AP Macro Unit Three Exam

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Questions and Answers
  • 1. 

    Which of the following best describes aggregate supply?

    • A.

      The amount buyers plan to spend on output

    • B.

      A schedule showing the relationship between inputs and outputs

    • C.

      A schedule indicating the level of real output that will be purchased at each possible price level

    • D.

      A schedule indicating the level of real output that will be produced at each possible price level

    Correct Answer
    D. A schedule indicating the level of real output that will be produced at each possible price level
    Explanation
    Aggregate supply refers to a schedule indicating the level of real output that will be produced at each possible price level. This means that it represents the total amount of goods and services that all firms in an economy are willing and able to produce at different price levels. It shows the relationship between the overall level of output and the general price level in the economy.

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  • 2. 

    A change in which of the following will cause the aggregate demand curve to shift?

    • A.

      Energy prices

    • B.

      Productivity rates

    • C.

      Consumer wealth

    • D.

      Prices of consumer goods

    Correct Answer
    C. Consumer wealth
    Explanation
    Consumer wealth refers to the total value of assets and financial resources owned by individuals. An increase in consumer wealth will lead to higher spending and consumption, which in turn will increase the aggregate demand in the economy. As a result, the aggregate demand curve will shift to the right. Conversely, a decrease in consumer wealth will lead to lower spending and consumption, causing the aggregate demand curve to shift to the left. Therefore, changes in consumer wealth have a significant impact on the aggregate demand curve.

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  • 3. 

    The SRAS curve will shirt to the right when

    • A.

      Energy prices increase

    • B.

      Government regulation increases

    • C.

      Prices of inputs decrease

    • D.

      Productivity rates decrease

    Correct Answer
    C. Prices of inputs decrease
    Explanation
    When the prices of inputs decrease, it becomes cheaper for firms to produce goods and services. This leads to a decrease in production costs and an increase in profitability. As a result, firms are able to supply more output at each price level, causing the SRAS (Short-Run Aggregate Supply) curve to shift to the right. This shift indicates an increase in the quantity of goods and services supplied in the short run at any given price level.

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  • 4. 

    A rightward shift in the AD curve with a horizontal AS curve will cause employment and the price level to change in which of the following ways

    • A.

      Employment increases, Price level increases

    • B.

      Employment increases, Price level decreases

    • C.

      Employment increases, Price level has no change

    • D.

      Employment decreases, Price level decreases

    Correct Answer
    C. Employment increases, Price level has no change
    Explanation
    A rightward shift in the AD curve indicates an increase in aggregate demand in the economy. With a horizontal AS curve, this means that the economy is operating at full employment, where any increase in aggregate demand does not lead to an increase in output or employment but instead causes prices to rise. Therefore, employment increases as the economy operates at full employment, but the price level remains unchanged.

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  • 5. 

    An increase in the capital stock will cause the

    • A.

      Aggregate demand curve to shift left

    • B.

      PPC to shift in

    • C.

      LRAS curve to shift right

    • D.

      Philips curve to shift out

    Correct Answer
    C. LRAS curve to shift right
    Explanation
    An increase in the capital stock will cause the LRAS (Long-Run Aggregate Supply) curve to shift right. This is because an increase in the capital stock, such as through investments in machinery and equipment, leads to an increase in the productive capacity of the economy. As a result, firms can produce more goods and services in the long run, shifting the LRAS curve to the right. This shift indicates an increase in potential output and economic growth in the long term.

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  • 6. 

    Which of the following is a fiscal policy that would increase AD in the Keynesian model?

    • A.

      A decrease in personal income taxes

    • B.

      A decrease in government spending

    • C.

      An increase in corporate income taxes

    • D.

      A sale of government bonds by the Federal Reserve

    Correct Answer
    A. A decrease in personal income taxes
    Explanation
    A decrease in personal income taxes would increase disposable income for individuals, leading to an increase in consumption spending. This increase in consumption would result in an increase in aggregate demand (AD) in the Keynesian model.

