilibrium income will increase by more than $100 in response to a $100 increase inG? a. Incomes will rise, resulting in a tax decrease. b. Incomes will rise, resulting in higher consumption. c. The increased spending raises the aggregate price level. d. The increased spending increases the money supply, lowering interest rates. e. The higher budget deficit reduces investment. 7. (56%) Unexpected increases in inventories usually precede a. increases in inflation b. increases in imports c. stagflation d. decreases in production e. decreases in unemployment

  25. 8. (63%) The economy on the right is currently experiencing a. inflation b. recession c. expansion d. stagflation e. rapid growth 9. (77%) Correct monetary policy to reach FE GDP is to increase a. the MS b. the RR c. discount rate d. taxes e. exports 10. (36%) The minimum increase in government spendingto reach full employment is a. $2,000 b. $1,000 c. $500 d. $200 e. $100 11. (58%) In the simple Keynesian AE model[not AD/AS]of an economy, changes in Ig or G will lead to a change in which of the following? a. the price level b. the level of output and employment c. interest rates d. the AS curve 12. (83%) In a closed-private in which the APC is .75, which of following is true? a. If income is $100, then saving is $75. d. If income is $200, then “C” is $75 b. If income is $100, then “C” is $50 e. If income is $500, then saving is $100 c. If income is $200, then saving is $50 AE C+Ig E $500 C A $400 Full.Employ. 0 $800$1,000 $2,000

  26. Fiscal Policy Questions from 2000 Exam 13. (73%) An inflationary gapcan be eliminated by all of the following EXCEPT a. an increase in personal income taxes d. a decrease in G b. an increase in the MS e. a decrease in Xn c. an increase in the interest rate 14. (56%) A major advantage of automatic stabilizers in fiscal policy is that they a. reduce the public debt b. increase the possibility of a balanced budget c. stabilize the unemployment rate d. go into effect without passage of new legislation e. automatically reduce the inflation rate Which answer does not slow the economy?

  27. 15. (70%) In the short run, a contractionary fiscal policy will cause AD, output, and the price level to change in which of the following ways? ADOutput Price level a. decrease decreasedecrease b. decrease increase increase c. increase decrease decrease d. increase increaseincrease 16. (52%) Crowding out due to government borrowing occurs when a. lower interest rates increase private sector investment b. lower interest rates decrease private sector investment c. higher interest rates decrease private sector investment d. a smaller money supply increases private sector investment 17. (42%) Compared to expansionary monetary policies adopted to counteract a recession, expansionary fiscal policies tend to result in a. less public spending c. a high rate of economic growth b. higher interest rates d. lower prices

  28. 18. (71%) An increase in which will increase the value of the ME? a. The supply of money d. The marginal propensity to consume b. Equilibrium output e. The required reserve ratio c. Personal income tax rates 19. (61%)An AS curve may be horizontal over some range because within that range a. a higher PL leads to higher interest rates, which reduces the MS & “C” b. changes in the aggregate PL do not induce substitution c. output cannot be increased unless prices and interest rates increase d. rigid prices prevent employment from fluctuating e. resources are underemployed & an increase in AD will be satisfied without any pressure on the PL 20. (45%)What could cause simultaneous increases in inflation & unemployment a. a decrease in government spending d. An increase in inflationary expectations b. A decrease in the money supply e. An increase in productivity c. A decrease in the velocity of money 21. (85%) Which of the following will result in the greatest increase in AD? a. A $100 increase in taxes b. A $100 decrease in taxes c. A $100 increase in government expenditures d. A $100 increase in government expenditures, coupled with a $100 increase in taxes e. A $100 increase in government expenditures, couples with a $100 decrease in taxes 22. (65%) Which of the following will result from a decrease in government spending? a. An increase in output d. A decrease in AS b. An increase in the price level e. A decrease in AD c. An increase in employment 1995 AP Exam

