AP Econ Unit 4 Test Practice

If economic agents perfectly anticipate policy changes and if all prices, including wages, are completely flexible, which of the following will be true in the long run?

• Changes in the money supply will not lead to changes in the price level.

• The unemployment rate will be greater than the natural rate of unemployment.

• The unemployment rate will be less than the natural rate of unemployment.

• There will be no trade-off between inflation and unemployment.

• The price level will be constant.

A contraction in the money supply will most likely change the nominal interest rate and aggregate demand in which of the following ways in the short run?

Nominal interest rate Aggregate Demand

• Increase Decrease

• Increase Increase

• Increase Not change

• Decrease Decrease

• Decrease Increase

An appropriate fiscal policy to combat a recession would be to increase which of the following?

• Interest rates

• The money supply

• Taxes

• Government spending

• The sales of government bonds

A commercial bank’s ability to create money depends on which of the following?

• The existence of a central bank

• A fractional reserve banking system

• Gold or silver reserves backing up the currency

• A large national debt

• The existence of both checking accounts and savings accounts

Classical economists believe that the economy moves toward full employment because

• government spending supplements private investment to keep aggregate demand in balance with aggregate supply

• households spend all of their disposable income to purchase the full-employment output

• wages and prices are flexible

• private investment is constant and independent of national income

• the money supply grows at a constant rate to generate sufficient demand to purchase the full-employment output

When the central bank sells government bonds on the open market, which of the following will most likely increase?

• Bank reserves

• Price of bonds

• Money supply

• Nominal interest rates

• The required reserve ratio

If fiscal policy is used to correct a recessionary gap, which of the following would most likely occur in the absence of crowding out in the short run?

Real Output Unemployment

• Increase Decrease

• Increase Increase

• Decrease Decrease

• Decrease Increase

• Decrease No change

Which of the following policies, if appropriately sized, would provide expansion during a recession with the smallest change in interest rates?

• An open-market purchase of government securities by the central bank and a decrease in the federal funds rate

• An open-market sale of government securities by the central bank and an increase in the federal funds rate

• A decrease in taxes and an open-market purchase of government securities by the central bank

• An increase in government spending and an open-market sale of government securities by the central bank

• An increase in taxes and an increase in the federal funds rate

Following a decrease in exports, what fiscal policy would restore the economy to the original equilibrium?

• An increase in the income tax rate

• An increase in government transfer payments

• A reduction in the government budget deficit

• An open-market purchase of bonds by the central bank

• An open-market sale of bonds by the central bank

If the federal government reduces its budget deficit when the economy is close to full employment, which of the following will most likely result?

• Inflation will increase.

• Tax revenues will increase.

• Interest rates will decrease.

• Unemployment will decrease.

• The international value of the dollar will increase.