AP Macro AP Macro Business Cycles and Output Gaps 3

Question 1

The long-run aggregate supply (LRAS) curve is vertical because:

Accepted Answer

In the long run, output is determined by real factors like technology and resource availability, not the price level

Answer

Prices are fixed in the long run

Answer

The government sets output targets for the long run

Answer

Monetary policy is ineffective in the long run

Question 2

A positive supply shock, such as a significant decrease in oil prices, would most likely:

Accepted Answer

Shift SRAS rightward, increasing output and decreasing the price level

Answer

Shift aggregate demand rightward, increasing output and prices

Answer

Shift LRAS leftward, reducing potential GDP

Answer

Have no effect on the business cycle

Question 3

When an economy is experiencing an inflationary gap, the appropriate discretionary fiscal policy response would be to:

Accepted Answer

Raise taxes or cut spending to reduce aggregate demand

Answer

Increase government spending to boost aggregate demand further

Answer

Cut taxes to stimulate investment

Answer

Lower the federal funds rate

Question 4

Which of the following would shift the long-run aggregate supply curve rightward?

Accepted Answer

Technological innovation that raises worker productivity

Answer

An increase in the money supply

Answer

A reduction in personal income taxes

Answer

An increase in government transfer payments

Question 5

According to the classical (self-correcting) model, a recessionary gap will self-correct in the long run through:

Accepted Answer

Falling wages and input prices that shift SRAS rightward

Answer

Automatic increases in government spending

Answer

Federal Reserve purchases of government bonds

Answer

Rising consumer confidence increasing aggregate demand

Question 6

The multiplier effect implies that an initial increase in government spending will lead to:

Accepted Answer

A larger total increase in GDP than the initial spending injection

Answer

An equal decrease in private investment

Answer

A smaller overall increase in GDP due to leakages

Answer

No change in GDP if taxes are simultaneously raised