AP Economics Chapter 35 Practice test

1. In the short run, the price level is assumed to be: A. Fixed, along with input prices B. Flexible, but input prices are not C. Flexible, along with input prices D. Fixed, but input prices are flexible

3. The economy enters the long-run once: A. Nominal wages become equal to real wages B. Real wages become equal to nominal wages C. Sufficient time has elapsed for wage contracts to expire and nominal wages to adjust to output-price changes D. Sufficient time has elapsed for real GDP to increase and unemployment to decrease as a consequence

4. Assume that initially your nominal wage was $16 an hour and the price index was 100. If the price level increases to 105, then your: A. Real wage has increased to $21 B. Real wage has decreased to $15.24 C. Nominal wage has increased to $21 D. Nominal wage has decreased to $15.24

5. In the short run, if the price level increases, then nominal wages: A. Stay fixed, thus firms' revenues and profits will increase B. Stay fixed, and the firms' revenues and profits also stay the same C. Increase, causing firms' revenues and profits to fall D. Decrease, causing firms' revenues and profits to rise

7. In the long run, if the price level increases, then nominal wages and other input prices: A. Also rise, so firms will reduce their output level B. Also rise, so firms will not change their output level C. Not change, so firms will not change their output level D. Decrease, so firms will increase their output level

8. In the long run, if the price level decreases, then the economy's output level will: A. Increase initially, but then fall back again B. Increase C. Decrease D. Stay the same 9. Refer to the graphs above. Graph A is constructed on the basic assumption that: A. The price level is not flexible B. Nominal wages are unresponsive to price-level changes C. Real output is unresponsive to price-level changes D. Unemployment is unresponsive to price-level changes

10. Refer to the graphs above. In Graph A, an increase in the price level from P1 to P2 will cause: A. The nation's unemployment rate to be greater than the natural rate of unemployment B. The nation's unemployment rate to be less than the natural rate of unemployment C. Product prices to decrease D. Profits to decrease

12. Refer to the graphs above. In Graph B, assume that the economy is initially in equilibrium at point x1 and that there is an increase in the price level from P1 to P2. In the long run, this change will lead to: A. Lower nominal wages and a shift in the short-run aggregate supply curve from AS1 to AS2 B. Higher nominal wages and a shift in the short-run aggregate supply curve from AS1 to AS2 C. Lower nominal wages and a movement from equilibrium point x1 to equilibrium point x2 D. Higher nominal wages and a movement from equilibrium point x1 to equilibrium point x2 16. Equilibrium in the long run occurs when: A. AD intersects the short-run AS, regardless of output level B. AD intersects the short-run AS, regardless of price level C. AD intersects the short-run and the long-run AS curves at the same point D. The short-run AS curve intersects the long-run AS curve

17. Inflation in the short run is most likely to result from a(n): A. Increase in aggregate demand or aggregate supply B. Decrease in aggregate demand or aggregate supply C. Increase in aggregate demand or a decrease in aggregate supply D. Decrease in aggregate demand or an increase in aggregate supply

18. Demand-pull inflation in the short-run raises the price level and the: A. Real wages B. Real output C. Unemployment rate D. Nominal wages

20. In the long run, demand-pull inflation leads to: A. Higher unemployment B. Lower real wages C. Lower real output D. Higher price level

23. In the cost-push model of inflation, increases in nominal-wage rates that exceed increases in the productivity of labor: A. Increase aggregate supply and the price level in the economy B. Increase aggregate supply and decrease the price level in the economy C. Decrease aggregate supply and the price level in the economy D. Decrease aggregate supply and increase the price level in the economy

24. If the government uses stimulative monetary or fiscal policies to counter the effects of cost-push inflation, then the economy is likely to experience: A. A decline in nominal wages B. An inflationary spiral C. A recession D. Disinflation 26. If cost-push inflation occurs and the government adopts a "hands-off" policy approach, then according to the simple extended AD-AS model, in the long run the economy will: A. Get back to where it started from B. Get stuck with high unemployment C. Experience an inflationary spiral D. Have a higher price level

33. Refer to the above graph. Assume that the economy is initially at equilibrium at point A. If AD increases, then the long run equilibrium point will be at point: A. A B. B C. C D. D

35. If prices and wages are flexible, a recession resulting from a decrease in aggregate demand will in the long run cause a(n): A. Decrease in the price level B. Increase in the price level C. Increase in the unemployment rate D. Decrease in real output 39. Refer to the above graph. Economic growth driven by productivity and technology would be illustrated as a shift of: A. AD1 to AD2 B. P1 to P2 C. AS2 to AS1 D. ASLR1 to ASLR2

41. Refer to the above graph. Ongoing inflation would occur if the Fed: A. Increases money supply to shift AD faster than technological progress shifts AS B. Increases money supply to shift AD slower than technological progress shifts AS C. Increases money supply to shift AD as fast as technological progress shifts AS D. Does not increase money supply while technological progress is shifting AS

