AP MACROECONOMICS Test Booklet

1. Assume that the marginal propensity to consume is 0.90. As a result of an increase in the tax rates, the government
collects an additional $20 million. What will be the impact on gross domestic product (GDP) ?
(A) GDP will increase by a maximum of $200 million.
(B) GDP will increase by a maximum of $180 million.
(C) GDP will decrease by a maximum of $200 million.
(D) GDP will decrease by a maximum of $180 million.
(E) GDP will decrease by a maximum of $20 million.

2. Assume that the marginal propensity to consume is 0.8. If the government increases its purchases of goods and
services by $200 and exports decline by $50, at most the equilibrium level of income will
(A) decrease by $250
(B) decrease by $1,000
(C) increase by $150
(D) increase by $750
(E) increase by $1,250

3. Automatic stabilizers can do which of the following?

(A) Offset the destabilizing influence of changes in tax revenues
(B) Aid the economy to move away from the full-employment output level
Allow policymakers to formulate a set of rules flexible and comprehensive enough to eliminate discretionary
(C)
actions
Cause tax revenues to decrease when gross domestic product (GDP) decreases and to increase when GDP
(D)
increases
Allow policymakers to prescribe public works programs during inflationary periods because expenditures for
(E)
unemployment and welfare have correspondingly decreased

4. A major advantage of automatic stabilizers in fiscal policy is that they

(A) reduce the public debt
(B) increase the possibility of a balanced budget
(C) stabilize the unemployment rate
(D) go into effect without passage of new legislation
(E) automatically reduce the inflation rate

5. If the government increases expenditures on goods and services and increases taxation by the same amount, which
of the following will occur?
(A) Aggregate demand will be unchanged.
(B) Aggregate demand will increase.
(C) Interest rates will decrease.
(D) The money supply will decrease.
(E) The money supply will increase.

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6. Faced with a large federal budget deficit, the government decides to decrease expenditures and tax revenues by the
same amount. This action will affect output and interest rates in which of the following ways?

Output Interest Rates

(A)
Increase Increase

Output Interest Rates

(B)
Increase Decrease

Output Interest Rates

(C)
No change Decrease

Output Interest Rates

(D)
Decrease Increase

Output Interest Rates

(E)
Decrease Decrease

7. Which of the following will most likely occur if a government adopts an annually balanced budget rule that requires
the government to eliminate any deficits or surpluses?
(A) Unemployment will be eliminated and prices will be stable.
(B) The national debt will increase.
(C) Business cycles will become more stable.
(D) The automatic stabilizing effect of fiscal policy will be eliminated.
(E) The government will be forced to spend less when there are surpluses.

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8. Assume that the marginal propensity to consume out of disposable income is 0.8 and that the government taxes all
income at a constant rate of 30 percent. If gross income increases by $100, consumption will initially increase by
(A) $44
(B) $56
(C) $70
(D) $80
(E) $100

9. Assume that Jane’s marginal propensity to consume equals 0.8, and that in 2004 Jane spent $36,000 from her
disposable income of $40,000. If her disposable income in 2005 increased to $50,000, her consumption spending
increased by
(A) $4,000
(B) $8,000
(C) $9,000
(D) $10,000
(E) $14,000

10. Suppose that in an economy with lump-sum taxes and no international trade, autonomous investment spending
increases by $2 million. If the marginal propensity to consume is 0.75, equilibrium gross domestic product will
change by a maximum of
(A) $0.5 million
(B) $1.5 million
(C) $2.0 million
(D) $8.0 million
(E) $15.0 million

11. If the marginal propensity to consume is 0.75, then a $100 increase in investment will result in a maximum increase
in equilibrium real gross domestic product of
(A) $40.00
(B) $100.00
(C) $133.33
(D) $400.00
(E) $500.00

12. Suppose that the economy is in the midst of a recession and government policy makers want to increase aggregate
demand by $600 billion.If the economy’s marginal propensity to consume is 0.75 and there is no crowding out, the
government should do which of the following?

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(A) Increase spending by $2,400 billion.

(B) Increase spending by $600 billion.
(C) Increase spending by $150 billion.
(D) Decrease taxes by $150 billion.
(E) Decrease taxes by $600 billion.

