1. Test Review
AE & Fiscal Policy
Remember, the next test will be over AD/AS [about half] and AE and Fiscal Policy. Make sure you know these 28 questions on AE and Fiscal Policy.

2. Fiscal Policy Test Review 1-2
1. Expansionary fiscal policy will be most effective
[increase GDP] when the AS curve is (vertical/horizontal)
& (incr/decr) “C” and (incr/decr) unemployment.
2. The paradox of thrift indicates that an increase in saving
(matched/unmatched) by an increase in investment will
lower equilibrium GDP.

3. Fiscal Policy Test Review 3-4
[#3 & #4, start from
a balanced budget]
3. A contractionary fiscal policy [decr G, incr T] would cause a[an]
(incr/decr) in output[GDP] and a[an] (incr/decr) in interest rates.
4. An expansionary fiscal policy [incr G, decr T] would cause a[an]
5. In the AE model, if AE[AD]doesn’t buy up FE output(GDP), then the
equilibrium output is (less than/more then) full employment output.
G $2 Trillion T $2 Trillion
[G ; LFM ; In. Rates ]
[T ; LFM ; In. Rates ]
[G ; LFM ; In. Rates ]
[T ; LFM ; In. Rates ]
“Recessionary Gap”
“Inflationary Gap”

4. 6. To decrease AD the greatest amount, the government should:
(decrease “G” only/increase “T” only/both decr G & incr T)
7. To increase AD the greatest amount, the “G” should:
(increase “G” only/decrease “T” only/both incr G and decr T)
8. With a MPC of .5 and current output at $500 billion, but
F.E. output is $700 billion, correct fiscal policy would be to
(increase G/Decrease T) by $100 billion.
9. If businesses are experiencing an unplanned increase in
inventories, AE is (less than/greater than) FE output and
spending in the economy will (increase/decrease).
10. If businesses are experiencing an unplanned decrease in
inventories [disinvestment]AE is (less than/greater than)
FE output & spending in the economy will (increase/decrease).

5. 11. If “C” equals income at $500 billion, & MPC is .9, then an
increase in Ig of $10 billion will change equilibrium GDP to
($400/$490/$510/$600) billion.
12. A conservative economist would want tax (incr/decr) during
a recession & (incr/decr) in “G” during inflationary times.
13. A liberal economist would want tax (incr/decr) during an
inflation & (incr/decr) in “G” during recessionary periods.
14. An inflationary gap indicates AE[actual GDP] (exceeds/falls short of) FE GDP.
15. A recessionary gap indicates AE[actual GDP] (exceeds/falls short of) FE GDP.
16. To increase GDP [but reduce military spending], we would combine two
(domestic/overseas) bases into one (domestic/overseas) base.
17. A tax cut to expand the economy would (incr/decr) Y & (incr/decr) in. rates.
18. A tax increase to contract the economy would (incr/decr) Y & (incr/decr) IR.

6. Test Review 19-22 19. To increase equilibrium GDP by $400,000,
with a MPC of .5, a Keynesian economist
would (decrease “T”/increase “G”) by $200,000.
20. Equilibrium GDP is $500 billion and MPS is .4.
Now “G” collects taxes of $22 billion and spends
the entire amount. As a result, equilibrium GDP will
change to: ($445/$478/$522/$555).
21. With a MPC of .5, a $12 billion increase
in “G” will increase “C” by ($12/$24/$36) bil.
22. With a MPC of .5 and the economy in a
recessionary spending gap of $12 billion,
we may conclude that the equilibrium is
($12/$24/$36) billion short of FE GDP.

7. Test Review 23-26
23. An increase in Ig of $25 billion resulted in an increase
in equilibrium income (GDP) of $50B, so the MPS was?
24. A contractionary fiscal policy results in a(n) (incr/decr) in output, and a(n) (incr/decr) in interest rates.
25. Increasing T or decreasing G will (increase/decrease) consumption, and (increase/decrease) unemployment.
26. With a MPC of .5, and the economy with an inflationary GDP Gap of $50 billion, G could eliminate this inflationary GDP by reducing government spending by?
[Incr T or Decr G]
$25 billion

8. Test Review 27-28 (increase)/decrease) GDP & (increase/decrease) C.
27. An increase in Ig in an economy
(increase)/decrease) GDP & (increase/decrease) C.
28. If there is an equal increase in G and T of $25 billion in the horizontal
range of AS, then output will (increase/decrease/stay the same). PL
AD1
AD2 PL
RGDP

9. From the above graph, moving from equilibrium “E” to
[Public Sector]
[No Public Sector]
250
1,200 GDP[bil]
From the above graph, moving from equilibrium “E” to
“F”, what can we conclude about the following:
A. How much is G?
B. The increase in Y?
C. The ME [Chg in Y/Chg in Expenditures = ME]?

10. 2. Know what these do to the AD[C+Ig+G+Xn] or AS[REP] curves.
A. Trade partners incomes increase? ___ decrease?___
B. Availability of land, labor, & capital increase?__ decrease?__
C. Productivity increases? ___
D. Resource[input] cost increases? ___ decreases? ___
E. Government spending increases? ___ decreases? ___
F. Stock Market drastically increases? ___ decreases? ___
E. A strong dollar’s impact on net exports. ___
F. A strong dollar’s impact on resource cost. ___

11. 3. Know the above on a graph like this:
A. At “K”, we have a [recessionary/inflationary] output gap?
B. At “J”, we have a [recessionary/inflationary] output gap?
C. The recessionary SPENDING gap is [KH/EI/JG]
D. The inflationary SPENDING gap is [KH/ED/EI]
C. Correct fiscal policy if we are at “C+Ig1” if “0B” is FE Y
would be to [increase/decrease] G and [increase/decrease] T.