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  • 7. 

    An increase in labor productivity would most likely cause real GDP and the price level to change in which of the following ways?

    • A.

      Real GDP increase, price level increase

    • B.

      Real GDP increase, price level decrease

    • C.

      Real GDP increase, price level has no change

    • D.

      Real GDP decrease, price level increase

    Correct Answer
    B. Real GDP increase, price level decrease
    Explanation
    An increase in labor productivity would most likely cause real GDP to increase because with higher productivity, more goods and services can be produced in the same amount of time. This leads to an increase in the total output of the economy. On the other hand, the price level is likely to decrease because the increased productivity reduces the cost of production. As a result, businesses can lower their prices while still maintaining their profit margins. This leads to a decrease in the overall price level in the economy.

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  • 8. 

    1. If Maria Escalera's disposable income increase from $600 to $650 and her level of personal consumption expenditures increase from $480 to $520, you may conclude that her marginal propensity to 

    • A.

      Consume is 0.8

    • B.

      Consume is 0.4

    • C.

      Consume is 0.25

    • D.

      Save is 0.25

    Correct Answer
    A. Consume is 0.8
    Explanation
    Based on the given information, Maria's disposable income increased by $50 ($650 - $600) and her personal consumption expenditures increased by $40 ($520 - $480). The marginal propensity to consume (MPC) is calculated by dividing the change in consumption by the change in income. In this case, the change in consumption is $40 and the change in income is $50. Dividing $40 by $50 gives us 0.8, which means that for every additional dollar of income, Maria spends 80 cents. Therefore, the correct answer is "consume is 0.8".

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  • 9. 

    In the Keynesian aggregate-expenditure model, if the MPC is 0.75 and gross investment increases by $6 billion, equilibrium GDP will increase by 

    • A.

      $6 billion

    • B.

      $8 billion

    • C.

      $12 billion

    • D.

      $24 billion

    Correct Answer
    D. $24 billion
    Explanation
    In the Keynesian aggregate-expenditure model, the marginal propensity to consume (MPC) represents the proportion of additional income that individuals choose to spend. If the MPC is 0.75, it means that for every additional dollar of income, individuals spend 75 cents. When gross investment increases by $6 billion, it injects additional income into the economy. This increase in income will be spent by individuals, with 75% of it being consumed. As a result, the total increase in equilibrium GDP will be greater than the initial increase in investment. Therefore, equilibrium GDP will increase by $24 billion, which is three times the initial increase in investment.

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  • 10. 

    In the Keynesian aggregate-expenditure model, the simple spending multiplier can be calculated by dividing 

    • A.

      The initial change in spending by the change in real GDP

    • B.

      The change in real GDP by the initial change in spending

    • C.

      One by one plus the marginal propensity to consume

    • D.

      The propensity to save by the propensity to consume

    Correct Answer
    B. The change in real GDP by the initial change in spending
    Explanation
    The correct answer is the change in real GDP by the initial change in spending. This is because the spending multiplier represents the total change in real GDP that is generated from an initial change in spending. By dividing the change in real GDP by the initial change in spending, we can determine the magnitude of this multiplier effect.

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  • 11. 

    Which of the following will cause the consumption schedule to shift upward?

    • A.

      An increase in the amount of consumer indebtedness

    • B.

      A reduction in the wealth or assets held by consumers

    • C.

      An expectation of future declines in the consumer price index

    • D.

      An expectation of future shortages of essential consumer goods

    Correct Answer
    D. An expectation of future shortages of essential consumer goods
    Explanation
    An expectation of future shortages of essential consumer goods will cause the consumption schedule to shift upward. This is because consumers will anticipate a decrease in the availability of these goods in the future, leading them to increase their current consumption in order to stock up and meet their needs. This increased demand for essential consumer goods will shift the consumption schedule upward.

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  • 12. 

    The investment demand curve will shift to the right as a result of

    • A.

      Excess productive capacity

    • B.