13. Suppose that autonomous consumption is $400 and that the marginal propensity to consume is 0.8. If disposable
income increases by $1,200, consumption spending will increase by
(A) $1,600
(B) $1,360
(C) $1,200
(D) $960
(E) $400

14.

According to the income and consumption schedules shown above, the marginal propensity to consume is
(A) 1.33
(B) 0.90
(C) 0.80
(D) 0.75
(E) decreasing as real disposable income increases

15. Which of the following will cause an increase in aggregate demand?

(A) An increase in the price level
(B) A decrease in income taxes
(C) An increase in the demand for money
(D) A decrease in the supply of money
(E) A decrease in government transfer payments

16. If the marginal propensity to consume is 0.9, the government increases purchases by $100, and net exports decline
by $60, the equilibrium level of real gross domestic product will

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(A) decrease by up to $400

(B) increase by up to $400
(C) increase by up to $600
(D) decrease by up to $1,600
(E) increase by up to $1,600

17. Assume the marginal propensity to consume is 0.8. How will a decrease in taxes of $100 billion and a decrease in
government spending of $100 billion affect aggregate demand?
(A) Aggregate demand will decrease by $900 billion.
(B) Aggregate demand will decrease by $500 billion.
(C) Aggregate demand will decrease by $400 billion.
(D) Aggregate demand will decrease by $100 billion.
(E) Aggregate demand will not change.

18. Which of the following changes will have the smallest expansionary effect on aggregate demand in the short run?
(A) An increase in exports of $100
(B) An increase in government spending of $100
(C) A decrease in taxes of $100
(D) A decrease in imports of $100
(E) A decrease in savings of $100

19. Assume the government reduces its spending and raises income taxes in an effort to reduce the budget deficit. The
most likely short-run result will be an increase in
(A) interest rates
(B) unemployment
(C) the money supply
(D) the price level
(E) personal savings

20. Which of the following is an example of fiscal policy?

(A) Decreasing income tax rates
(B) Increasing the money supply
(C) Decreasing the discount rate
(D) Selling government bonds
(E) Decreasing the required reserve ratio

21. Which of the following is a fiscal policy action aimed at reducing unemployment?

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(A) Decreasing government expenditures

(B) Decreasing income taxes
(C) Decreasing tax credits
(D) Increasing nominal interest rates
(E) Increasing required reserves

22. Which of the following statements best describes the concept of an automatic stabilizer?
It is nondiscretionary fiscal policy that mitigates business cycles by increasing aggregate demand during
(A)
recessions and decreasing aggregate demand during expansions.
It is discretionary fiscal policy that increases government spending during recessions and decreases
(B)
government spending during expansions.
It is a measure of the effect that a change in government spending and investment has on the gross domestic
(C)
product.
It is a description of how total income is always equal to total expenditures as a measure of gross domestic
(D)
product.
It is the process whereby surpluses lead to falling prices and shortages lead to rising prices to stabilize market
(E)
equilibrium.

23. Suppose that disposable income is $1,000, consumption is $700, and the marginal propensity to consume (MPC) is
0.6. If disposable income then increases by $100, consumption and savings will equal which of the following?

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Consumption Savings

(A)
$420 $280

Consumption Savings
(B)
$600 $400

Consumption Savings
(C)
$660 $320

Consumption Savings
(D)
$660 $440

Consumption Savings
(E)
$760 $340

24. A discretionary fiscal policy action to reduce inflation in the short run would be to
(A) increase transfer payments to those on fixed incomes
(B) increase taxes or decrease government spending
(C) decrease taxes or increase government spending
(D) increase taxes and the money supply
(E) decrease taxes and interest rates

25. If the federal government decreases its expenditures on goods and services by $10 billion and decreases taxes on
personal incomes by $10 billion, which of the following will occur in the short run?

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(A) The federal budget deficit will increase by $10 billion.

(B) The federal budget deficit will decrease by $10 billion.
(C) Aggregate income will remain the same.
(D) Aggregate income will increase by up to $10 billion.
(E) Aggregate income will decrease by up to $10 billion.