12. PL - ; Y/Empl. – PL – ; Y/Empl. - PL – ; Y/Empl. – AS AS AS (a.) (b.)
AD2 PL PL PL
AD2
AD1
AD2
AD1
AD1 AS PL
RGDP
RGDP Y*
RGDP
(a.)
(b.)
(c.)
4. Which of the following would be the
A. Classical AS curve
B. Keynesian AS curve
C. Supply-side AS curve
5. If there is an increase in AD in each one of these,
what happens to PL, Output & Employment?
(a.)
PL - ; Y/Empl. –
(b.)
PL – ; Y/Empl. -
(c.)
PL – ; Y/Empl. –

13. 6. Paradox of Thrift applies in the Keynesian range or Classical
7. Ratchet effect – are prices and wages “sticky” up or down?
8. Crowding out - An increase in government spending causes the
interest rate to (increase/decrease) &, Ig to (increase/decrease)?
9. If MPS is .50 and we have a recessionary spending gap of
$10 billion, how short are we of FE GDP?
10. What is a political business cycle?
11. What triggers the wealth effect, interest rate effect, and the
foreign purchase effect?
12. Know how to figure productivity and per unit production cost.
13. Know the difference between a
A. “Change in AQD or AQS”
B. “Change in AD or AS”

14. 14. If income increases from $500 B to $600 B, and Ig of $25 B
caused the $100 B increase in Y, then the ME and MPS were?
15. The MPS is .50, and “C” = “Y” at $600 billion. Now Ig is
increased by $50 billion, therefore the new equilibrium Y is?
16. Now G increases G&T by 50 bil., then the new equilibrium
Y would be?
AE[C+Ig]
Consumption
$600 B
$50 B
$600
$700
RGDP [billions]

15. Practice Quiz 3 AE (C+Ig2) F AE (C+Ig1) Consumption D E C A B G +25 BAP
Practice Quiz 3
AE (C+Ig2) F
AE (C+Ig1)
Consumption D E C
AE (C+Ig) A B G
11. Going from “OV” to “OU”, what is the ME?
+25 B 45
W V U T
Real GDP
400
500
1. At income level “OT”, the volume of consumption is _____.
2. At income level “OT”, the volume of saving is _____
3. The “APC” is equal to “1” at income level ___.
4. If Ig is Ig1, then “equilibrium GDP” is _____.
5. If Ig is Ig2, then “equilibrium GDP” is _____.
6. If Ig increases from Ig1 to Ig2, equilibrium GDP increases by _____.
7. If Ig increases from Ig1 to Ig2, the “MPC” is equal to __________.
8. As we move from income level OV to OU, the “MPS” is ________.
9. The economy is “dissaving” at income level _____.
10. Consumption will be equal to income at income level ___.

16. Test Review 1-5
1. An increase in Ig of $75B results in an increase in equilibrium income (GDP) of $300billion, so the MPS is?
2. An expansionary fiscal policy results in a(n) (incr/decr) in output, & a(n) (incr/decr) in interest rates.
3. Increasing T or decreasing G will (increase/decrease) consumption, and (increase/decrease) unemployment.
4. With a MPC of .75, & the economy with an inflationary GDP Gap of $80B, G could eliminate this $80 billion inflationary GDP Gap by reducing government spending by?
5. With a MPC of .60 & current output at $650 bil. but FE output is $700 billion, correct fiscal policy would be to (increase G/decrease T) by $20 billion.
$2 Tr.
$2 Tr. G T .

17. Test Review 6-9 6. An increase in Ig in an economy
will (incr)/decr) GDP & (incr/decr) C.
7. In an inflationary economy,
(actual Y/potential Y) exceeds
(actual Y/potential Y).
8. In the complex economy (C+Ig+G+Xn), the leakages are? & the injections are?
9. If there is an equal increase in G&T of $10 billion,
then output will (increase/decrease).
[S, T, & M]
[G, Ig, X]

18. Practice Quiz A $2,200 AE2[C+Ig+G] AE1[C+Ig] G $1,600 Consumption
AE3[C+Ig+G+Xn] A
$2,200
AE2[C+Ig+G] B G
AE1[C+Ig]
$1,600 C
Consumption F D
AE[C+Ig+G+Xn]
+300 H
$1,000 E
$800
+300 I
$700 J
$500 P
$400
+300
Inflat.
Gap
Recess.
Gap
$200
, , ,200 bil.
0 N Q K L M
Real GDP
1. The APC is “one” at letter: (J/H/G/A).
2. Consumption will be equal to income(GDP) at (200/400/1000).
3. A shift from AE2 to AE3 would be caused by a[an]
(appreciation/depreciation) of the dollar.
4. If there is a shift from J to H, the simple multiplier is: (2/3/4/5)
5. With an MPC of .75, an increase in G of $200 billion, would increase
“C” [not income] by: a. $800 billion b. $600 billion c. $150 billion
6. If the FE GDP is OL & we are at AE1, the (recess./inflat.) gap is (AB/BC).

19. Practice Quiz A $2,200 AE2[C+Ig+G] G AE1[C+Ig] $1,600 Consumption
AE3[C+Ig+G+Xn] A
$2,200
AE2[C+Ig+G] B G
AE1[C+Ig]
$1,600 C
Consumption F D
AE[C+Ig+G+Xn] H E
$1,000
+300
$800
+300 I
$700 J
$500
+300 P
$400
Inflat.
Gap
Recess.
Gap
$200
, , ,200 bil.
0 N Q K L M
Real GDP
7. If the FE GDP is OL [$1,600] and we are at AE3, the
(recessionary/inflationary) gap is: (BC or AB).
8. The equilibrium level of GDP at AE3 is ($1,000/$1,600/$2,200).
9. If FE is OL [$1,600] & we are at AE1, correct fiscal policy
would be to (increase/decrease) “G” &/or (increase/decrease) “T”.
10. If FE is OL [$1,600] & we are at AE3, correct fiscal policy
11. At income level OK, the volume of saving is: ($300/$700/$1,000).
12. The economy is dissaving GDP level: ($200/$400/$600).