      An increase in corporate business taxes

    • C.

      Firms becoming more optimistic with respect to future business conditions

    • D.

      A decrease in the real interest rate

    Correct Answer
    C. Firms becoming more optimistic with respect to future business conditions
    Explanation
    When firms become more optimistic about future business conditions, they are more likely to make investments in new projects and expand their operations. This increased optimism leads to an increase in investment demand, causing the investment demand curve to shift to the right. As a result, firms are willing to invest more at every given interest rate, indicating a higher level of investment in the economy.

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  • 13. 

    Automatic stabilizers in the economy include which of the following?

    • A.

      A progressive personal income tax and Congressional action that increases tax rates

    • B.

      Unemployment compensation and Congressional action that increases tax rates

    • C.

      A progressive personal income tax and unemployment compensation

    • D.

      A progressive personal income tax and Philips reductions

    Correct Answer
    C. A progressive personal income tax and unemployment compensation
    Explanation
    Automatic stabilizers in the economy refer to policies or mechanisms that help stabilize economic fluctuations without the need for specific government intervention. These stabilizers are designed to automatically kick in during economic downturns or recessions. The correct answer, "A progressive personal income tax and unemployment compensation," aligns with this definition. A progressive personal income tax helps stabilize the economy by reducing income inequality and redistributing wealth. Unemployment compensation provides financial support to individuals who have lost their jobs, helping to maintain their purchasing power and stimulate demand in the economy. Both of these policies act as automatic stabilizers by providing support during economic downturns.

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  • 14. 

    In order to be called an automatic, or built-in, stabilizer, which of the following must taxes do in a recessionary period and in an inflationary period?

    • A.

      Recessionary period decrease, inflationary period decrease

    • B.

      Recessionary period decrease, inflationary period increase

    • C.

      Recessionary period increase, inflationary period decrease

    • D.

      Recessionary period increase, inflationary period increase

    Correct Answer
    B. Recessionary period decrease, inflationary period increase
    Explanation
    Taxes act as automatic stabilizers in the economy by adjusting in response to economic conditions. During a recessionary period, taxes should decrease in order to stimulate spending and boost economic activity. This helps to mitigate the negative effects of the recession. On the other hand, during an inflationary period, taxes should increase in order to reduce aggregate demand and prevent excessive price increases. This helps to cool down the economy and control inflationary pressures. Therefore, the correct answer is recessionary period decrease, inflationary period increase.

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  • 15. 

    In which of the following ways will increases in the SRAS change the price level and unemployment?

    • A.

      Price level increase, unemployment no change

    • B.

      Price level decrease, unemployment decrease

    • C.

      Price level decrease, unemployment increase

    • D.

      Price level decrease, unemployment no change

    Correct Answer
    B. Price level decrease, unemployment decrease
    Explanation
    When the Short-Run Aggregate Supply (SRAS) increases, it means that there is an increase in the quantity of goods and services supplied in the short run. This increase in supply will lead to a decrease in the price level, as there will be more goods and services available at lower prices. Additionally, the increase in SRAS will also lead to a decrease in unemployment, as more production requires more workers to meet the demand. Therefore, the correct answer is that an increase in SRAS will result in a decrease in both the price level and unemployment.

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  • 16. 

    The balanced-budget multiplier indicates that

    • A.

      Equal increases in government spending and taxation will make a recession worse

    • B.

      Equal increases in government spending and taxation will increase total spending

    • C.

      Government deficits might have contractionary impact on the economy

    • D.

      The level of GDP is never less than the level of disposable income

    Correct Answer
    B. Equal increases in government spending and taxation will increase total spending
    Explanation
    The balanced-budget multiplier suggests that equal increases in government spending and taxation will increase total spending. This is because when the government increases spending, it injects money into the economy, which leads to an increase in aggregate demand. At the same time, when taxes are increased, people have less disposable income to spend, which can dampen consumption. However, the balanced-budget multiplier argues that the increase in government spending outweighs the decrease in private consumption due to higher taxes, resulting in a net increase in total spending.

