National Income and Price Determination:Sample Questions

AP EconomicsMr. Bordelon

My cat Emma loves you all, and is watching you work hard.

• Suppose GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8.

Which of the following is an accurate equation for the consumption function?a. C = 8,000 + 0.8YD

b. C = 8,700 + 0.2YD

c. C = 500 + 0.8YD

d. C = 1,700 + 0.2YD

e. C = 700 + 0.8YD

• Suppose GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8.

Which of the following is an accurate equation for the consumption function?a. C = 8,000 + 0.8YD

b. C = 8,700 + 0.2YD

c. C = 500 + 0.8YD

d. C = 1,700 + 0.2YD

e. C = 700 + 0.8YD

Disposable Income (in billions) Consumer Spending (in billions)

$0 $100

200 220

400 340

600 460

800 580

1000 700

Referring to the table provided, the autonomous consumer spending is:a. $200.b. $100.c. $120.d. $0.e. $220.

Disposable Income (in billions) Consumer Spending (in billions)

$0 $100

200 220

400 340

600 460

800 580

1000 700

Referring to the table provided, the autonomous consumer spending is:a. $200.b. $100.c. $120.d. $0.e. $220.

If the marginal propensity to consume is 0.5, individual autonomous consumption is $10,000, and disposable income is $40,000, then individual consumption spending is:a. $20,000.b. $25,000.c. $30,000.d. $45,000.e. $50,000.

If the marginal propensity to consume is 0.5, individual autonomous consumption is $10,000, and disposable income is $40,000, then individual consumption spending is:a. $20,000.b. $25,000.c. $30,000.d. $45,000.e. $50,000.

If the MPC is 0.8, then the multiplier is:a. 4.b. 5.c. 8.d. 10.e. 2.

If the MPC is 0.8, then the multiplier is:a. 4.b. 5.c. 8.d. 10.e. 2.

According to the wealth effect, when the price level decreases, the purchasing power of assets:a. decreases and consumer spending decreases.b. increases and consumer spending decreases.c. decreases and consumer spending increases.d. remains constant and consumer spending is

unchanged.e. increases and consumer spending increases.

According to the wealth effect, when the price level decreases, the purchasing power of assets:a. decreases and consumer spending decreases.b. increases and consumer spending decreases.c. decreases and consumer spending increases.d. remains constant and consumer spending is

unchanged.e. increases and consumer spending increases.

A decrease in the money supply is likely to cause:a. an increase in money holdings, higher interest

rates and a decrease in aggregate demand.b. an increase in money holdings, higher interest

rates and an increase in aggregate demand.c. a decrease in money holdings, lower interest

rates and a decrease in aggregate demand.d. a decrease in money holdings, lower interest

rates and an increase in aggregate demand.e. a decrease in money holdings, higher interest

rates and a decrease in aggregate demand.

A decrease in the money supply is likely to cause:a. an increase in money holdings, higher interest

rates and a decrease in aggregate demand.b. an increase in money holdings, higher interest

rates and an increase in aggregate demand.c. a decrease in money holdings, lower interest

rates and a decrease in aggregate demand.d. a decrease in money holdings, lower interest

rates and an increase in aggregate demand.e. a decrease in money holdings, higher interest

rates and a decrease in aggregate demand.

The economy is in a recession. Which of the following is a fiscal policy that the government should adopt to strengthen the economy?a. A decrease in government transfer payments.b. An increase in government purchases of

goods and services.c. An increase in tax rates.d. A decrease in interest rates.e. An increase in the money supply.

The economy is in a recession. Which of the following is a fiscal policy that the government should adopt to strengthen the economy?a. A decrease in government transfer payments.b. An increase in government purchases of

goods and services.c. An increase in tax rates.d. A decrease in interest rates.e. An increase in the money supply.

Which of the following policies will shift AD to the left?a. The government increases its level of spending in

the economy.b. The government increases transfer payments to

households.c. The Federal Reserve increases the money supply

in the economy.d. The government decreases its level of taxation in

the economy.e. The government increases its level of taxation in

the economy.

Which of the following policies will shift AD to the left?a. The government increases its level of spending in

the economy.b. The government increases transfer payments to

households.c. The Federal Reserve increases the money supply

in the economy.d. The government decreases its level of taxation in

the economy.e. The government increases its level of taxation in

the economy.

Which of the following would likely cause the SRAS to shift left?a. a decrease in consumer spending.b. a decrease in the price of imported oil.c. an increase in the price of imported oil.d. an increase in consumer spending.e. an increase in personal income taxes.