20. Practice Quiz A $2,200 AE2[C+Ig+G] G AE1[C+Ig] $1,600 C AE[C+Ig+G+Xn]B G
AE1[C+Ig]
$1,600 C C
13. A shift from “J” to “H”
would result in a MPC of:
(HK/OK or IP/QK or HI/OK)
14. A shift from “J” to “H”
would result in a MPS of:
(HK/OK or IP/QK or HI/QK)
15. At AE1, consumption totals
($200/$300/$700). F D
+300
$1,000 E
AE[C+Ig+G+Xn] H
$800
+300
$700 I J
$500
+300 P
$400
Inflat.
Gap
Recess.
Gap
$200
, , ,200 bil.
0 N Q K L M
16. At AE1 [$1,000], the G decreases both G & T by $400 billion to
balance the budget. With a simple multiplier of 5, the GDP
(increases/decreases) to ($600/$1,000/ $1,600/$1,800).
17. At AE1 ($1,000), the G spends $500 billion & increases taxes
by $500 billion to balance the budget. With a simple multiplier
of 5 the GDP (increases/decreases) to ($500/$1,000/$1,500/$1,800).

21. The AE Quiz Hard Quiz 1.The economy is dissaving
at a b c. 1,000
2. Aggregate saving will be
zero where GDP is
a. $200 b. $400 c. $600
3. At AE1, savings totals
a. $300 b. $700 c. $1,000
4. If the FE GDP is OL & we
are at AE3 the inflationary
spending gap is a. BC b. AB c. CD G
+300
+300
Hard Quiz
$500
+300
$400
$200
5. With an MPC of .60, an increase in G of $100 billion would increase
“C” [not income] to: a. $150 B b. $250 B c. $600 B
6. Moving from J to H, the MPC is: a. FE/KL b. IP/OK c. IP/QK
7. A movement from AE2 to AE3 would be caused by a(an)
_______ of the dollar? A. appreciation b. depreciation
8. If the FE GDP is OL and we are at AE1 the recessionary
spending gap is: a. AB b. BC c. CD
9. Consumption is equal to GDP at: a b. $400 c. $600
10. At AE1($1,000 GDP), G increases G&T by $100 billion. With
a “M” of 2, GDP increases to: a. $1,000 b. $1,100 c. $1,200

22. Answers to previous quiz
a 2. b 3. a 4. b 5. a 6. c 7. b 8. b 9. b 10. b
Answers to previous quiz
Let’s look at some AE and Fiscal Policy
questions asked on previous AP Macro Exams

23. (64%) 1. Crowding out is best described as which of the following?
a. The decrease in full-employment output caused by an increase in taxes
b. The decrease in private investment spending & consumption caused by an increase
in government spending
c. The decrease in government spending caused by a decrease in taxes
d. The increase in the amount of capital outflow caused by the increase in
government spending
e. The increase in the amount of capital inflow caused by the increase in
(51%) 2. An increase in government spending with no change in taxes leads to a
a. lower income level
b. lower price level
c. smaller money supply
d. higher interest rate
e. higher bond price
(39%) 3. If investors feel that business conditions will deteriorate in the future, the
demand for loans and real interest rate in the loanable funds market will
change in which of the following ways in the short run?
Demand for Loans Real Interest Rate
a. Increase Increase
b. Increase Decrease
c. Decrease Increase
d. Decrease Decrease
e. Decrease Not change
Fiscal Policy

24. AE & Fiscal Policy Questions on 2000 AP Exam
4. (81%) The value of the spending multiplier (ME) decreases when
a. tax rates are reduced d. government spending increases
b. exports decline e. the marginal propensity to save increases
c. imports decline
5. (75%) Which of the following policies would a Keynesian recommend during
a period of high unemployment and low inflation?
a. decreasing the MS to reduce AD
b. decreasing taxes to stimulate AD
c. decreasing government spending to stimulate AS
d. balancing the budget to stimulate AS
6. (47%) Which of the following best explains why equilibrium income will
increase by more than $100 in response to a $100 increase in G?
a. Incomes will rise, resulting in a tax decrease.
b. Incomes will rise, resulting in higher consumption.
c. The increased spending raises the aggregate price level.
d. The increased spending increases the money supply, lowering interest rates.
e. The higher budget deficit reduces investment.
7. (56%) Unexpected increases in inventories usually precede
a. increases in inflation b. increases in imports c. stagflation
d. decreases in production e. decreases in unemployment

25. AE C+Ig C 8. (63%) The economy on the right is currently experiencing
a. inflation b. recession c. expansion
d. stagflation e. rapid growth
9. (77%) Correct monetary policy to
reach FE GDP is to increase
a. the MS b. the RR c. discount rate
d. taxes e. exports
10. (36%) The minimum increase in government
spending to reach full employment is
a. $2,000 b. $1,000 c. $500
d. $ e. $100
11. (58%) In the simple Keynesian AE model [not AD/AS] of an economy,
changes in Ig or G will lead to a change in which of the following?
a. the price level b. the level of output and employment c. interest rates
d. the AS curve
12. (83%) In a closed-private in which the APC is .75, which of following is true?
a. If income is $100, then saving is $75. d. If income is $200, then “C” is $75
b. If income is $100, then “C” is $50 e. If income is $500, then saving is $100
c. If income is $200, then saving is $50 AE
C+Ig E
$500 C A
$400
Full.Employ.
$800 $1,000 $2,000

26. Fiscal Policy Questions from 2000 Exam
13. (73%) An inflationary gap can be eliminated by all of the following EXCEPT
a. an increase in personal income taxes d. a decrease in G
b. an increase in the MS e. a decrease in Xn
c. an increase in the interest rate
14. (56%) A major advantage of automatic stabilizers in fiscal policy is that they
a. reduce the public debt
b. increase the possibility of a balanced budget
c. stabilize the unemployment rate
d. go into effect without passage of new legislation
e. automatically reduce the inflation rate
Which answer does
not slow the economy?

