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

The LRAS is vertical at potential GDP because real productive capacity depends on resources and technology, not on the price level.

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

Lower oil prices reduce production costs, shifting SRAS right, which raises real output and lowers the price level simultaneously.

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

Contractionary fiscal policy — higher taxes or reduced spending — shifts aggregate demand left to close an inflationary gap.

Question 4

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

Accepted Answer

Technological innovation that raises worker productivity

Answer

Technological progress raises the economy's productive capacity and potential GDP, shifting LRAS rightward.

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

In the classical view, excess unemployment causes wages and input prices to fall, lowering production costs and shifting SRAS rightward to restore full employment.

AP Practice Test

AP Practice Test

AP Macro AP Macro Business Cycles and Output Gaps 3