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  • 17. 

    Assume the AS 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?

    • A.

      Price level increase, real GDP increase

    • B.

      Price level increase, real GDP decrease

    • C.

      Price level increase, real GDP no change

    • D.

      Price level decrease, real GDP decrease

    Correct Answer
    A. Price level increase, real GDP increase
    Explanation
    When the AS curve is upward sloping and the economy is in a recession, increasing both taxes and government spending by $25 billion will lead to an increase in the price level and an increase in real GDP. This is because increasing government spending will stimulate aggregate demand, leading to an increase in both the price level and real GDP. Additionally, increasing taxes will reduce disposable income, which can help control inflationary pressures and prevent the price level from increasing too rapidly. Overall, the increase in government spending outweighs the impact of increased taxes, resulting in an increase in both the price level and real GDP.

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  • 18. 

    (Use graph 3.1) Which of the following are true statements about total income?

    • A.

      Equilibrium total income is $800 billion

    • B.

      Planned investment is $50 billion

    • C.

      Equilibrium aggregate expenditure is $600 billion

    • D.

      Planned investment is $50 billion AND equilibrium aggregate expenditure is $600 billion

    Correct Answer
    D. Planned investment is $50 billion AND equilibrium aggregate expenditure is $600 billion
    Explanation
    In the given graph, the equilibrium total income is shown to be $800 billion. This means that at this level of income, aggregate expenditure equals total income. The statement "Planned investment is $50 billion" is also true as it is mentioned in the question. Additionally, the statement "equilibrium aggregate expenditure is $600 billion" is also true as it is mentioned in the question. Therefore, the correct answer is that planned investment is $50 billion AND equilibrium aggregate expenditure is $600 billion.

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  • 19. 

    (Use graph 3.1) In the graph, if full-employment GDP is $800 billion, the minimum increase in autonomous expenditures that would be required to move total income to full employment income is

    • A.

      $200 billion

    • B.

      $100 billion

    • C.

      $50 billion

    • D.

      Zero because total income is already at full employment

    Correct Answer
    C. $50 billion
    Explanation
    In the given graph, the full-employment GDP is $800 billion. To move total income to full employment income, there needs to be an increase in autonomous expenditures. The minimum increase required can be determined by finding the difference between the current total income and full employment income. Since the options are given in billions, we can compare the options with the difference. The option that matches the difference is $50 billion, as it is the minimum increase required to reach full employment income.

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  • 20. 

    (use graph 3.1) In the graph, the values of the MPC, MPS and simple expenditure multiplier are

    • A.

      MPC 0.5, MPS 0.5, Multiplier 4

    • B.

      MPC 0.6, MPS 0.4, Multiplier 4

    • C.

      MPC 0.75, MPS 0.25, Multiplier 4

    • D.

      MPC 0.8, MPS 0.2 Mutiplier 4

    Correct Answer
    C. MPC 0.75, MPS 0.25, Multiplier 4
    Explanation
    The correct answer is MPC 0.75, MPS 0.25, Multiplier 4. The MPC (Marginal Propensity to Consume) represents the proportion of additional income that individuals spend, while the MPS (Marginal Propensity to Save) represents the proportion of additional income that individuals save. In this case, the MPC of 0.75 indicates that individuals spend 75% of their additional income, while saving 25% (MPS). The simple expenditure multiplier is calculated as 1/(1-MPC), which in this case is 4. This means that a change in autonomous spending will have a four times larger impact on the overall economy.

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  • 21. 

    Which of the following fiscal policy actions would be most effective in combating a recession?

    • A.

      $25 billion decrease in taxes, $25 billion decrease in government spending

    • B.

      $25 billion decrease in taxes, $25 billion increase in government spending

    • C.

      $25 billion decrease in taxes, no change in government spending

    • D.