27. 15. (70%) In the short run, a contractionary fiscal policy will cause AD,
output, and the price level to change in which of the following ways?
AD Output Price level
a. decrease decrease decrease
b. decrease increase increase
c. increase decrease decrease
d. increase increase increase
16. (52%) Crowding out due to government borrowing occurs when
a. lower interest rates increase private sector investment
b. lower interest rates decrease private sector investment
c. higher interest rates decrease private sector investment
d. a smaller money supply increases private sector investment
17. (42%) Compared to expansionary monetary policies adopted to
counteract a recession, expansionary fiscal policies tend to result in
a. less public spending c. a high rate of economic growth
b. higher interest rates d. lower prices

28. 1995 AP Exam
18. (71%) An increase in which will increase the value of the ME?
a. The supply of money d. The marginal propensity to consume
b. Equilibrium output e. The required reserve ratio
c. Personal income tax rates
19. (61%) An AS curve may be horizontal over some range because within that range
a. a higher PL leads to higher interest rates, which reduces the MS & “C”
b. changes in the aggregate PL do not induce substitution
c. output cannot be increased unless prices and interest rates increase
d. rigid prices prevent employment from fluctuating
e. resources are underemployed & an increase in AD will be satisfied without any pressure on the PL
20. (45%) What could cause simultaneous increases in inflation & unemployment
a. a decrease in government spending d. An increase in inflationary expectations
b. A decrease in the money supply e. An increase in productivity
c. A decrease in the velocity of money
21. (85%) Which of the following will result in the greatest increase in AD?
a. A $100 increase in taxes
b. A $100 decrease in taxes
c. A $100 increase in government expenditures
d. A $100 increase in government expenditures, coupled with a $100 increase in taxes
e. A $100 increase in government expenditures, couples with a $100 decrease in taxes
22. (65%) Which of the following will result from a decrease in government spending?
a. An increase in output d. A decrease in AS
b. An increase in the price level e. A decrease in AD
c. An increase in employment

29. 23. (61%) The graph indicates equilibrium at E
for a closed economy without G. If the
addition of G results in equilibrium at F,
which of the following is true?
a. G is $300 and the multiplier is 5.
b. G is $125 and the multiplier is 4.
c. G is $100 and consumption increased by $500.
d. G and Ig increase by $500.
e. Consumption and GDP increase by $500 each. AE
C+Ig+G F
C+Ig E
$325
$200
$1,000 $1, GDP
24. (84%) According to Keynesian theory, decreasing taxes and increasing G will
most likely change consumption and unemployment in which of the following ways?
Consumption Unemployment
a. Decrease No change
b. Decrease No change
c. Increase Decrease
d. Increase Increase
e. No change Decrease
25. (79%) In an economy at full employment, a presidential candidate proposes cutting
the government debt in half in 4 years by increase T and reducing G. According to
Keynesian theory, implementation of these policies is most likely to increase
a. unemployment d. aggregate supply
b. consumer prices e. the rate of economic growth
c. aggregate demand

30. fiscal policy most effective in stimulating production and employment?
26. (79%) If the economy is in a severe recession, which of the following is the
fiscal policy most effective in stimulating production and employment?
a. Government spending increases.
b. Government spending decreases.
c. Personal income taxes are increased.
d. The Fed sells bonds on the open market.
e. The Fed buys bonds on the open market.
27. (27%) Faced with a large federal budget deficit, the government decides to decrease
expenditures and tax revenues by the same amount. This action will affect
output and interest rates in which of the following ways?
Output Interest Rates
a. Increase Increase
b. Increase Decrease
c. No change Decrease
d. Decrease Increase
e. Decrease Decrease
28. (28%) If crowding out only partially offsets the effects of a tax cut, which of the
following changes in interest rates and GDP are most likely to occur.
Interest Rates GDP
a. Increase Increase
b. Increase Remain unchanged
c. Increase Decrease
d. Remain unchanged Increase
e. Decrease Decrease

31. 29. (62%) According to the Keynesian saving schedule, when aggregate income increases by a given amount, savings will a. remain the same b. decrease by the amount of the change in income c. increase by the amount of the change in income d. increase by less than the amount of the change in income e. increase by more than the amount of the change in income

32. Check your answers!!

33. Test Review
ANSWERS!!
AE & Fiscal Policy
Remember, the next test will be over AD/AS [about half] and AE and Fiscal Policy. Make sure you know these 28 questions on AE and Fiscal Policy.

34. Fiscal Policy Test Review 1-2
1. Expansionary fiscal policy will be most effective
[increase GDP] when the AS curve is (vertical/horizontal)
& (incr/decr) “C” and (incr/decr) unemployment.
2. The paradox of thrift indicates that an increase in saving
(matched/unmatched) by an increase in investment will
lower equilibrium GDP.

