AP Macro Unit 3 Review

Which of the following best explains why the aggregate demand curve slopes downward?

• As the price level rises, government spending automatically increases.

• Higher prices lead to higher real wealth, increasing consumption.

• When the price level falls, purchasing power increases, boosting consumption, and lower interest rates increase investment.

• Lower prices increase the marginal propensity to save, reducing consumption.

• The downward slope is caused by rising production costs as prices fall.

If imports increased, which of the following would occur?

• increase in aggregate demand

• decrease in aggregate demand

• increase in short run aggregate supply

• no change to aggregate demand

• decrease in short run aggregate supply

If interest rates decrease, what will most likely happen to aggregate demand?

• increase in aggregate demand

• decrease in aggregate demand

• increase in short run aggregate supply

• no change to aggregate demand

• decrease in short run aggregate supply

Which of the following best explains why the short-run aggregate supply (SRAS) curve is upward sloping?

• As the price level falls, real wages rise, leading firms to hire more workers.

• As the price level rises the money supply automatically increases.

• Higher prices reduce consumer spending, leading firms to cut back production.

• Long-run output increases whenever price levels change.

• As the price level rises, real wages lag behind, making production more profitable and encouraging firms to produce more.

Which of the following changes would most likely shift the short-run aggregate supply (SRAS) curve to the right?

• An increase in input prices

• An increase in the minimum wage

• Advancements in production technology

• An increase in business taxes

• A decrease in the availability of key natural resources

Which of the following best describes the short-run trade-off between inflation and unemployment?

• As inflation decreases, unemployment decreases in the short run.

• In the short run inflation rises first, then unemployment rises shortly after.

• In the short run, there is direct relationship between inflation and unemployment.

• In the short run, there is an inverse relationship between inflation and unemployment.

• There is no trade-off between inflation and unemployment in the short run.

In the long run, what does the term “flexible wages” mean?

• Wages stay the same even when prices change.

• Wages quickly adjust to changes in the price level, restoring full employment.

• Wages are controlled by the government to maintain price stability.

• Workers refuse wage changes because of fixed contracts.

• Wages only increase, never decrease, over time.

Why is the long-run aggregate supply (LRAS) curve vertical?

• Because output can increase indefinitely as prices rise.

• Because in the long run, output depends on price level rather than productivity.

• Because in the long run, output is determined by available resources, technology, and productivity—not the price level.

• Because firms reduce production when prices fall.

• Because higher prices automatically increase output.

When an economy is at long-run equilibrium, the actual unemployment rate:

• is less than the natural rate of unemployment

• changes as the price level changes

• is greater than the natural rate of unemployment

• has a direct relationship with inflation

• is equal to the natural rate of unemployment

How do the long-run aggregate supply (LRAS) curve and the production possibilities curve (PPC) represent similar economic concepts?

• Both show the relationship between inflation and unemployment.

• Both show changes in demand over time.

• Both illustrate short-run fluctuations in GDP.

• Both illustrate the maximum sustainable output an economy can produce using all resources efficiently.

• Both show how price levels determine production capacity.