  29. C+Ig+G • 23. (61%) The graph indicates equilibrium at E • for a closed economy without G. If the • addition of G results in equilibrium atF, • which of the following is true? • a. G is $300 and the multiplier is 5. • b. G is $125 and the multiplier is 4. • c. G is $100 and consumption increased by $500. • d. G and Ig increase by $500. • e. Consumption and GDP increase by $500 each. AE F C+Ig E $325 $200 0 $1,000$1,500 GDP 24. (84%) According to Keynesian theory, decreasing taxes and increasing G will most likelychange consumptionand unemployment in which of the following ways? ConsumptionUnemployment a. Decrease No change b. Decrease No change c. Increase Decrease d. Increase Increase e. No change Decrease 25. (79%) In an economy at full employment, a presidential candidate proposes cutting the government debt in half in 4 years by increase T and reducing G. According to Keynesian theory, implementation of these policies is most likely to increase a. unemployment d. aggregate supply b. consumer prices e. the rate of economic growth c. aggregate demand

  30. 26. (79%) If the economy is in a severe recession, which of the following is the fiscal policymost effective instimulating production and employment? a. Government spending increases. b. Government spending decreases. c. Personal income taxes are increased. d. The Fed sells bonds on the open market. e. The Fed buys bonds on the open market. 27. (27%) Faced with a large federal budget deficit, the government decides to decrease expenditures and tax revenuesby the same amount. This action will affect output and interest rates in which of the following ways? OutputInterest Rates a. Increase Increase b. Increase Decrease c. No change Decrease d. Decrease Increase e. Decrease Decrease 28. (28%) If crowding out only partially offsets the effects of a tax cut, which of the following changes in interest rates and GDP are most likely to occur. Interest RatesGDP a. Increase Increase b. Increase Remain unchanged c. Increase Decrease d. Remain unchanged Increase e. Decrease Decrease

  31. 29. (62%) According to the Keynesian saving schedule, when aggregate income increasesby a given amount,savings will a. remain the same b. decrease by the amount of the change in income c. increase by the amount of the change in income d. increase by less than the amount of the change in income e. increase by more than the amount of the change in income

  32. Check your answers!!

  33. Test Review ANSWERS!! AE & Fiscal Policy Remember, the next test will be over AD/AS [about half] and AE and Fiscal Policy. Make sure you know these 28 questions on AE and Fiscal Policy.

  34. Fiscal Policy Test Review 1-2 1.Expansionary fiscal policy will be most effective [increase GDP]when theAS curveis(vertical/horizontal) & (incr/decr) “C” and (incr/decr) unemployment. 2.The paradox of thrift indicates that an increase in saving (matched/unmatched) by an increase in investment will lower equilibrium GDP.

  35. Fiscal Policy Test Review 3-4 [#3 & #4, start from a balanced budget] 3. A contractionary fiscal policy[decr G, incr T] would cause a[an] (incr/decr) in output[GDP] and a[an] (incr/decr) in interest rates. 4. An expansionary fiscal policy[incr G, decr T] would cause a[an] (incr/decr) in output[GDP] and a[an] (incr/decr) in interest rates. 5. In the AE model, if AE[AD]doesn’t buy up FE output(GDP),then the equilibrium output is (less than/more then) full employment output. G $2 Trillion T $2 Trillion [T ; LFM ; In. Rates ] [G ; LFM ; In. Rates ] [T ; LFM ; In. Rates ] [G ; LFM ; In. Rates ] “Inflationary Gap” “Recessionary Gap”

  36. 6. To decrease AD the greatest amount, the government should: (decrease “G” only/increase “T” only/both decr G & incr T) 7. To increase AD the greatest amount, the “G” should: (increase “G” only/decrease “T” only/both incr G and decr T) 8. With a MPC of .5 and current output at $500 billion, but F.E. output is $700 billion, correct fiscal policy would be to (increase G/Decrease T) by $100 billion. 9. If businesses are experiencing an unplanned increase in inventories, AE is (less than/greater than) FE output and spending in the economy will (increase/decrease). 10. If businesses are experiencing an unplanned decrease in inventories[disinvestment]AE is (less than/greater than) FE output & spending in the economy will (increase/decrease).