35. Fiscal Policy Test Review 3-4
[#3 & #4, start from
a balanced budget]
3. A contractionary fiscal policy [decr G, incr T] would cause a[an]
(incr/decr) in output[GDP] and a[an] (incr/decr) in interest rates.
4. An expansionary fiscal policy [incr G, decr T] would cause a[an]
5. In the AE model, if AE[AD]doesn’t buy up FE output(GDP), then the
equilibrium output is (less than/more then) full employment output.
G $2 Trillion T $2 Trillion
[G ; LFM ; In. Rates ]
[T ; LFM ; In. Rates ]
[G ; LFM ; In. Rates ]
[T ; LFM ; In. Rates ]
“Recessionary Gap”
“Inflationary Gap”

36. 6. To decrease AD the greatest amount, the government should:
(decrease “G” only/increase “T” only/both decr G & incr T)
7. To increase AD the greatest amount, the “G” should:
(increase “G” only/decrease “T” only/both incr G and decr T)
8. With a MPC of .5 and current output at $500 billion, but
F.E. output is $700 billion, correct fiscal policy would be to
(increase G/Decrease T) by $100 billion.
9. If businesses are experiencing an unplanned increase in
inventories, AE is (less than/greater than) FE output and
spending in the economy will (increase/decrease).
10. If businesses are experiencing an unplanned decrease in
inventories [disinvestment]AE is (less than/greater than)
FE output & spending in the economy will (increase/decrease).

37. 11. If “C” equals income at $500 billion, & MPC is .9, then an
increase in Ig of $10 billion will change equilibrium GDP to
($400/$490/$510/$600) billion.
12. A conservative economist would want tax (incr/decr) during
a recession & (incr/decr) in “G” during inflationary times.
13. A liberal economist would want tax (incr/decr) during an
inflation & (incr/decr) in “G” during recessionary periods.
14. An inflationary gap indicates AE[actual GDP] (exceeds/falls short of) FE GDP.
15. A recessionary gap indicates AE[actual GDP] (exceeds/falls short of) FE GDP.
16. To increase GDP [but reduce military spending], we would combine two
(domestic/overseas) bases into one (domestic/overseas) base.
17. A tax cut to expand the economy would (incr/decr) Y & (incr/decr) in. rates.
18. A tax increase to contract the economy would (incr/decr) Y & (incr/decr) IR.

38. Test Review 19-22 19. To increase equilibrium GDP by $400,000,
with a MPC of .5, a Keynesian economist
would (decrease “T”/increase “G”) by $200,000.
20. Equilibrium GDP is $500 billion and MPS is .4.
Now “G” collects taxes of $22 billion and spends
the entire amount. As a result, equilibrium GDP will
change to: ($445/$478/$522/$555).
21. With a MPC of .5, a $12 billion increase
in “G” will increase “C” by ($12/$24/$36) bil.
22. With a MPC of .5 and the economy in a
recessionary spending gap of $12 billion,
we may conclude that the equilibrium is
($12/$24/$36) billion short of FE GDP.

39. Test Review 23-26
23. An increase in Ig of $25 billion resulted in an increase
in equilibrium income (GDP) of $50B, so the MPS was?
24. A contractionary fiscal policy results in a(n) (incr/decr) in output, and a(n) (incr/decr) in interest rates.
25. Increasing T or decreasing G will (increase/decrease) consumption, and (increase/decrease) unemployment.
26. With a MPC of .5, and the economy with an inflationary GDP Gap of $50 billion, G could eliminate this inflationary GDP by reducing government spending by? .5
[Incr T or Decr G]
$25 billion

40. Test Review 27-28 (increase)/decrease) GDP & (increase/decrease) C.
27. An increase in Ig in an economy
(increase)/decrease) GDP & (increase/decrease) C.
28. If there is an equal increase in G and T of $25 billion in the horizontal
range of AS, then output will (increase/decrease/stay the same).
[would increase by $25 billion] PL
AD1
AD2 PL
RGDP

41. [Public Sector]
[No Public Sector]
250
1,200 GDP[bil]
From the above graph, moving from equilibrium “E” to
“F”, what can we conclude about the following:
A. How much is G?
B. The increase in Y?
C. The ME [Chg in Y/Chg in Expenditures = ME]?
$50 B
$200 B
$200 B/$50 B = 4

42. 2. Know what these do to the AD[C+Ig+G+Xn] or AS[REP] curves.
A. Trade partners incomes increase? ___ decrease?___
B. Availability of land, labor, & capital increase?__ decrease?__
C. Productivity increases? ___
D. Resource[input] cost increases? ___ decreases? ___
E. Government spending increases? ___ decreases? ___
F. Stock Market drastically increases? ___ decreases? ___
E. A strong dollar’s impact on net exports. ___
F. A strong dollar’s impact on resource cost. ___ A B C D C D C A B A B B C

43. 3. Know the above on a graph like this:
A. At “K”, we have a [recessionary/inflationary] output gap?
B. At “J”, we have a [recessionary/inflationary] output gap?
C. The recessionary SPENDING gap is [KH/EI/JG]
D. The inflationary SPENDING gap is [KH/ED/EI]
C. Correct fiscal policy if we are at “C+Ig1” if “0B” is FE Y
would be to [increase/decrease] G and [increase/decrease] T.

