AP Macro MACRO: Policies and Theories 2

Question 1

According to the Keynesian model, what happens to aggregate demand when the government cuts spending by $100 billion, assuming a spending multiplier of 2?

Accepted Answer

AD falls by $200 billion

Answer

The spending multiplier amplifies the initial change, so a $100B cut reduces AD by $100B × 2 = $200 billion.

Question 2

Which school of thought argues that the economy self-corrects in the long run, making active fiscal policy unnecessary?

Accepted Answer

Classical economics

Answer

Classical economists believe flexible wages and prices restore full employment automatically, so government intervention is unnecessary.

Question 3

The Taylor Rule is a guideline that suggests central banks should adjust the federal funds rate based on which two variables?

Accepted Answer

Inflation and output gap

Answer

The Taylor Rule prescribes adjusting the policy interest rate in response to deviations of inflation from its target and output from potential.

Question 4

Supply-side economics primarily advocates which of the following to stimulate long-run economic growth?

Accepted Answer

Tax cuts and deregulation to boost productive capacity

Answer

Supply-side economists argue that reducing taxes and regulation increases incentives to work, save, and invest, shifting LRAS rightward.

Question 5

What does the concept of 'crowding out' suggest happens when the government borrows heavily in the loanable funds market?

Accepted Answer

Private investment declines as interest rates rise

Answer

Government borrowing increases the demand for loanable funds, raising interest rates and reducing private sector investment.

AP Practice Test

AP Practice Test

AP Macro MACRO: Policies and Theories 2