AP Macro Aggregate Models 3

Question 1

If the MPC is 0.75, what is the value of the simple spending multiplier?

Accepted Answer

4

Answer

The multiplier = 1/(1-MPC) = 1/(1-0.75) = 1/0.25 = 4.

Question 2

In the AD-AS model, which of the following best explains why the AD curve slopes downward?

Accepted Answer

Higher price levels reduce real wealth, raise interest rates, and make exports less competitive

Answer

The downward slope of AD reflects the wealth effect, interest rate effect, and net export effect — all of which reduce spending when the price level rises.

Question 3

The 'crowding out' effect of expansionary fiscal policy refers to:

Accepted Answer

Higher interest rates caused by government borrowing reducing private investment

Answer

When government borrows to finance spending it competes for loanable funds, driving up interest rates and reducing private sector investment.

Question 4

According to the Classical model, if wages and prices are perfectly flexible, a recessionary gap will:

Accepted Answer

Automatically self-correct as falling wages shift SRAS rightward

Answer

Classical economists believe that wage and price flexibility will automatically restore full employment as lower wages reduce costs and shift SRAS right.

Question 5

Which of the following correctly describes the difference between the short-run and long-run aggregate supply curves?

Accepted Answer

SRAS is upward sloping because input prices are sticky; LRAS is vertical at potential GDP

Answer

SRAS slopes upward because wages and input prices are sticky in the short run, while LRAS is vertical because all prices adjust fully in the long run.

AP Practice Test

AP Practice Test

AP Macro Aggregate Models 3