44. PL - no change; Y/Empl. - increase PL – increase; Y/Empl. - increase
AD2 PL PL PL
AD2
AD1
AD2
AD1
AD1 AS PL
RGDP
RGDP Y*
RGDP
(a.)
(b.)
(c.)
4. Which of the following would be the
A. Classical AS curve
B. Keynesian AS curve
C. Supply-side AS curve
5. If there is an increase in AD in each one of these,
what happens to PL, Output & Employment?
(c.)
(a.)
(b.)
(a.)
PL - no change; Y/Empl. - increase
(b.)
PL – increase; Y/Empl. - increase
(c.)
PL – increase; Y/Empl. – no change

45. Rev up economy before an election
6. Paradox of Thrift applies in the Keynesian range or Classical
range?
7. Ratchet effect – are prices and wages “sticky” up or down?
8. Crowding out - An increase in government spending causes the
interest rate to (increase/decrease) &, Ig to (increase/decrease)?
9. If MPS is .50 and we have a recessionary spending gap of
$10 billion, how short are we of FE GDP?
10. What is a political business cycle?
11. What triggers the wealth effect, interest rate effect, and the
foreign purchase effect?
12. Know how to figure productivity and per unit production cost.
13. Know the difference between a
A. “Change in AQD or AQS”
B. “Change in AD or AS”
Keynesian range
$20 billion
Rev up economy before an election
Change in PL
How many outputs from inputs; Total input cost divided by outputs
Caused by chg in PL
Caused by chg in CIGXn or REP

46. 14. If income increases from $500 B to $600 B, and Ig of $25 B
caused the $100 B increase in Y, then the ME and MPS were?
15. The MPS is .50, and “C” = “Y” at $600 billion. Now Ig is
increased by $50 billion, therefore the new equilibrium Y is?
4 and .25
16. Now G increases G&T by 50 bil., then the new equilibrium
Y would be?
$750 billion
AE[C+Ig]
Consumption
$600 B
$50 B
$600
$700
RGDP [billions]

47. Practice Quiz 3 AE (C+Ig2) F AE (C+Ig1) Consumption D E C A B G +25 BAP
Practice Quiz 3
AE (C+Ig2) F
AE (C+Ig1)
Consumption D E C
AE (C+Ig) A B G
11. Going from “OV” to “OU”, what is the ME?
+25 B 4 45
W V U T
Real GDP
400
500
1. At income level “OT”, the volume of consumption is _____.
2. At income level “OT”, the volume of saving is _____.
3. The “APC” is equal to “1” at income level ___.
4. If Ig is Ig1, then “equilibrium GDP” is _____.
5. If Ig is Ig2, then “equilibrium GDP” is _____.
6. If Ig increases from Ig1 to Ig2, equilibrium GDP increases by _____.
7. If Ig increases from Ig1 to Ig2, the “MPC” is equal to __________.
8. As we move from income level OV to OU, the “MPS” is ________.
9. The economy is “dissaving” at income level _____.
10. Consumption will be equal to income at income level _____. TC CF OV OU OT UT
BC/UT
AE/VU OW OV

48. Test Review 1-5
1. An increase in Ig of $75B results in an increase in equilibrium income (GDP) of $300billion, so the MPS is?
2. An expansionary fiscal policy results in a(n) (incr/decr) in output, & a(n) (incr/decr) in interest rates.
3. Increasing T or decreasing G will (increase/decrease) consumption, and (increase/decrease) unemployment.
4. With a MPC of .75, & the economy with an inflationary GDP Gap of $80B, G could eliminate this $80 billion inflationary GDP Gap by reducing government spending by?
5. With a MPC of .60 & current output at $650 bil. but FE output is $700 billion, correct fiscal policy would be to (increase G/decrease T) by $20 billion.
.25
[Decr T or Incr G]
$2 Tr.
$2 Tr. G T
$20 bil.

49. Test Review 6-9 6. An increase in Ig in an economy
will (incr)/decr) GDP & (incr/decr) C.
7. In an inflationary economy,
(actual Y/potential Y) exceeds
(actual Y/potential Y).
8. In the complex economy (C+Ig+G+Xn), the leakages are? & the injections are?
9. If there is an equal increase in G&T of $10 billion,
then output will (increase/decrease).
[S, T, & M]
[G, Ig, X]

50. Practice Quiz A $2,200 AE2[C+Ig+G] AE1[C+Ig] G $1,600 Consumption
AE3[C+Ig+G+Xn] A
$2,200
AE2[C+Ig+G] B G
AE1[C+Ig]
$1,600 C
Consumption F D
AE[C+Ig+G+Xn]
+300 H
$1,000 E
$800
+300 I
$700 J
$500 P
$400
+300
Inflat.
Gap
Recess.
Gap
$200
, , ,200 bil.
0 N Q K L M
Real GDP
1. The APC is “one” at letter: (J/H/G/A).
2. Consumption will be equal to income(GDP) at (200/400/1000).
3. A shift from AE2 to AE3 would be caused by a[an]
(appreciation/depreciation) of the dollar.
4. If there is a shift from J to H, the simple multiplier is: (2/3/4/5)
5. With an MPC of .75, an increase in G of $200 billion, would increase
“C” [not income] by: a. $800 billion b. $600 billion c. $150 billion
6. If the FE GDP is OL & we are at AE1, the (recess./inflat.) gap is (AB/BC).

51. Practice Quiz A $2,200 AE2[C+Ig+G] G AE1[C+Ig] $1,600 Consumption
AE3[C+Ig+G+Xn] A
$2,200
AE2[C+Ig+G] B G
AE1[C+Ig]
$1,600 C
Consumption F D
AE[C+Ig+G+Xn] H E
$1,000
+300
$800
+300 I
$700 J
$500
+300 P
$400
Inflat.
Gap
Recess.
Gap
$200
, , ,200 bil.
0 N Q K L M
Real GDP
7. If the FE GDP is OL [$1,600] and we are at AE3, the
(recessionary/inflationary) gap is: (BC or AB).
8. The equilibrium level of GDP at AE3 is ($1,000/$1,600/$2,200).
9. If FE is OL [$1,600] & we are at AE1, correct fiscal policy
would be to (increase/decrease) “G” &/or (increase/decrease) “T”.
10. If FE is OL [$1,600] & we are at AE3, correct fiscal policy
11. At income level OK, the volume of saving is: ($300/$700/$1,000).
12. The economy is dissaving GDP level: ($200/$400/$600).