Which of the following would likely cause the SRAS to shift left?a. a decrease in consumer spending.b. a decrease in the price of imported oil.c. an increase in the price of imported oil.d. an increase in consumer spending.e. an increase in personal income taxes.

In the long run, nominal wages are:a. sticky downward but flexible in an upward

direction.b. sticky upward but flexible in a downward

direction.c. sticky in both an upward and downward

direction.d. flexible because contracts and informal

agreements are renegotiated in the long run.e. flexible because the government adjusts

disequilibrium in labor markets in the long run.

In the long run, nominal wages are:a. sticky downward but flexible in an upward

direction.b. sticky upward but flexible in a downward

direction.c. sticky in both an upward and downward

direction.d. flexible because contracts and informal

agreements are renegotiated in the long run.e. flexible because the government adjusts

disequilibrium in labor markets in the long run.

When the economy is on the short-run aggregate supply curve and to the left of the long-run aggregate supply curve, actual aggregate output will eventually equal potential output as:a. nominal wages fall and the long-run aggregate supply

curve shifts to the left.b. the aggregate price level falls and the long-run aggregate

supply curve shifts to the left.c. nominal wages fall and the short-run aggregate supply

curve shifts to the right.d. the aggregate price level falls and the aggregate demand

curve shifts to the right.e. nominal wages rise and the short-run aggregate supply

curve shifts to the left.

When the economy is on the short-run aggregate supply curve and to the left of the long-run aggregate supply curve, actual aggregate output will eventually equal potential output as:a. nominal wages fall and the long-run aggregate supply

curve shifts to the left.b. the aggregate price level falls and the long-run aggregate

supply curve shifts to the left.c. nominal wages fall and the short-run aggregate supply

curve shifts to the right.d. the aggregate price level falls and the aggregate demand

curve shifts to the right.e. nominal wages rise and the short-run aggregate supply

curve shifts to the left.

Stagflation may result from:a. an increase in the supply of money.b. a decrease in the supply of money.c. an increase in the price of imported oil.d. a decrease in the price of imported oil.e. an increase in personal income taxes.

Stagflation may result from:a. an increase in the supply of money.b. a decrease in the supply of money.c. an increase in the price of imported oil.d. a decrease in the price of imported oil.e. an increase in personal income taxes.

Suppose the economy is operating in long-run equilibrium. If a positive demand shock hits the economy, we would expect:a. a short-run increase in real GDP and price level, and a long-run

decrease in real GDP and an increase in price level.b. a short-run increase in real GDP and price level, and a long-run

increase in real GDP and an increase in price level.c. a short-run increase in real GDP and price level, and a long-run

decrease in real GDP and a decrease in price level.d. a short-run increase in real GDP and price level, and a long-run

increase in real GDP and a decrease in price level.e. a short-run decrease in real GDP and price level, and a long-run

increase in real GDP and a decrease in price level.

Suppose the economy is operating in long-run equilibrium. If a positive demand shock hits the economy, we would expect:a. a short-run increase in real GDP and price level, and a long-run

decrease in real GDP and an increase in price level.b. a short-run increase in real GDP and price level, and a long-run

increase in real GDP and an increase in price level.c. a short-run increase in real GDP and price level, and a long-run

decrease in real GDP and a decrease in price level.d. a short-run increase in real GDP and price level, and a long-run

increase in real GDP and a decrease in price level.e. a short-run decrease in real GDP and price level, and a long-run

increase in real GDP and a decrease in price level.

As a recessionary gap is eliminated through self-correcting adjustment, the equilibrium price level _____ and the equilibrium real output _____.a. increases; decreasesb. increases; increasesc. decreases; decreasesd. decreases; increasese. remains constant; increases

As a recessionary gap is eliminated through self-correcting adjustment, the equilibrium price level _____ and the equilibrium real output _____.a. increases; decreasesb. increases; increasesc. decreases; decreasesd. decreases; increasese. remains constant; increases

If there is an inflationary gap, which of the following accurately describes the adjustment to long-run equilibrium?a. Nominal wages decrease, and the aggregate demand curve

shifts left until the economy reaches long-run equilibrium.b. Nominal wages increase, and the aggregate demand curve

shifts right until the economy reaches long-run equilibrium.c. Nominal wages decrease, and the short-run aggregate

supply curve shifts right until the economy reaches long-run equilibrium.

d. Nominal wages increase, and the short-run aggregate supply curve shifts right until the economy reaches long-run equilibrium.

e. Nominal wages increase, and the short-run aggregate supply cure shifts left until the economy reaches long-run equilibrium.