42. The traditional Phillips Curve shows the: A. Direct correlation between the rate of inflation and the unemployment rate B. Inverse correlation between the rate of inflation and the rate of unemployment C. Direct correlation between the short-run and long-run aggregate supply D. Inverse correlation between the short-run and long-run aggregate supply 45. Refer to the graphs above. Assume that the economy is initially at equilibrium where AD2 and AS intersect in Graph 1, and also assume that the economy is initially at point C in Graph 2. A movement from point C to point B in graph 2 would most likely be associated in graph 1 with a shift of: A. AD to the right B. AD to the left C. AS to the right D. AS to the left

49. Given a Phillips Curve with stable and predictable inflation and unemployment rate tradeoffs, it appears that: A. An expansionary fiscal policy can shift the curve to the left B. A tight money policy can shift the curve to the right C. Manipulating aggregate demand through fiscal and monetary policies has the effect of causing a movement along the curve D. Manipulating aggregate demand through fiscal and monetary policies has the effect of shifting the curve

51. Adverse aggregate-supply shocks or stagflation would cause a: A. Movement up along a stable Phillips Curve B. Movement down along a stable Phillips Curve C. Shift of the Phillips Curve to the left D. Shift of the Phillips Curve to the right 53. Stagflation can be described as a: A. Shift right in the aggregate supply curve B. Shift left in the aggregate supply curve C. Period of stable prices and high unemployment D. Period of rising prices and low unemployment

55. Adverse aggregate supply shocks would result in: A. A lower rate of inflation and a higher rate of unemployment B. A higher rate of inflation and a lower rate of unemployment C. A lower rate of inflation and a lower rate of unemployment D. A higher rate of inflation and a higher rate of unemployment

59. The misery index is a measure of national economic discomfort that adds together a nation's: A. Saving and investment B. Budget deficit and public debt C. Unemployment rate and inflation rate D. Level of taxation with the amount of government spending

61. Refer to the above graph. Assume the economy is at the initial position of B2. An increase in aggregate demand with no corresponding change in inflation expectations and wage rates will tend to: A. Temporarily move the economy to point B3 B. Temporarily move the economy to point C2 C. Temporarily move the economy to point C1 D. Have no effect in shifting the economy from point B2 62. Refer to the above graph. Assume the economy is at the initial position of B2. An increase in aggregate demand with a corresponding adjustment in inflation expectations and wages will tend to: A. Move the economy to point B3 B. Move the economy to point C2 C. Move the economy to point C1 D. Have no effect in shifting the economy from point B2

64. Refer to the above graph. The long-run relationship between the rate of inflation and the unemployment rate is represented by: A. The zigzag line, B1C1B2C2B3C3B4 B. A line connecting points C1C2C3 C. A line connecting points B1B2B3B4 D. A line connecting points B1 and C1

67. The automatic adjustment mechanism that makes the economy move towards the long-run Phillips Curve is: A. Expansionary fiscal or monetary policy B. Inflation expectations and wage adjustments C. Contractionary fiscal or monetary policy D. Increases in productivity over time

72. When the rate of inflation is decreasing, this economic condition is called: A. Disinflation B. Depreciation C. A stagflation D. Deflation

81. Supply-side economists contend that the system of taxation in the United States: A. Creates incentives to save and invest B. Creates disincentives to work C. Generates maximum tax revenue D. Reduces the effects of cost-push inflation

83. A Congressional representative who calls for a decrease in tax rates to increase saving, work effort, and economic growth would most likely be advocating: A. An easy money policy B. A tight money policy C. A supply-side fiscal policy D. A contractionary fiscal policy 93. Refer to the above graph. A movement from point C to point D on the Laffer Curve represents: A. Increased tax rates from T2 to T3 and increased tax revenues from R2 to R3 B. Decreased tax rates from T3 to T2 and increased tax revenues from R2 to R3 C. Decreased tax rates from T3 to T2 and decreased tax revenues from R3 to R2 D. Increased tax rates from T2 to T3 and decreased tax revenues from R3 to R2

94. Refer to the Laffer Curve above. A cut in the tax rate from T5 to T4 would: A. Decrease tax revenues and support the views of supply-side economists B. Increase tax revenues and support the views of supply-side economists C. Increase tax revenues and support the views of mainstream economists D. Decrease tax revenues and support the views of mainstream economists

98. Most economists think that: A. Supply-side effects of a tax cut exceed the demand-side effects B. Demand-side effects of a tax cut exceed the supply-side effects C. Demand-side and supply-side effects of a tax cut offset each other D. There are only supply-side effects from a tax cut

105. Which presidential administration is most closely associated with the economic policies of supply-side economics? A. Clinton B. Nixon C. Reagan D. Bush