52. Practice Quiz A $2,200 AE2[C+Ig+G] G AE1[C+Ig] $1,600 C AE[C+Ig+G+Xn]B G
AE1[C+Ig]
$1,600 C C
13. A shift from “J” to “H”
would result in a MPC of:
(HK/OK or IP/QK or HI/OK)
14. A shift from “J” to “H”
would result in a MPS of:
(HK/OK or IP/QK or HI/QK)
15. At AE1, consumption totals
($200/$300/$700). F D
+300
$1,000 E
AE[C+Ig+G+Xn] H
$800
+300
$700 I J
$500
+300 P
$400
Inflat.
Gap
Recess.
Gap
$200
, , ,200 bil.
0 N Q K L M
16. At AE1 [$1,000], the G decreases both G & T by $400 billion to
balance the budget. With a simple multiplier of 5, the GDP
(increases/decreases) to ($600/$1,000/ $1,600/$1,800).
17. At AE1 ($1,000), the G spends $500 billion & increases taxes
by $500 billion to balance the budget. With a simple multiplier
of 5 the GDP (increases/decreases) to ($500/$1,000/$1,500/$1,800).

53. 1. a 2. b 3. a 4. b 5. a 6. c 7. b 8. b 9. b 10. b
The AE Quiz
1.The economy is dissaving
at a b c. 1,000
2. Aggregate saving will be
zero where GDP is
a. $200 b. $400 c. $600
3. At AE1, savings totals
a. $300 b. $700 c. $1,000
4. If the FE GDP is OL & we
are at AE3 the inflationary
spending gap is a. BC b. AB c. CD G
+300
+300
Hard Quiz
$500
+300
$400
$200
5. With an MPC of .60, an increase in G of $100 billion would increase
“C” [not income] to: a. $150 B b. $250 B c. $600 B
6. Moving from J to H, the MPC is: a. FE/KL b. IP/OK c. IP/QK
7. A movement from AE2 to AE3 would be caused by a(an)
_______ of the dollar? A. appreciation b. depreciation
8. If the FE GDP is OL and we are at AE1 the recessionary
spending gap is: a. AB b. BC c. CD
9. Consumption is equal to GDP at: a b. $400 c. $600
10. At AE1($1,000 GDP), G increases G&T by $100 billion. With
a “M” of 2, GDP increases to: a. $1,000 b. $1,100 c. $1,200

54. Let’s look at some AE and Fiscal Policy
questions asked on previous AP Macro Exams

55. Fiscal Policy
(64%) 1. Crowding out is best described as which of the following?
a. The decrease in full-employment output caused by an increase in taxes
b. The decrease in private investment spending & consumption caused by an increase
in government spending
c. The decrease in government spending caused by a decrease in taxes
d. The increase in the amount of capital outflow caused by the increase in
government spending
e. The increase in the amount of capital inflow caused by the increase in
(51%) 2. An increase in government spending with no change in taxes leads to a
a. lower income level
b. lower price level
c. smaller money supply
d. higher interest rate
e. higher bond price
(39%) 3. If investors feel that business conditions will deteriorate in the future, the
demand for loans and real interest rate in the loanable funds market will
change in which of the following ways in the short run?
Demand for Loans Real Interest Rate
a. Increase Increase
b. Increase Decrease
c. Decrease Increase
d. Decrease Decrease
e. Decrease Not change
Incr in G causes incr in I.R. in LFM, decr “Ig” & “C”.
Starting from a bal. bud., G would now run a deficit
and have to borrow in the LFM, pushing up the I.R.
The “negative profit expectations”cause firms
to decr Ig & not borrow as much, decr the I.R.

56. AE & Fiscal Policy Questions on 2000 AP Exam
4. (81%) The value of the spending multiplier (ME) decreases when
a. tax rates are reduced d. government spending increases
b. exports decline e. the marginal propensity to save increases
c. imports decline
5. (75%) Which of the following policies would a Keynesian recommend during
a period of high unemployment and low inflation?
a. decreasing the MS to reduce AD
b. decreasing taxes to stimulate AD
c. decreasing government spending to stimulate AS
d. balancing the budget to stimulate AS
6. (47%) Which of the following best explains why equilibrium income will
increase by more than $100 in response to a $100 increase in G?
a. Incomes will rise, resulting in a tax decrease.
b. Incomes will rise, resulting in higher consumption.
c. The increased spending raises the aggregate price level.
d. The increased spending increases the money supply, lowering interest rates.
e. The higher budget deficit reduces investment.
7. (56%) Unexpected increases in inventories usually precede
a. increases in inflation b. increases in imports c. stagflation
d. decreases in production e. decreases in unemployment
If MPS incr from .10 to .20, the ME would decrease from 10 to 5.
The Multiplier ensures more C
with each round.

