1. Inflation, Unemployment and Stabilization Policies
AP Macroeconomics
MR. GRAHAM
Unit Six Review
Inflation, Unemployment and Stabilization Policies

2. If government spending exceeds tax revenues, which of the following is necessarily true? There is a I. positive budget balance. II. budget deficit. III. recession.
I only
II only
III only
I and II only
I, II and III

3. Which of the following fiscal policies is expansionary. Taxes
Which of the following fiscal policies is expansionary? Taxes Government Spending
Increase by $100 million Increases by $100 million
Decrease by $100 million Decreases by $100 million
Increase by $100 million Decreases by $100 million
Decrease by $100 million Increases by $100 million
both (a) and (d)

4. The cyclically adjusted budget deficit is an estimate of what the budget balance would be if real GDP were
greater than potential output.
equal to nominal GDP.
equal to potential output.
falling.
calculated during a recession.

5. During a recession in the United States, what happens automatically to tax revenues and government spending? Taxes Government Spending
Increase Increases
Decrease Decreases
Increase Decreases
Decrease Increases
Decrease No Change

6. Which of the following is a reason to be concerned about persistent budget deficits?
crowding out
government default
the opportunity cost of future interest payments
higher interest rates leading to decreased long-run growth
all of the above

7. At each meeting of the Federal Open Market Committee, the Federal Reserve sets a target for which of the following? I. the federal funds rate II. the prime interest rate III. the market interest rate
I only
II only
III only
I and III only
I, II and III

8. Which of the following actions can the Fed take to decrease the equilibrium interest rate?
increase the money supply
increase money demand
decrease the money supply
decrease money demand
both (a) and (d)

9. Contractionary monetary policy attempts to ________ aggregate demand by ________ interest rates.
Decrease Increasing
Increase Decreasing
Decrease Decreasing
Increase Increasing
Increase Maintaining

10. Which of the following is a goal of monetary policy?
zero inflation
deflation
price stability
increased potential output
decreased actual real GDP

11. When implementing monetary policy, the Federal Reserve attempts to achieve
an explicit target inflation rate.
zero inflation.
a low rate of deflation.
a low, but positive inflation rate.
4–5% inflation.

12. In the long run, changes in the quantity of money affect which of the following? I. real aggregate output II. interest rates III. the aggregate price level
I only
II only
III only
I and II only
I, II and III

13. An increase in the money supply will lead to which of the following in the short run?
higher interest rates
decreased investment spending
decreased consumer spending
increased aggregate demand
lower real GDP

14. A 10% decrease in the money supply will change the aggregate price level in the long run by
zero.
less than 10%.
10%.
20%.
more than 20%.

15. Monetary neutrality means that, in the long run, changes in the money supply
cannot happen.
have no effect on the economy.
have no real effect on the economy.
increase real GDP.
change real interest rates

16. A graph of percentage increases in the money supply and average annual increases in the price level for various countries provides evidence that
changes in the two variables are exactly equal.
the money supply and aggregate price level are unrelated.
money neutrality holds only in wealthy countries.
monetary policy is ineffective.
money is neutral in the long run.

17. The real quantity of money is. I. equal to M/P. II
The real quantity of money is I. equal to M/P. II. the money supply adjusted for inflation. III. higher in the long run when the Fed buys government securities.
I only
II only
III only
I and II only
I, II and III

18. In the classical model of the price level
only the short-run aggregate supply curve is vertical.
The aggregate supply curve is vertical.
only the long-run aggregate supply curve is vertical.
both the short-run aggregate demand and supply curves are vertical.
both the long-run aggregate demand and supply curves are vertical.

19. The classical model of the price level is most applicable in
the United States.
periods of high inflation.
periods of low inflation.
recessions.
depressions.

20. An inflation tax is imposed by governments to offset price increases.
paid directly as a percentage of the sale price on purchases.
the result of a decrease in the value of money held by the public.
generally levied by states rather than the federal government.
higher during periods of low inflation.

21. Revenue generated by the government’s right to print money is known as
seignorage.
an inflation tax.
hyperinflation.
fiat money.
monetary funds.

22. The long-run Phillips curve is. I
The long-run Phillips curve is I. the same as the short-run Phillips curve. II. vertical. III. the short-run Phillips curve plus expected inflation.
I only
II only
III only
I and II only
I, II and III

23. The short-run Phillips curve shows a _________ relationship between ________.

24. An increase in expected inflation will shift
the short-run Phillips curve downward.
the short-run Phillips curve upward.
the long-run Phillips curve upward.
the long-run Phillips curve downward.
neither the short-run nor the long-run Phillips curve.

25. Bringing down inflation that has become embedded in expectations is called
deflation.
negative inflation.
anti-inflation.
unexpected inflation.
disinflation.

26. Debt deflation is
the effect of deflation in decreasing aggregate demand.
an idea proposed by Irving Fisher.
a contributing factor in causing the Great Depression.
due to differences in how borrowers/ lenders respond to inflation losses/gains.
all of the above.

27. Which of the following was an important point emphasized in Keynes’s influential work? I. In the short run, shifts in aggregate demand affect aggregate output. II. Animal spirits are an important determinant of business cycles. III. In the long run we’re all dead.
I only
II only
III only
I and II only
I, II, and III

28. Which of the following is a central point of monetarism?
Business cycles are associated with fluctuations in money demand.
Activist monetary policy is the best way to address business cycles.
Discretionary monetary policy is effective while discretionary fiscal policy is not.
The Fed should follow a monetary policy rule.
All of the above.

29. The natural rate hypothesis says that the unemployment rate should be
below the NAIRU.
high enough that the actual rate of inflation equals the expected rate.
as close to zero as possible.
5%.
left wherever the economy sets it.

30. The main difference between the classical model of the price level and Keynesian economics is that
the classical model assumes a vertical short-run aggregate supply curve.
Keynesian economics assumes a vertical short-run aggregate supply curve.
the classical model assumes an upward sloping long-run aggregate supply curve.
Keynesian economics assumes a vertical long-run aggregate supply curve.
the classical model assumes aggregate demand can not change in the long run.

31. That fluctuations in total factor productivity growth cause the business cycle is the main tenet of which theory?
Keynesian
Classical
rational expectations
real business cycle
natural rate