  37. 500 500 11. If “C” equals income at $500 billion, & MPC is .9, then an increase in Ig of $10 billion will change equilibrium GDP to ($400/$490/$510/$600) billion. 12. A conservative economistwould want tax (incr/decr) during a recession & (incr/decr) in “G” during inflationary times. 13. A liberal economistwould want tax (incr/decr) during an inflation & (incr/decr) in “G” during recessionary periods. 14. An inflationary gap indicates AE[actual GDP] (exceeds/falls short of) FE GDP. 15. A recessionary gapindicates AE[actual GDP] (exceeds/falls short of) FE GDP. 16. To increase GDP [but reduce military spending], we would combine two (domestic/overseas) bases into one (domestic/overseas) base. 17. A tax cut to expand the economywould (incr/decr) Y & (incr/decr) in. rates. 18. A tax increase to contract the economywould(incr/decr) Y & (incr/decr) IR.

  38. Test Review 19-22 19. To increase equilibrium GDP by $400,000, with a MPC of .5, a Keynesian economist would (decrease “T”/increase “G”) by $200,000. 20. Equilibrium GDP is $500 billionand MPS is .4. Now “G” collects taxes of $22 billion and spends the entire amount. As a result, equilibrium GDP will change to: ($445/$478/$522/$555). 21. With a MPC of .5, a $12 billion increase in “G” will increase “C”by($12/$24/$36) bil. 22. With a MPC of .5 and the economy in a recessionaryspending gapof $12 billion, we may conclude that the equilibrium is ($12/$24/$36) billion short of FE GDP.

  39. Test Review 23-26 .5 [Incr T or Decr G] 23. An increase in Ig of $25 billionresulted in an increase in equilibrium income (GDP) of $50B, so the MPS was? 24. A contractionary fiscal policyresults in a(n) (incr/decr) in output, and a(n) (incr/decr) in interest rates. 25. Increasing T or decreasing Gwill (increase/decrease) consumption, and (increase/decrease) unemployment. 26. With a MPC of .5, and the economy with an inflationaryGDP Gapof $50 billion, G could eliminate this inflationaryGDP by reducing government spendingby? $25 billion

  40. Test Review 27-28 27. An increase in Igin an economy (increase)/decrease)GDP & (increase/decrease) C. 28. If there is an equal increase in G and T of $25 billion in the horizontal range of AS, then output will (increase/decrease/stay the same). [would increase by $25 billion] PL AD1 AD2 PL RGDP

  41. [Public Sector] [No Public Sector] 250 1,200 GDP[bil] • From the above graph, moving from equilibrium “E” to • “F”,what can we conclude about the following: • A. How much is G? • B. The increase in Y? • C. The ME [Chg in Y/Chg in Expenditures = ME]? $50 B $200 B $200 B/$50 B = 4

  42. 2. Know what these do to the AD[C+Ig+G+Xn] or AS[REP] curves. A. Trade partners incomes increase? ___ decrease?___ B. Availability of land, labor, & capital increase?__ decrease?__ C. Productivity increases? ___ D. Resource[input] cost increases? ___ decreases? ___ E. Government spending increases? ___ decreases? ___ F. Stock Market drastically increases? ___ decreases? ___ E. A strong dollar’s impact on net exports. ___ F. A strong dollar’s impact on resource cost. ___ A B D C C C D B A A B B C

  43. 3. Know the above on a graph like this: A. At “K”, we have a [recessionary/inflationary] output gap? B. At “J”, we have a [recessionary/inflationary] output gap? C. The recessionarySPENDINGgapis [KH/EI/JG] D. The inflationarySPENDINGgapis [KH/ED/EI] C. Correct fiscal policy if we are at “C+Ig1” if “0B” is FE Y would be to [increase/decrease] Gand [increase/decrease] T.

  44. AS AS AD2 PL PL AD2 PL AD2 AD1 AD1 AD1 AS PL RGDP Y* RGDP RGDP (a.) (c.) (b.) 4. Which of the following would be the A. Classical AS curve B. Keynesian AS curve C. Supply-side AS curve 5. If there is an increase in AD in each one of these, what happens to PL, Output & Employment? (c.) (a.) (b.) PL - no change; Y/Empl. - increase (a.) (b.) PL – increase; Y/Empl. - increase (c.) PL – increase; Y/Empl. – no change