57. AE C+Ig C 8. (63%) The economy on the right is currently experiencing
a. inflation b. recession c. expansion
d. stagflation e. rapid growth
9. (77%) Correct monetary policy to
reach FE GDP is to increase
a. the MS b. the RR c. discount rate
d. taxes e. exports
10. (36%) The minimum increase in government
spending to reach full employment is
a. $2,000 b. $1,000 c. $500
d. $ e. $100
11. (58%) In the simple Keynesian AE model [not AD/AS] of an economy,
changes in Ig or G will lead to a change in which of the following?
a. the price level b. the level of output and employment c. interest rates
d. the AS curve
12. (83%) In a closed-private in which the APC is .75, which of following is true?
a. If income is $100, then saving is $75. d. If income is $200, then “C” is $75
b. If income is $100, then “C” is $50 e. If income is $500, then saving is $100
c. If income is $200, then saving is $50 AE
C+Ig E
$500 C A
$400
Full.Employ.
$800 $1,000 $2,000
Determine what the “M” is going
from A to E; then M X ? = $1,000

58. Fiscal Policy Questions from 2000 Exam
13. (73%) An inflationary gap can be eliminated by all of the following EXCEPT
a. an increase in personal income taxes d. a decrease in G
b. an increase in the MS e. a decrease in Xn
c. an increase in the interest rate
14. (56%) A major advantage of automatic stabilizers in fiscal policy is that they
a. reduce the public debt
b. increase the possibility of a balanced budget
c. stabilize the unemployment rate
d. go into effect without passage of new legislation
e. automatically reduce the inflation rate
Which answer does
not slow the economy?

59. 15. (70%) In the short run, a contractionary fiscal policy will cause AD,
output, and the price level to change in which of the following ways?
AD Output Price level
a. decrease decrease decrease
b. decrease increase increase
c. increase decrease decrease
d. increase increase increase
16. (52%) Crowding out due to government borrowing occurs when
a. lower interest rates increase private sector investment
b. lower interest rates decrease private sector investment
c. higher interest rates decrease private sector investment
d. a smaller money supply increases private sector investment
17. (42%) Compared to expansionary monetary policies adopted to
counteract a recession, expansionary fiscal policies tend to result in
a. less public spending c. a high rate of economic growth
b. higher interest rates d. lower prices

60. 1995 AP Exam
18. (71%) An increase in which will increase the value of the ME?
a. The supply of money d. The marginal propensity to consume
b. Equilibrium output e. The required reserve ratio
c. Personal income tax rates
19. (61%) An AS curve may be horizontal over some range because within that range
a. a higher PL leads to higher interest rates, which reduces the MS & “C”
b. changes in the aggregate PL do not induce substitution
c. output cannot be increased unless prices and interest rates increase
d. rigid prices prevent employment from fluctuating
e. resources are underemployed & an increase in AD will be satisfied without any pressure on the PL
20. (45%) What could cause simultaneous increases in inflation & unemployment
a. a decrease in government spending d. An increase in inflationary expectations
b. A decrease in the money supply e. An increase in productivity
c. A decrease in the velocity of money
21. (85%) Which of the following will result in the greatest increase in AD?
a. A $100 increase in taxes
b. A $100 decrease in taxes
c. A $100 increase in government expenditures
d. A $100 increase in government expenditures, coupled with a $100 increase in taxes
e. A $100 increase in government expenditures, couples with a $100 decrease in taxes
22. (65%) Which of the following will result from a decrease in government spending?
a. An increase in output d. A decrease in AS
b. An increase in the price level e. A decrease in AD
c. An increase in employment

61. 23. (61%) The graph indicates equilibrium at E
for a closed economy without G. If the
addition of G results in equilibrium at F,
which of the following is true?
a. G is $300 and the multiplier is 5.
b. G is $125 and the multiplier is 4.
c. G is $100 and consumption increased by $500.
d. G and Ig increase by $500.
e. Consumption and GDP increase by $500 each. AE
C+Ig+G F
C+Ig E
$325
$200
$1,000 $1, GDP
24. (84%) According to Keynesian theory, decreasing taxes and increasing G will
most likely change consumption and unemployment in which of the following ways?
Consumption Unemployment
a. Decrease No change
b. Decrease No change
c. Increase Decrease
d. Increase Increase
e. No change Decrease
25. (79%) In an economy at full employment, a presidential candidate proposes cutting
the government debt in half in 4 years by increase T and reducing G. According to
Keynesian theory, implementation of these policies is most likely to increase
a. unemployment d. aggregate supply
b. consumer prices e. the rate of economic growth
c. aggregate demand

62. fiscal policy most effective in stimulating production and employment?
26. (79%) If the economy is in a severe recession, which of the following is the
fiscal policy most effective in stimulating production and employment?
a. Government spending increases.
b. Government spending decreases.
c. Personal income taxes are increased.
d. The Fed sells bonds on the open market.
e. The Fed buys bonds on the open market.
27. (27%) Faced with a large federal budget deficit, the government decides to decrease
expenditures and tax revenues by the same amount. This action will affect
output and interest rates in which of the following ways?
Output Interest Rates
a. Increase Increase
b. Increase Decrease
c. No change Decrease
d. Decrease Increase
e. Decrease Decrease
28. (28%) If crowding out only partially offsets the effects of a tax cut, which of the
following changes in interest rates and GDP are most likely to occur.
Interest Rates GDP
a. Increase Increase
b. Increase Remain unchanged
c. Increase Decrease
d. Remain unchanged Increase
e. Decrease Decrease
An equal decrease in G & T [Let’s say by $10 billion] would
decrease GDP by $10 billion. The decrease in GDP would
decrease PL which would cause a decrease in interest rates.
Partially means GDP increases. Starting from a
balanced budget, the tax cut would put the G in deficit
and the G borrowing would increase demand for money
in the LFM and push up interest rates.

63. 29. (62%) According to the Keynesian saving schedule, when aggregate income increases by a given amount, savings will a. remain the same b. decrease by the amount of the change in income c. increase by the amount of the change in income d. increase by less than the amount of the change in income e. increase by more than the amount of the change in income