AP Macro MACRO: Concepts and Models 3 — Questions and Answers
Question 1: In the Keynesian model, the primary determinant of aggregate expenditure in the short run is:
- The price level
- The money supply
- Aggregate income and output (Correct answer)
- The interest rate alone
Correct answer: Aggregate income and output
In the Keynesian expenditure model, spending components like consumption are primarily driven by the level of income and output (Y).
Question 2: The multiplier effect in the Keynesian model occurs because:
- Banks create money through lending
- An initial change in spending generates subsequent rounds of income and spending (Correct answer)
- The government prints money to finance spending
- Higher prices reduce the real value of money
Correct answer: An initial change in spending generates subsequent rounds of income and spending
An initial injection of spending becomes income for others, who then spend a fraction, creating a chain reaction that multiplies the initial impact on GDP.
Question 3: If the marginal propensity to consume (MPC) is 0.75, the simple spending multiplier is:
- 0.75
- 1.33
- 4 (Correct answer)
- 7.5
Correct answer: 4
The simple multiplier = 1 / (1 - MPC) = 1 / (1 - 0.75) = 1 / 0.25 = 4.
Question 4: In the aggregate expenditure (AE) model, equilibrium GDP is determined where:
- AE = 0
- AE equals the price level
- AE = GDP (actual output) (Correct answer)
- Government spending equals tax revenue
Correct answer: AE = GDP (actual output)
Equilibrium in the AE model occurs where planned aggregate expenditures equal actual output (GDP), so there is no unplanned inventory change.
Question 5: Which of the following would shift the aggregate demand (AD) curve to the right?
- A decrease in consumer confidence
- An increase in the price level
- An increase in government spending (Correct answer)
- A decrease in the money supply
Correct answer: An increase in government spending
Increased government spending raises total spending in the economy, directly shifting the AD curve rightward.
Question 6: The long-run aggregate supply (LRAS) curve is vertical because in the long run:
- Prices are sticky and cannot adjust
- The economy always operates below full employment
- Output is determined by resource availability and technology, not price level (Correct answer)
- The government fixes prices
Correct answer: Output is determined by resource availability and technology, not price level
In the long run, all prices and wages are flexible, so output returns to its potential level regardless of the price level.
Question 7: According to the classical model, the economy will self-correct to full employment because:
- The government will always intervene with fiscal policy
- Flexible wages and prices will automatically eliminate unemployment (Correct answer)
- The central bank will always expand the money supply
- Consumer spending will automatically increase
Correct answer: Flexible wages and prices will automatically eliminate unemployment
Classical economists believe flexible wages and prices adjust to clear labor and goods markets, restoring full employment without government intervention.
AP Macro MACRO: Concepts and Models 3
In the Keynesian model, the primary determinant of aggregate expenditure in the short run is: