AP Macroeconomics: Unit 3 Progress Check MCQ(with
solved solutions)
It is a curve that shows the level of spending by consumers, businesses, the government, and the
foreign sector at different price levels.
Correct. The aggregate demand curve describes the relationship between the price level and
quantity of goods and services demanded by households, firms, the government, and the rest of
the world. correct answersWhich of the following best describes the aggregate demand curve?
At a lower price level, domestic goods will become less expensive compared to foreign goods,
which causes an increase in spending on domestic goods.
Correct. The three reasons the aggregate demand curve has a negative slope are the wealth effect,
the interest rate effect, and the exchange rate effect. At a lower price level, domestic goods will
become relatively cheaper compared to foreign goods, exports increase, and spending on
domestic goods increases. This is the exchange rate effect. correct answersWhich of the
following explains the relationship between the price level and real output along the aggregate
demand curve?
There will be a rightward shift in the AD curve.
Correct. Aggregate demand is the sum of four components: consumption spending (C),
investment spending (I), government spending (G), and net exports. An increase in CC, II, G or
net exports will increase AD. Therefore the increase in government spending will shift the AD
curve to the right. correct answersThe government of Euroland is considering increasing
government spending to avoid a recession. What is the most likely effect on aggregate demand in
Euroland?
Real output will increase by a maximum of $400 billion.
Correct. Real output will increase by a maximum of $400 billion. The maximum change in real
output is determined by multiplying the spending multiplier by the amount of the change in
government spending. The spending multiplier is equal to (1/(1−MPC=)= 1/(1-.75)=4 Therefore,
real output will increase by a maximum of $100 billion×4=$400 billion. correct answersAssume
the marginal propensity to consume is 0.75. What will happen if government spending increases
by $100 billion?
A greater-than-one-dollar increase in aggregate demand for goods and services
Correct. A one-dollar change in autonomous expenditure leads to a greater-than-one-dollar
increase in aggregate demand for goods and services. correct answersAccording to the
expenditure multiplier, if the marginal propensity to consume is greater than zero, a one-dollar
change in autonomous expenditures will result in which of the following?
MPC=0.60 , MPS=0.40
, Correct. The marginal propensity to consume is the change in consumption spending divided by
the change in disposable income. The sum of the marginal propensity to consume and marginal
propensity to save is equal to one. The change in consumption spending is $600 and the change
in disposable income is $1,000. Therefore, the marginal propensity to consume is
$600/$1,000=0.6 and the marginal propensity to save is 1−0.6=0.4 correct answersUsing the
disposable income and consumption data in the table above, calculate the value of the marginal
propensity to consume (MPC) and the marginal propensity to save (MPS).
There will be an upward movement along the short-run aggregate supply curve and real output
will increase.
Correct. The increase in the price level results in an upward movement along the short-run
aggregate supply curve to a higher real output level. correct answersIn an economy where wages
and prices are sticky, which of the following will happen as a result of an increase in the price
level?
It will cause the SRAS curve to shift leftward.
Correct. The tariff will increase the costs of production and shift the (SRAS) curve to the left.
correct answersThe imposition by the United States of a tariff on imported steel from the
European Union will likely have what impact on the short-run aggregate supply (SRAS) curve in
the United States?
An increase in the price level will increase profits and production.
Correct. With fixed nominal wages, an increase in the price level will increase profits, to which
firms respond by hiring more workers and increasing production. correct answersIf nominal
wages are fixed by labor contracts, then which of the following explains why the aggregate
supply curve is upward sloping?
The maximum sustainable capacity
Correct. Both the LRAS curve and the PPC represent maximum sustainable capacity. correct
answersWhich of the following is illustrated by the long-run aggregate supply (LRAS) curve and
the production possibilities curve (PPC)?
Both curves would shift to the right.
Correct. The LRAS curve corresponds to the production possibilities curve (PPC) because they
both represent maximum sustainable capacity. Maximum sustainable capacity is the total output
an economy will produce over a set period of time if all resources are fully employed. More
workers would mean both curves shift to the right. correct answersSuppose a nation opened its
borders to the free flow of workers from other nations. How would this event likely affect the
long-run aggregate supply (LRAS) curve and the production possibilities curve of the nation?
solved solutions)
It is a curve that shows the level of spending by consumers, businesses, the government, and the
foreign sector at different price levels.
