Download Practice Problems for AD/AS, Fiscal Policy, and Monetary Policy

Mr. Leader
AP ECON
Practice Problems for AD/AS, Fiscal Policy, and Monetary Policy
1. For each of the following events, determine whether the aggregate demand curve or
the short run aggregate supply curve will shift. Show the shift on a graph and explain
what happens to equilibrium price level and equilibrium RGDP because of the shift.
A.) A stock market boom makes people wealthier.
B.) A recession overseas causes foreigners to buy fewer US goods.
C.) Oil prices rise.
D.) The government implements several new programs thereby increasing its
spending.
E.) A technological improvement raises productivity.
F.) The government puts into law a new tax plan that increases corporate income
taxes
G.) The Fed decreases the discount rate and interest rates fall.
H.) The government passes a law increasing tax deductions for the average
American.
I.) The government increases defense spending and approves a stimulus package
to aid businesses.
J.) The government dramatically increases taxes and crowds out the ability of
many consumers and producers to spend,
2. Consider your answers in number 2. For each scenario in which AD shifted, tell if the
shift occurred because of changes in C, I, G, (X-M).
(Text Pages 190-196)
3. Assume that the US economy is in recession. Using an AD/AS graph explain the
situation the US economy is facing (i.e., a recession) (hint would you more likely have a
deflationary or an inflationary gap in a recession?) and then explain how fiscal policy can
fix the problem. Be sure to show the result of the fiscal policy graphically. (Hint: You
won’t have any actual numbers here. Show where the economy is currently operating
and where we (policymakers and citizens of the US) would like for it to be operating and
then show where we should end up if the stimulus package (fiscal policy) works
correctly.)
4. Using an AD/AS graph, depict an inflationary gap. What are the two fiscal policy
options that the government has to correct an inflationary gap? What are the policy
options for fixing the inflationary gap with monetary policy? Of the three monetary
policy options, which of the 3 is most likely to be used? Are these fiscal and monetary
policies expansionary or contractionary policies? Show the where we would end up if the
monetary of fiscal tools work.