AP Macro Unit Three Exam

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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".

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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).

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.

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.

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.

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.

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.