26. Which of the following is an example of an automatic stabilizer?

(A) Discretionary fiscal policy
(B) Progressive income taxes
(C) Autonomous consumption
(D) The spending multiplier
(E) Cyclical unemployment

27. Which of the following is an example of fiscal policy?

(A) Increasing government expenditures to build highways
(B) Increasing the money supply to increase income
(C) Decreasing the discount rate to lower unemployment and inflation
(D) Decreasing the federal funds rate to stimulate investment
(E) Decreasing the reserve ratio to increase bank reserves

28. All the following are examples of automatic stabilizers EXCEPT:

(A) unemployment insurance benefits
(B) personal income taxes
(C) welfare benefits
(D) corporate income taxes
(E) tariffs

29. If the government implements an expansionary fiscal policy, how will real gross domestic product (GDP) and the
price level be affected in the short run?

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Real GDP Price Level

(A)
Increase Decrease

Real GDP Price Level

(B)
Decrease No change

Real GDP Price Level

(C)
No change Increase

Real GDP Price Level

(D)
Increase Increase

Real GDP Price Level

(E)
Decrease Decrease

30. With an expansionary fiscal policy, what will most likely happen to the real gross domestic product (GDP) and the
nominal interest rate in the short run?

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Real GDP Nominal Interest Rate

(A)
Increase Decrease

Real GDP Nominal Interest Rate

(B)
Increase Increase

Real GDP Nominal Interest Rate

(C)
No change No change

Real GDP Nominal Interest Rate

(D)
Decrease Increase

Real GDP Nominal Interest Rate

(E)
Decrease Decrease

31. An economy experiences a sharp increase in energy prices, and policy makers adopt a stabilization policy to
increase aggregate demand. Compared with the initial short-run equilibrium, which of the following will definitely
occur?
(A) Lower level of output
(B) Higher level of output
(C) Lower price level
(D) Higher price level
(E) Higher aggregate supply

32. Which of the following combinations of changes in government spending and taxes is necessarily expansionary?

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Government Spending Taxes

(A)
Increase Increase

Government Spending Taxes

(B)
Increase Decrease

Government Spending Taxes

(C)
Decrease Not change

Government Spending Taxes

(D)
Decrease Increase

Government Spending Taxes

(E)
Decrease Decrease

33. Which of the following statements is true about an expansionary fiscal policy?
(A) It decreases demand for loanable funds.
(B) It decreases the equilibrium price level.
(C) It decreases the equilibrium real interest rate.
(D) It increases aggregate demand.
(E) It increases the money supply.

34. Which of the following best explains the increase in national income that results from equal increases in
government spending and taxes?

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(A) Consumers do not reduce their spending by the full amount of the tax increase.
(B) The government purchases some goods that consumers would have purchased on their own anyway.
(C) Consumers believe all tax cuts are transitory.
(D) The increase in government spending causes a decrease in investment.
(E) Consumers are aware of tax increases but not of increases in government spending.

35. Which of the following is an example of an expansionary fiscal policy?

(A) An increase in income tax rates
(B) An increase in government expenditures
(C) A decrease in transfer payments
(D) An increase in the price level
(E) An increase in consumption spending

36. An appropriate fiscal policy to combat a recession would be to increase which of the following?
(A) Interest rates
(B) The money supply
(C) Taxes
(D) Government spending
(E) The sales of government bonds

37. If policy makers use fiscal policy to reduce inflation, which of the following will most likely happen in the short
run?
(A) The unemployment rate will decrease.
(B) The unemployment rate will increase.
(C) The real interest rate will increase.
(D) The nominal interest rate will increase.
(E) The economy will remain at the natural rate of unemployment.

38. Following a decrease in exports, what fiscal policy would restore the economy to the original equilibrium?
(A) An increase in the income tax rate
(B) An increase in government transfer payments
(C) A reduction in the government budget deficit
(D) An open-market purchase of bonds by the central bank
(E) An open-market sale of bonds by the central bank

39. In a closed economy with only lump-sum taxation, if the marginal propensity to consume is equal to 0.75, a $70
billion increase in government spending could cause a maximum increase in output of

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(A) $52.5 billion

(B) $70 billion
(C) $122.5 billion
(D) $210 billion
(E) $280 billion

40. If equilibrium is less than potential , which of the following is a fiscal policy action that could move
the economy to long-run equilibrium?
(A) An increase in taxes
(B) An increase in the money supply
(C) An increase in government spending
(D) A decrease in transfer payments
(E) A decrease in business income tax credits

41. In an economy with lump-sum taxes and no international sector, assume that the aggregate supply curve is
horizontal. If the marginal propensity to consume is equal to 0.8, which of the following will necessarily be true?
(A) The average propensity to consume will be less than the marginal propensity to consume.
(B) The government expenditure multiplier will be equal to 5.
(C) A $10 increase in consumption spending will bring about an $80 increase in disposable income.
(D) Wealth will tend to accumulate in the hands of a few people.
(E) The economy will be running a deficit, since consumption expenditures exceed personal saving.

