AP Macro MACRO: Policies and Theories 3

Question 1

The Phillips Curve in the short run illustrates a trade-off between:

Accepted Answer

Inflation and unemployment

Answer

The short-run Phillips Curve shows that lower unemployment is associated with higher inflation and vice versa.

Question 2

Milton Friedman argued that the long-run Phillips Curve is vertical at the natural rate of unemployment because:

Accepted Answer

Workers eventually adjust their inflation expectations, eliminating the trade-off

Answer

Once workers adjust expectations to actual inflation, real wages return to equilibrium and unemployment returns to its natural rate.

Question 3

Which monetary policy tool is considered the Federal Reserve's primary instrument for implementing policy since the 2000s?

Accepted Answer

Open market operations targeting the federal funds rate

Answer

The Fed primarily targets the federal funds rate through open market operations (buying and selling Treasury securities).

Question 4

Expansionary fiscal policy is most effective when the economy is operating:

Accepted Answer

Well below potential output with a large recessionary gap

Answer

Fiscal stimulus has the greatest real effect when idle resources exist and a recessionary gap means output is below potential.

Question 5

The concept of 'automatic stabilizers' refers to:

Accepted Answer

Government programs that expand spending or cut taxes automatically during recessions without new legislation

Answer

Programs like unemployment insurance and progressive taxes automatically inject or withdraw spending from the economy based on economic conditions.

AP Practice Test