If there is an inflationary gap, which of the following accurately describes the adjustment to long-run equilibrium?a. Nominal wages decrease, and the aggregate demand curve

shifts left until the economy reaches long-run equilibrium.b. Nominal wages increase, and the aggregate demand curve

shifts right until the economy reaches long-run equilibrium.c. Nominal wages decrease, and the short-run aggregate

supply curve shifts right until the economy reaches long-run equilibrium.

d. Nominal wages increase, and the short-run aggregate supply curve shifts right until the economy reaches long-run equilibrium.

e. Nominal wages increase, and the short-run aggregate supply cure shifts left until the economy reaches long-run equilibrium.

The current level of real GDP lies below potential GDP. An appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.a. increase government purchases; AD; left.b. increase transfer payments; SRAS; right.c. increase tax rates; AD; right.d. increase government purchases; AD; right.e. decrease government purchases; AD; left.

The current level of real GDP lies below potential GDP. An appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.a. increase government purchases; AD; left.b. increase transfer payments; SRAS; right.c. increase tax rates; AD; right.d. increase government purchases; AD; right.e. decrease government purchases; AD; left.

Suppose the economy is experiencing an inflationary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:a. decrease tax rates.b. decrease government purchases.c. increase the investment tax credit.d. decrease the real interest rate.e. lower the federal funds rate.

Suppose the economy is experiencing an inflationary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:a. decrease tax rates.b. decrease government purchases.c. increase the investment tax credit.d. decrease the real interest rate.e. lower the federal funds rate.

An increase in taxes is considered to be an example of _____ because it _____.a. expansionary fiscal policy; shifts the aggregate demand

curve to the left, increasing aggregate outputb. contractionary fiscal policy; shifts the aggregate

demand curve to the left, decreasing aggregate output.c. expansionary fiscal policy; shifts the aggregate demand

curve to the right, increasing aggregate output.d. contractionary fiscal policy; shifts the aggregate

demand curve to the right, decreasing aggregate output.e. expansionary fiscal policy; shifts the aggregate demand

curve to the right, decreasing aggregate output.

An increase in government transfers is considered to be an example of _____ because it _____.a. expansionary fiscal policy; shifts the aggregate demand

curve to the left, increasing aggregate outputb. contractionary fiscal policy; shifts the aggregate demand

curve to the left, decreasing aggregate output.c. expansionary fiscal policy; shifts the aggregate demand

curve to the right, increasing aggregate output.d. contractionary fiscal policy; shifts the aggregate demand

curve to the right, decreasing aggregate output.e. expansionary fiscal policy; shifts the aggregate demand

curve to the right, decreasing aggregate output.

The existence of lags:a. makes fiscal policy more effective than

monetary policy.b. makes monetary policy more effective than

fiscal policy.c. makes discretionary fiscal policy more

effective than automatic stabilizers.d. makes both fiscal and monetary policy more

effective.e. makes both fiscal and monetary policy more

challenging to implement.

The existence of lags:a. makes fiscal policy more effective than

monetary policy.b. makes monetary policy more effective than

fiscal policy.c. makes discretionary fiscal policy more

effective than automatic stabilizers.d. makes both fiscal and monetary policy more

effective.e. makes both fiscal and monetary policy more

challenging to implement.

Assume that the marginal propensity to consume is 0.8, and potential output is $800 billion. If current real GDP is $700 billion, which of the following policies would bring the economy to potential output?a. Increase government spending by $25 billion.b. Increase government spending by $100 billion.c. Increase government spending by $20 billion.d. Decrease government spending by $100 billion.e. Increase government spending by $800 billion.

Assume that the marginal propensity to consume is 0.8, and potential output is $800 billion. If current real GDP is $700 billion, which of the following policies would bring the economy to potential output?a. Increase government spending by $25 billion.b. Increase government spending by $100 billion.c. Increase government spending by $20 billion.d. Decrease government spending by $100 billion.e. Increase government spending by $800 billion.

If the marginal propensity to consume is 0.8, and the federal government decreases spending by $200 billion, the income expenditure model would predict that real GDP will decrease by:a. $160 billion.b. $200 billion.c. $800 billion.d. $1000 billion.e. $750 billion.

If the marginal propensity to consume is 0.8, and the federal government decreases spending by $200 billion, the income expenditure model would predict that real GDP will decrease by:a. $160 billion.b. $200 billion.c. $800 billion.d. $1000 billion.e. $750 billion.

Assume that marginal propensity to consume is 0.8, and potential output is $800 billion. The tax multiplier is:a. 0.8.b. 1.25.c. 5.d. 4.e. 8.

Assume that marginal propensity to consume is 0.8, and potential output is $800 billion. The tax multiplier is:a. 0.8.b. 1.25.c. 5.d. 4.e. 8.