42. Which of the following are the most likely short-run effects of an increase in government expenditures?
Unemployment Rate: Increase
(A) Inflation Rate: Increase
Real Gross Domestic Product: Increase
Unemployment Rate: Increase
(B) Inflation Rate: Increase
Real Gross Domestic Product: Decrease
Unemployment Rate: Decrease
(C) Inflation Rate: Increase
Real Gross Domestic Product: Increase
Unemployment Rate: Decrease
(D) Inflation Rate: Decrease
Real Gross Domestic Product: Increase
Unemployment Rate: No change
(E) Inflation Rate: Decrease
Real Gross Domestic Product: Increase

43. An increase in government spending that is financed by an equal increase in taxes results in which of the following
changes in aggregate demand and short-run aggregate supply curves?

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Curve Curve
(A)

Shifts to the right Shifts to the right

Curve Curve
(B)

Shifts to the left Shifts to the left

Curve Curve
(C)

Shifts to the right No change

Curve Curve
(D)

Shifts to the left No change

Curve Curve
(E)

No change No change

44. In an economy with a horizontal aggregate supply curve, an increase in government spending will cause output and
the price level to change in which of the following ways?

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Output Price Level

(A)
Decrease Increase

Output Price Level

(B)
Increase Increase

Output Price Level

(C)
Increase No change

Output Price Level

(D)
No change Increase

Output Price Level

(E)
No change No change

45. An increase in which of the following will increase the value of the spending multiplier?
(A) The supply of money
(B) Equilibrium output
(C) Personal income tax rates
(D) The marginal propensity to consume
(E) The required reserve ratio

46. An increase in the marginal propensity to consume causes an increase in which of the following?

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(A) Marginal propensity to save

(B) Spending multiplier
(C) Savings rate
(D) Exports
(E) Aggregate supply

47. An increase in which of the following will increase aggregate demand?

(A) Taxes
(B) Government spending
(C) The federal funds rate
(D) Reserve requirements
(E) The discount rate

48. A fiscal policy action to reduce inflationary pressure would be to increase which of the following?
(A) The required reserve ratio
(B) The discount rate
(C) Transfer payments
(D) Government spending
(E) Income tax rates

49. If there is an inflationary gap, which of the following changes will move the economy back toward full
employment?
(A) An increase in investment spending
(B) An increase in government spending
(C) An increase in taxes
(D) An increase in exports
(E) An increase in transfer payments

50. Which of the following is a possible limitation of fiscal policy?

(A) It affects only interest-sensitive spending.
(B) Its outcome could be delayed because of implementation lags.
(C) It is more effective during inflationary periods than during recessionary periods.
(D) It is less effective in reducing the natural rate of unemployment than monetary policy.
(E) It does not affect discouraged workers.

51. Recessions will most likely be less severe if tax revenues and transfer payments automatically change in which of
the following ways?

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(A) Tax revenues increase, and transfer payments increase.

(B) Tax revenues decrease, and transfer payments decrease.
(C) Tax revenues increase, and transfer payments decrease.
(D) Tax revenues decrease, and transfer payments increase.
(E) Tax revenues do not change, and transfer payments decrease.

52. A high marginal propensity to consume implies which of the following?

(A) A small change in consumption when income changes
(B) A high savings rate
(C) A high marginal tax rate
(D) An equilibrium level of income near full employment
(E) A low marginal propensity to save

53. If the economy was in a severe recession, the most expansionary fiscal policy would be to
(A) decrease both personal income taxes and government spending by equal amounts
(B) decrease both the reserve requirement and government spending by the same proportion
(C) decrease personal income taxes and increase government spending by equal amounts
(D) increase the money supply and increase government spending by the same proportion
(E) increase social security taxes and increase government spending by equal amounts

54. In an economy with lump-sum taxes and no international trade, if the marginal propensity to consume is 0.8, which
of the following is true?
(A) When consumption increases by $5, investment increases by a maximum of $1.
(B) When consumption increases by $5, savings increase by a maximum of $1.
(C) When investment increases by $1, income increases by a maximum of $5.
(D) When investment increases by $1, consumption increases by a maximum of $5.
(E) When income increases by $1, investment increases by a maximum of $5.