  45. 6. Paradox of Thrift applies in the Keynesian range or Classical range? 7. Ratchet effect – are prices and wages “sticky” up or down? 8. Crowding out - An increase in government spending causes the interest rate to (increase/decrease) &, Ig to (increase/decrease)? 9. If MPS is .50 and we have a recessionary spending gap of $10billion, how short are we of FE GDP? 10. What is a political business cycle? 11. What triggers the wealth effect, interest rate effect, and the foreign purchase effect? 12. Know how to figure productivity and per unit production cost. 13. Know the difference between a A. “Change in AQD or AQS” B. “Change in AD or AS” Keynesian range $20 billion Rev up economy before an election Change in PL How many outputs from inputs; Total input cost divided by outputs Caused by chg in PL Caused by chg in CIGXn or REP

  46. 14. If income increases from $500 B to $600 B, and Ig of $25 B caused the $100 B increase in Y, then the ME and MPS were? 15. The MPS is .50, and “C” = “Y” at $600 billion. Now Ig is increased by $50 billion, therefore the new equilibrium Y is? 4 and .25 16.Now G increases G&T by 50 bil., then the new equilibrium Y would be? $750 billion AE[C+Ig] Consumption $600 B $50 B $700 $600 RGDP [billions]

  47. AP Practice Quiz 3 AE (C+Ig2) F AE (C+Ig1) Consumption D E C AE (C+Ig) A B G 11. Going from “OV” to “OU”, what is the ME? +25 B 4 45 WVU T Real GDP 0 500 400 1. At income level “OT”,the volume of consumption is _____. 2. At income level “OT”,the volume of saving is _____. 3. The “APC” is equal to “1”at income level ___. 4. If Ig is Ig1, then “equilibrium GDP”is _____. 5. If Ig is Ig2, then “equilibrium GDP”is _____. 6. If Ig increases from Ig1 to Ig2, equilibrium GDP increases by _____. 7. If Ig increases from Ig1 to Ig2, the “MPC” is equal to __________. 8. As we move from income level OV to OU, the “MPS” is ________. 9. The economy is “dissaving” at income level _____. 10. Consumption will be equal to income at income level _____. TC CF OV OU OT UT BC/UT AE/VU OW OV

  48. Test Review 1-5 .25 [Decr T or Incr G] 1.Anincrease in Ig of $75Bresults in an increase inequilibrium income(GDP) of$300billion, so the MPS is? 2.Anexpansionary fiscal policyresults in a(n) (incr/decr) in output, & a(n) (incr/decr) in interest rates. 3.Increasing T or decreasing Gwill (increase/decrease) consumption, and (increase/decrease) unemployment. 4.With aMPC of .75, & the economy with aninflationaryGDP Gap of $80B, G could eliminate this $80 billioninflationaryGDP Gap by reducing government spendingby? 5.With aMPC of .60 & current output at $650 bil. but FE output is $700billion, correct fiscal policy would be to (increase G/decrease T) by $20 billion. $2 Tr. $2 Tr. T G $20 bil.

  49. Test Review 6-9 6.An increase in Igin an economy will(incr)/decr)GDP& (incr/decr)C. 7. In aninflationary economy, (actual Y/potential Y) exceeds (actual Y/potential Y). 8.In thecomplex economy(C+Ig+G+Xn), theleakagesare? &theinjectionsare? 9. If there is anequal increase in G&T of $10 billion, then output will (increase/decrease). [S, T, & M] [G,Ig,X]

  50. Practice Quiz AE3[C+Ig+G+Xn] A $2,200 AE2[C+Ig+G] B AE1[C+Ig] G $1,600 C Consumption F D AE[C+Ig+G+Xn] +300 H E $1,000 $800 +300 I $700 J $500 P +300 Inflat. Gap $400 Recess. Gap $200 200400 1,0001,6002,200bil. 0 N QK LM Real GDP 1. The APC is “one”at letter: (J/H/G/A). 2. Consumption will be equal toincome(GDP) at (200/400/1000). 3. A shift from AE2toAE3would be caused by a[an] (appreciation/depreciation) of the dollar. 4. If there is a shift from JtoH, the simple multiplieris: (2/3/4/5) 5. With an MPC of .75, an increase in G of $200 billion, would increase “C” [not income] by: a. $800 billion b. $600 billion c. $150 billion 6. If the FE GDP is OL & we are at AE1, the (recess./inflat.) gap is (AB/BC).

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