      $25 billion increase in taxes, $25 billion increase in government spending

    Correct Answer
    B. $25 billion decrease in taxes, $25 billion increase in government spending
    Explanation
    A decrease in taxes would put more money in the hands of consumers, which would increase their spending. This increase in consumer spending would stimulate the economy and help combat a recession. Additionally, an increase in government spending would also stimulate the economy by creating jobs and increasing demand for goods and services. Therefore, a combination of a decrease in taxes and an increase in government spending would be the most effective fiscal policy action in combating a recession.

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  • 22. 

    If the primary goal is to reduce inflation, which of the following fiscal policy actions would be appropriate during a period of a rapidly increasing consumer price index?

    • A.

      Increase transfer payments

    • B.

      Increase personal income taxes

    • C.

      Reduce government spending on defense and increase transfer payments

    • D.

      Reduce government expenditures for space research and increase personal income taxes

    Correct Answer
    D. Reduce government expenditures for space research and increase personal income taxes
    Explanation
    During a period of rapidly increasing consumer price index, reducing government expenditures for space research and increasing personal income taxes would be appropriate fiscal policy actions to reduce inflation. By reducing government expenditures for space research, the government can decrease overall spending, which can help alleviate inflationary pressures. Additionally, increasing personal income taxes can reduce disposable income and curb excessive spending, further contributing to the reduction of inflation.

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  • 23. 

    As the average price level decreases, the purchasing power of people's cash balances increases. This results in an increase in spending. This effect is called

    • A.

      The Keynesian effect

    • B.

      The real-balance effect

    • C.

      The money illusion effect

    • D.

      The Phillips effect

    Correct Answer
    B. The real-balance effect
    Explanation
    The correct answer is the real-balance effect. When the average price level decreases, the purchasing power of people's cash balances increases, meaning they can buy more goods and services with the same amount of money. This leads to an increase in spending, as individuals feel wealthier and have more disposable income. This effect is known as the real-balance effect.

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  • 24. 

    A severe, sustained increase in oil prices would most likely cause the SRAS, LRAS, and PPC to change in which of the following ways?

    • A.

      SRAS decrease, LRAS no change, PPC shift outward

    • B.

      SRAS decrease, LRAS decrease, PPC shift outward

    • C.

      SRAS decrease, LRAS decrease, PPC shift inward

    • D.

      SRAS increase, LRAS no change, PPC no change

    Correct Answer
    C. SRAS decrease, LRAS decrease, PPC shift inward
    Explanation
    A severe, sustained increase in oil prices would cause the short-run aggregate supply (SRAS) to decrease because higher oil prices increase production costs, leading to a decrease in the quantity of goods and services supplied in the short run. The long-run aggregate supply (LRAS) would also decrease because higher oil prices can lead to reduced investment and productivity growth, causing a decrease in potential output in the long run. The production possibilities curve (PPC) would shift inward because higher production costs and reduced potential output limit the economy's ability to produce goods and services efficiently.

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  • 25. 

    A decrease in lump-sum personal income taxes will most likely result in an increase in real GDP because which of the following occurs?

    • A.

      Government spending decreases to maintain a balanced budget

    • B.

      Consumption spending incrases because disposable personal income increases

    • C.

      Investment spending decreases because disposable personal income increases

    • D.

      Consumer spending increases and government spending decreases

    Correct Answer
    B. Consumption spending incrases because disposable personal income increases
    Explanation
    A decrease in lump-sum personal income taxes will result in an increase in disposable personal income, which is the income that individuals have available to spend or save after paying taxes. When disposable personal income increases, consumption spending tends to increase because individuals have more money to spend on goods and services. This increase in consumption spending then leads to an increase in real GDP as businesses produce more to meet the higher demand.

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  • 26. 

    A rapid increase in successful research and development projects for the nation will most likely result in which of the following changes in the SRAS, LRAS, and PPC?

    • A.

      SRAS decrease, LRAS no change, PPC no change

    • B.

      SRAS decrease, LRAS decrease, PPC shift inward

    • C.

