Download Unit 5 - Multiple Choice Test Review

Unit 5
AP Eco
Test
Review
• Explain the theory of rational
expectations.
• People optimally use all available
information when forecasting the future
• For the U.S. economy, which of the
theories is the most important reason for
the downward slope of the aggregatedemand curve?
• Investment is the biggest influence on our
economy, so it’s the Interest Rate Effect
• If NASA receives an increase in funding, how
does this affect the economy?
• More jobs, those workers spend money, the
stores where they spend money make more
profits, i.e. the Multiplier Effect
• If the Fed conducts monetary policy, what
happens to the money supply and aggregate
demand?
• An expansionary policy would increase the
money supply and aggregate demand would
increase. A contractionary monetary policy
would decrease the money supply and
aggregate demand would decrease.
• If the government raises government
expenditures, what happens to the economy?
• Unemployment should decrease and inflation
should rise in the short-run
• If the stock market booms, what will happen to
aggregate demand? What could the Fed do to
offset this?
• Aggregate demand should increase because
people feel confident about the future. This
could lead to inflation, so the fed could
decrease the money supply to offset this.
• What are the tools of fiscal policy?
• Changing taxes and government
spending
• What did the restrictive monetary policy
followed by the Fed in the early 1980s do
to the economy?
• It decreased inflation, but it increased
unemployment and sent the U.S. into a
recession
• What do we mean by the term automatic
stabilizer? What are some examples?
• Something built into the economy that
kicks in automatically (or without an
additional law being passed) to help keep
the economy stable when it slows down
or when it speeds up. Examples are
things like unemployment compensation,
graduated income tax, food stamps,
welfare.
• What happens in the economy if we have
an increase in the interest rate?
• Investment will decrease, and this will
hurt long-term growth.
• What is an adverse supply shock? What
problem does it create?
• Something that would make aggregate
supply decrease (natural disaster, OPEC),
and it creates stagflation
• What is the crowding-out effect?
• The government has to borrow money to
fund it’s deficit spending, this causes
interest rates to rise, this causes
investment to decrease, so the economy
doesn’t expand by as much as it normally
would.
• What is the misery index?
• When you add the inflation rate and the
unemployment rate
• What is the relationship between
unemployment and inflation? What graph
illustrates this concept?
• In the short-run, they have an inverse
relationship. This is illustrated by the
Phillip’s Curve.
• What is the sacrifice ratio, and how is it
calculated?
• It’s how much output you lose when you
reduce inflation. You divide the difference
in output by the difference in the inflation
rate.
• What is the shape of the money supply
curve?
• It’s a vertical line because the money
supply is controlled by the Fed.
• What will a favorable supply shock do to
the Phillips curve, price, output and
employment?
• It would increase aggregate supply, so the
Phillips curve would move to the left.
This would also make prices go down,
output go up and employment go up.
• When the price level falls, what happens to the
interest rate? Why?
• The normal reason for the price level to fall
would be because the economy is slowing
down. If the economy is slowing down, then
people would not demand as much money. If
they are NOT demanding as much money, then
interest rates would drop.
• Know how to draw and change an AD/AS graph,
Money Market graph, Loanable Funds graph,
PPC and Philip’s Curve.