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AP Macroeconomics
MODULE 19 REVIEW
Check Your Understanding
1. Describe the short-run effects of each of the following shocks on the aggregate price level and on aggregate output.
a. The government sharply increases the minimum wage, raising the wages of many workers
b. Solar energy firms launch a major program of investment spending
c. Congress raises taxes and cuts spending
d. Severe weather destroys crops around the world
2. A rise in productivity increases potential output, but some worry that demand for the additional output will be
insufficient even in the long run. How would you respond?
Tackle the Test: Multiple-Choice Questions
1. Which of the following causes a negative supply shock?
I. a technological advance
II. increasing productivity
III. an increase in oil prices
a. I only
b. II only
c. III only
d. I and III only
e. I, II and III
2. Which of the following causes a positive demand shock?
a. an increase in wealth
b. pessimistic consumer expectations
c. a decrease in government spending
d. an increase in taxes
e. an increase in the existing stock of capital
3. During stagflation, what happens to the aggregate price level and real GDP?
For 4 and 5, refer to the graph below.
4. Which of the following statements is true if this economy is operating at P1 and Y1?
I. The level of aggregate output equals potential output.
II. It is in short-run macroeconomic equilibrium.
III. It is in long-run macroeconomic equilibrium.
a. I only
b. II only
c. III only
d. II and III only
e. I and III only
5. The economy depicted in the graph is experiencing a(n)
a. contractionary gap.
b. recessionary gap.
c. inflationary gap.
d. demand gap.
e. supply gap.
Tackle the Test: Free-Response Questions (answer on loose leaf)
1. Refer to the graph.
a.
Is the economy in short-run macroeconomic equilibrium? Explain.
b. Is the economy in long-run macroeconomic equilibrium? Explain.
c. What type of gap exists in this economy?
d. Calculate the size of the output gap.
e. What will happen to the size of the output gap in the long run?
2. Draw a correctly labeled aggregate demand and aggregate supply graph illustrating an economy in long-run
macroeconomic equilibrium.