The table below shows the level of household savings at various levels of disposable income in a country.

Disposable
Savings
Income

55. Based on the level of savings and disposable income data in the table above, which of the following must be true?

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(A) The marginal propensity to save is 0.2.

(B) The marginal propensity to save is 0.9.
(C) When disposable income is , consumption is .
(D) The marginal propensity to consume is 0.1.
(E) The marginal propensity to consume is 0.9.

56. Based on the data on savings and disposable income in the table above, what are the income tax multiplier and the
spending multiplier?
(A) The tax multiplier is and the spending multiplier is 0.9.
(B) The tax multiplier is 0.2 and the spending multiplier is .
(C) The tax multiplier is and the spending multiplier is 8.
(D) The tax multiplier is and the spending multiplier is 10.
(E) The tax multiplier is 10 and the spending multiplier is .

57. In a closed economy with lump sum taxes, if the marginal propensity to consume increased from 0.5 to 0.75, the
simple spending multiplier and the marginal propensity to save (MPS) would change min which of the following
ways?

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Multiplier MPS
(A)
Increase Increase

Multiplier MPS
(B)
Increase Decrease

Multiplier MPS
(C)
No change Decrease

Multiplier MPS
(D)
Decrease Increase

Multiplier MPS
(E)
Decrease Decrease

58. In an economy the marginal propensity to consume is 0.90, and gross domestic product (GDP) is $100 billion. If
gross private domestic investment declines by $2 billion, then GDP will
(A) decrease by a maximum of $1.8 billion
(B) decrease by a maximum of $2 billion
(C) decrease by a maximum of $20 billion
(D) increase by a maximum of $1.8 billion
(E) increase by a maximum of $20 billion

59. If the central bank holds interest rates constant, an autonomous decrease of $10 million in investment spending will
most likely result in

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(A) a decrease of exactly $10 million in gross domestic product

(B) a decrease of more than $10 million in gross domestic product
(C) an increase of $10 million in taxes to offset the decrease in investment
(D) an increase of $10 million in aggregate supply to offset the decrease in investment
(E) an increase in the cost of loans for investment purposes

60. Which of the following best explains why equilibrium income will rise by more than $100 in response to a $100
increase in government spending?
(A) Incomes will rise, resulting in a tax decrease.
(B) Incomes will rise, resulting in higher consumption.
(C) The increased spending raises the aggregate price level.
(D) The increased spending increases the money supply, lowering interest rates.
(E) The higher budget deficit reduces investment.

61. Which of the following will happen if the government raises both taxes and spending by $100 million and the
marginal propensity to consume is 0.8?
(A) Aggregate demand will decrease, and real will decrease by a maximum of $500.
(B) Aggregate demand will decrease, and real will decrease by a maximum of $400.
(C) Aggregate demand will increase, and real will increase by a maximum of $100.
(D) Aggregate demand will increase, and real will increase by a maximum of $400.
(E) Aggregate demand will increase, and real will increase by a maximum of $500.

62. If wages are sticky, which of the following policies will be the most effective in raising real gross domestic product
to the full-employment level?
(A) Doing nothing, since there are automatic stabilizers
(B) The sale of bonds by the Federal Reserve
(C) An increase in the income tax
(D) An increase in government spending
(E) An increase in the discount rate

63. If, at full employment, the government wants to increase its spending by $100 billion without increasing inflation in
the short run, it must do which of the following?
(A) Raise taxes by more than $100 billion.
(B) Raise taxes by $100 billion.
(C) Raise taxes by less than $100 billion.
(D) Lower taxes by $100 billion.
(E) Lower taxes by less than $100 billion.

64. In the short run, a restrictive fiscal policy will cause aggregate demand, output, and the price level to change in
which of the following ways?