Correct. The aggregate demand curve describes the relationship between the price level and
quantity of goods and services demanded by households, firms, the government, and the rest of
the world. correct answersWhich of the following best describes the aggregate demand curve?
At a lower price level, domestic goods will become less expensive compared to foreign goods,
which causes an increase in spending on domestic goods.
Correct. The three reasons the aggregate demand curve has a negative slope are the wealth effect,
the interest rate effect, and the exchange rate effect. At a lower price level, domestic goods will
become relatively cheaper compared to foreign goods, exports increase, and spending on
domestic goods increases. This is the exchange rate effect. correct answersWhich of the
following explains the relationship between the price level and real output along the aggregate
demand curve?
There will be a rightward shift in the AD curve.
Correct. Aggregate demand is the sum of four components: consumption spending (C),
investment spending (I), government spending (G), and net exports. An increase in CC, II, G or
net exports will increase AD. Therefore the increase in government spending will shift the AD
curve to the right. correct answersThe government of Euroland is considering increasing
government spending to avoid a recession. What is the most likely effect on aggregate demand in
Euroland?
Real output will increase by a maximum of $400 billion.
Correct. Real output will increase by a maximum of $400 billion. The maximum change in real
output is determined by multiplying the spending multiplier by the amount of the change in
government spending. The spending multiplier is equal to (1/(1−MPC=)= 1/(1-.75)=4 Therefore,
real output will increase by a maximum of $100 billion×4=$400 billion. correct answersAssume
the marginal propensity to consume is 0.75. What will happen if government spending increases
by $100 billion?
A greater-than-one-dollar increase in aggregate demand for goods and services
Correct. A one-dollar change in autonomous expenditure leads to a greater-than-one-dollar
increase in aggregate demand for goods and services. correct answersAccording to the
expenditure multiplier, if the marginal propensity to consume is greater than zero, a one-dollar
change in autonomous expenditures will result in which of the following?
MPC=0.60 , MPS=0.40
, Correct. The marginal propensity to consume is the change in consumption spending divided by
the change in disposable income. The sum of the marginal propensity to consume and marginal
propensity to save is equal to one. The change in consumption spending is $600 and the change
in disposable income is $1,000. Therefore, the marginal propensity to consume is
$600/$1,000=0.6 and the marginal propensity to save is 1−0.6=0.4 correct answersUsing the
disposable income and consumption data in the table above, calculate the value of the marginal
propensity to consume (MPC) and the marginal propensity to save (MPS).
There will be an upward movement along the short-run aggregate supply curve and real output
will increase.
Correct. The increase in the price level results in an upward movement along the short-run
aggregate supply curve to a higher real output level. correct answersIn an economy where wages
and prices are sticky, which of the following will happen as a result of an increase in the price
level?
It will cause the SRAS curve to shift leftward.
Correct. The tariff will increase the costs of production and shift the (SRAS) curve to the left.
correct answersThe imposition by the United States of a tariff on imported steel from the
European Union will likely have what impact on the short-run aggregate supply (SRAS) curve in
the United States?
An increase in the price level will increase profits and production.
Correct. With fixed nominal wages, an increase in the price level will increase profits, to which
firms respond by hiring more workers and increasing production. correct answersIf nominal
wages are fixed by labor contracts, then which of the following explains why the aggregate
supply curve is upward sloping?
The maximum sustainable capacity
Correct. Both the LRAS curve and the PPC represent maximum sustainable capacity. correct
answersWhich of the following is illustrated by the long-run aggregate supply (LRAS) curve and
the production possibilities curve (PPC)?
Both curves would shift to the right.
Correct. The LRAS curve corresponds to the production possibilities curve (PPC) because they
both represent maximum sustainable capacity. Maximum sustainable capacity is the total output
an economy will produce over a set period of time if all resources are fully employed. More
workers would mean both curves shift to the right. correct answersSuppose a nation opened its
borders to the free flow of workers from other nations. How would this event likely affect the
long-run aggregate supply (LRAS) curve and the production possibilities curve of the nation?