      SRAS increase, LRAS increase, PPC no change

    • D.

      SRAS increase, LRAS increase, PPC shift outward

    Correct Answer
    D. SRAS increase, LRAS increase, PPC shift outward
    Explanation
    A rapid increase in successful research and development projects for the nation will lead to an increase in the short-run aggregate supply (SRAS) as more productive capacity is developed. This is because successful research and development projects can lead to technological advancements and improved efficiency in production. The long-run aggregate supply (LRAS) will also increase as these advancements become more widespread and integrated into the economy. The production possibilities curve (PPC) will shift outward because the increase in aggregate supply allows for a higher level of output to be produced in the economy.

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  • 27. 

    If the marginal propensity to consume is two-thirds, then an increase in personal income taxes of $100 will most likely result in 

    • A.

      A decrease in consumption of $100

    • B.

      A decrease in autonomous investment of $100

    • C.

      A decrease in consumption of $67 and an increase in savings of $33

    • D.

      A decrease in consumption of $67 and a decrease in savings of $33

    Correct Answer
    D. A decrease in consumption of $67 and a decrease in savings of $33
    Explanation
    An increase in personal income taxes reduces disposable income for individuals. With a marginal propensity to consume of two-thirds, individuals are likely to spend two-thirds of any increase in income. Therefore, an increase in personal income taxes of $100 will result in a decrease in consumption of $67 (two-thirds of $100) and a decrease in savings of $33 (one-third of $100).

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  • 28. 

    An increase in personal income taxes will most likely result in which of the following changes in real GDP and the price level in the SR?

    • A.

      Real GDP decrease, price level decrease

    • B.

      Real GDP decrease, price level increase

    • C.

      Real GDP increase, price level no change

    • D.

      Real GDP increase, price level increase

    Correct Answer
    A. Real GDP decrease, price level decrease
    Explanation
    An increase in personal income taxes will likely result in a decrease in real GDP because higher taxes reduce disposable income, leading to lower consumer spending and investment. This decrease in spending and investment will cause a decrease in the overall production and output of goods and services in the economy. Additionally, the increase in taxes may also lead to a decrease in aggregate demand, further contributing to the decrease in real GDP. The increase in taxes will also likely result in a decrease in the price level as reduced consumer spending and demand for goods and services put downward pressure on prices.

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  • 29. 

    One of the reasons the aggregate demand curve is downward sloping is that as the value of cash balances decreases, aggregate spending decreases. This is called

    • A.

      The substitution effect

    • B.

      A negative externality

    • C.

      The Pareto effect

    • D.

      The real-balance effect

    Correct Answer
    D. The real-balance effect
    Explanation
    The correct answer is the real-balance effect. The real-balance effect explains that as the value of cash balances decreases, people feel less wealthy and tend to spend less. This is because a decrease in cash balances reduces their purchasing power, leading to a decrease in aggregate spending. Therefore, the aggregate demand curve is downward sloping due to the real-balance effect.

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  • 30. 

    If there is a decrease in the SRAS curve and no changes in monetary and fiscal policies are implemented, the economy over time will

    • A.

      Remain at the new price and output level

    • B.

      Continue to have rising prices and decreasing real GDP

    • C.

      Experience increasing nominal wages

    • D.

      Return to the original output and price level

    Correct Answer
    D. Return to the original output and price level
    Explanation
    If there is a decrease in the SRAS curve and no changes in monetary and fiscal policies are implemented, the economy over time will return to the original output and price level. This is because a decrease in the SRAS curve indicates a decrease in the aggregate supply of goods and services in the economy. As a result, the price level will initially rise and the output level will decrease. However, over time, the decrease in output will lead to a decrease in nominal wages and other input prices, causing the SRAS curve to shift back to the right. This shift will eventually restore the original output and price level.

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  • Mar 14, 2023
    Quiz Edited by
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  • Mar 13, 2013
    Quiz Created by
    Mrscindytong
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