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Aggregate Demand Output Price Level

(A)
Decrease Decrease Decrease

Aggregate Demand Output Price Level

(B)
Decrease Increase Increase

Aggregate Demand Output Price Level

(C)
Increase Decrease Decrease

Aggregate Demand Output Price Level

(D)
Increase Increase Increase

Aggregate Demand Output Price Level

(E)
Not change Not change Not change

65. If the economy is in a severe recession, which of the following is the fiscal policy most effective in stimulating
production?
(A) Government spending increases.
(B) Government spending decreases.
(C) Personal income taxes are increased.
(D) The Federal Reserve sells bonds on the open market.
(E) The Federal Reserve buys bonds on the open market.

66. An increase in spending in an economy will cause a multiplied increase in gross domestic product because

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(A) government spending is greater than zero

(B) investment is greater than zero
(C) investment increases as income decreases
(D) consumption increases as income increases
(E) taxes increase as income increases

67. If the marginal propensity to consume is , an increase of in government spending will change the real
gross domestic product by a maximum of
(A)
(B)
(C)
(D)
(E)

68. The value of the spending multiplier decreases when

(A) tax rates are reduced
(B) exports decline
(C) imports decline
(D) government spending increases
(E) the marginal propensity to save increases

69. Which of the following will result in the greatest increase in aggregate demand?
(A) A $100 increase in taxes
(B) A $100 decrease in taxes
(C) A $100 increase in government expenditures
(D) A $100 increase in government expenditures, coupled with a $100 increase in taxes
(E) A $100 increase in government expenditures, coupled with a $100 decrease in taxes
Refer to the income and consumption data presented in the table below. Assume a closed economy with no government
and a marginal propensity to consume of 0.80.

70. The marginal propensity to save for this economy is

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(A) 4.0
(B) 1.0
(C) 0.8
(D) 0.2
(E) 0

71. Dissaving occurs when disposable income is

(A) $620
(B) $640
(C) $660
(D) $700
(E) $1,000

72. A decrease in taxes will necessarily result in an increase in which of the following?
(A) Nominal gross domestic product
(B) Unemployment
(C) Exports
(D) Marginal propensity to save
(E) Money supply

73. If a nation’s government cuts income taxes, how will consumption spending, real output, and unemployment change
in the short run?
(A) Consumption spending will increase, real output will increase, and unemployment will decrease.
(B) Consumption spending will increase, real output will decrease, and unemployment will decrease.
(C) Consumption spending will decrease, real output will decrease, and unemployment will increase.
(D) Consumption spending, real output, and unemployment will all decrease.
(E) Consumption spending, real output, and unemployment will all increase.

74. An inflationary gap could be reduced by

(A) an increase in government spending
(B) an increase in the supply of money
(C) an increase in the income tax rate
(D) a decrease in the discount rate
(E) a decrease in the reserve requirement

75. Which of the following is true about the marginal propensity to consume?

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(A) It is the percentage of total income that is spent on consumption.

(B) It determines the size of the simple spending multiplier.
(C) It increases as incomes increase because increases in income cause people to spend more.
(D) It is the same as the money multiplier.
(E) It is equal to the average propensity to consume for people with low incomes.

76. If the marginal propensity to save is ,a billion increase in government spending will lead to an increase in
national income by a maximum of
(A) billion
(B) billion
(C) billion
(D) billion
(E) billion

77. Assume that the marginal propensity to consume is 0.75, net exports decline by $10 billion, and government
spending increases by $20 billion. Given that there is no crowding out, the equilibrium gross domestic product can
increase by a maximum of
(A) $7.5 billion
(B) $15.5 billion
(C) $40 billion
(D) $80 billion
(E) $120 billion

78. An economy is currently producing billion of output. The full-employment output is billion, and the
marginal propensity to consume is . Assuming no crowding out and a horizontal aggregate supply curve, what
level of additional spending is necessary to achieve full employment?
(A) billion
(B) billion
(C) billion
(D) billion
(E) billion

79. Which of the following can be expected to cause an increase in gross domestic product in the short run?
(A) An increase in the tax rate
(B) An increase in the interest rate
(C) Equal increases in both imports and exports
(D) Equal increases in both taxes and government expenditures
(E) Equal decreases in both investment and government expenditures

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