AP Macroeconomics AS/AD and Fiscal Policy Test

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Assume the aggregate supply curve is upward sloping and the economy is in a recession. If the government
increases both taxes and government spending by $25 billion, the price level and real GDP will most likely
change in which of the following ways?

Price Level Real GDP

a. Increase Increase
b. Increase Decrease
c. Increase No change
d. Decrease Decrease
e. Decrease No change
____ 2. Which of the following best explains why equilibrium income will rise by more than $100 in response to a $100
increase in government spending?
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 real interest rates.
e. The higher budget deficit reduces investment.
____ 3. Which of the following best explains how an economy could simultaneously experience high inflation and high
unemployment?
a. The government increases spending without increasing taxes.
b. The government increases taxes without increasing spending.
c. Inflationary expectations decline.
d. Women and teenagers enter the labor force.
e. Negative supply shocks cause resource prices to increase.
____ 4. If Janet Yellen’s disposable income increases from $600 to $700 and her level of personal consumption
expenditures increases from $450 to $475. You may conclude that her marginal propensity to consume is
a. 0.1
b. 0.25
c. 0.5
d. 0.75
e. 1
____ 5. A decrease in lump-sum personal income taxes will most likely result in an increase in real GDP because which
of the following occurs?

I. Government spending decreases to maintain a balanced budget.

II. Consumption spending increases because disposable personal income increases.
III. Investment spending decreases because disposable personal income increases.

a. I only
b. II only
c. III only
d. I and III only
 e. I, II, and III
____ 6. In order to be called an automatic stabilizer, which of the following must government spending automatically do
during a recessionary or or an inflationary period?

Recessionary Period Inflationary Period

a. Decrease Decrease
b. Decrease Increase
c. Increase Decrease
d. Increase Increase
e. No change No change
____ 7. Assume that the short-run aggregate supply curve decreases. What is the impact on the short run Phillips curve?
a. It will shift left.
b. It will shift right.
c. There will be movement along the curve to the left.
d. There will be movement along the curve to the right.
e. The curve will not change.
____ 8. A leftward shift in the aggregate demand curve with a horizontal aggregate supply curve will cause employment
and the price level to change in which of the following ways?

Employment Price Level

a. Increase Increase
b. Increase Decrease
c. Increase No change
d. Decrease No change
e. No change No change
____ 9. In which of the following ways will a decrease in short-run aggregate supply change the price level and
unemployment?

Price Level Unemployment

a. Increase Decrease
b. Decrease Decrease
c. Decrease Increase
d. Decrease No change
e. No change Increase
____ 10. Which of the following correctly describes how income groups are affected by sales taxes?
a. High income consumers suffer the most because sales taxes are progressive.
b. Low income consumers suffer the most because sales taxes are regressive.
c. All income groups pay the same percentage so the tax is proportional.
d. Sales taxes are inherently designed to ensure that all people pay the same percentage in
taxes.
____ 11. The value of the spending multiplier increases when
a. tax rates are reduced
b. exports decline
c. imports decline
d. government spending increases
e. the marginal propensity to save decreases
____ 12. A rapid increase in successful research and development projects for the nation will most likely result in which of
the following changes in the short-run and long-run aggregate supply curves and production possibilities curves?

SRAS LRAS PPC

a. Decrease No change
No change
b. Decrease Decrease
Shift inward
c. Increase No change
Shift inward
d. Increase Increase
No change
e. Increase Increase
Shift outward
____ 13. In response to an increase in government spending of $10 billion, gross domestic product rises by a total of $20
billion. The marginal propensity to save is
a. 0.1
b. 0.2
c. 0.5
d. 0.8
e. 0.9
____ 14. An increase in the stock of capital goods will cause the
a. aggregate demand curve to shift leftward.
b. production possibilties curve to shift in.
c. Phillips curve to shift out.
d. long-run aggregate supply curve to shift rightward.
e. consumption function to shift down.
____ 15. If the primary goal is to reduce inflation, which of the following fiscal policy actions would be appropriate during
a rapidly increasing consumer price index?

I. Reduce government expenditures for defense and space research.

II. Increase transfer payments to those most severely affected by the rising price index.
III. Increase personal income tax rates.

a. I only
b. II only
c. III only
d. I and III only
e. II and III only
____ 16. Assume there is an decrease in aggregate demand in an economy. How would this affect inflation and
unemployment?
a. Prices will rise; Unemployment will fall.
b. Prices will fall; Unemployment will rise.
c. Prices will rise; Unemployment will rise.
d. Prices will fall. Unemployment will fall.
____ 17. Which of the following will occur as a result of an improvement in technology?
a. The aggregate demand curve will shift to the right.
b. The aggregate demand curve will shift to the left.
c. The aggregate supply curve will shift to the right.
d. The aggregate supply curve will shift to the left.
e. The production possibilities curve will shift inward.
____ 18. Which of the following best describes the relationship between government budget deficits and the national debt?
a. Budget deficits lead to a decrease in the national debt.
b. Budget deficits lead to an increase in the national debt.
c. A national debt makes budget deficits less likely.
d. As the national debt expands, budget deficits are reduced significantly.
____ 19. Which of the following fiscal policy actions would be most effective in combatting inflation?

Taxes Government Spending

a. $25 billion decrease $25 billion decrease
b. $25 billion decrease $25 billion increase
c. $25 billion decrease No change
d. $25 billion increase $25 billion decrease
e. $25 billion increase $25 billion increase
____ 20. Crowding out due to government borrowing occurs when
a. lower interest rates incrase 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
e. a larger money supply increases private sector investment

Key:
1. A
2. B
3. E.
4. B
5. B
6. C
7. B
8. D
9. A
10. B
11. E
12. E
13. C
14. D
15. D
16. B
17. C
18. B
19. D
20. C
AP Macroeconomics AS/AD and Fiscal Policy Test
Answer Section

MULTIPLE CHOICE

1. ANS: A PTS: 1
2. ANS: B PTS: 1
3. ANS: E PTS: 1
4. ANS: B PTS: 1
5. ANS: B PTS: 1
6. ANS: C PTS: 1
7. ANS: B PTS: 1
8. ANS: D PTS: 1
9. ANS: A PTS: 1
10. ANS: B PTS: 1
11. ANS: E PTS: 1
12. ANS: E PTS: 1
13. ANS: C PTS: 1
14. ANS: D PTS: 1
15. ANS: D PTS: 1
16. ANS: B PTS: 1
17. ANS: C PTS: 1
18. ANS: B PTS: 1
19. ANS: D PTS: 1
20. ANS: C PTS: 1