Download Name - My CCSD

1. ____/20
2. ____/8
3. ____/4
4. ____/12
FRQ #1 ____/10
FRQ #2 ____/5
Name: _______________________
Total: ______/59
AP Macroeconomics Problem Set #3
Aggregate Demand, Aggregate Supply, and Fiscal Policy
1. Aggregate Demand and Aggregate Supply ( ____/20)
a. Define and give examples of the shifters (4) of aggregate demand. ( ____/8)
b.
Define and give examples of the shifters (4) of aggregate supply. ( ____/8)
c.
Explain the difference between sticky wages and prices vs. flexible wages and prices. ( ____/1)
d.
Graph the following curves (on the same graph): AD, SRAS, and LRAS. Make sure to correctly
label the axes. ( ____/3)
2. Key Concepts ( ____/8)
Define and explain each concept and give specific examples:
a. The Multiplier Effect and Spending Multiplier ( ____/4)
b.
Crowding Out ( ____/2)
c.
A Built-in Stabilizer ( ____/2)
3. Macroeconomic Equilibrium ( _____/4)
What causes each of the following?
a. An increase in AD? ( ____/1)
b.
A decrease in AD? ( ____/1)
c.
An increase in AS? ( ____/1)
d.
A decrease in AS? ( ____/1)
4. Fiscal Policy ( ____/12 Points)
a. Explain the difference between expansionary and contractionary fiscal policies. Explain their goals
and give specific examples. ( ____/6)
b. To support your answer in part a, draw a recessionary gap and an inflationary gap. Draw and explain
how fiscal policies are used to close each gap. ( ____/6)
5. Practice Free Response Questions
FRQ #1: (____/10)
1. Assume that the economy is operating below full-employment level of output and that the government’s
budget is balanced.
(a) Using a correctly labeled aggregate demand and aggregate supply graph, show how an increase in
government spending will affect each of the following in the short run (+1)
(i) Real Output (+1/Shared with part ii; all or nothing)
(ii) Price Level
(b) Explain how this increase in government spending will affect each of the following in the short run.
(i) Real interest rates (+1)
(ii) Investment (+1)
Now assume that instead of increasing government spending, the government decreases corporate-profits
taxes.
(c) Using a correctly labeled aggregate demand and aggregate supply graph show and explain how this
decrease in corporate-profits taxes will affect each of the following. (+1 – Includes two graphs and an
explanation)
(i) Aggregate Demand (+1)
(ii) Long-run aggregate supply (+1)
(iii) Real Output (+1)
(iv) Price Level (+1)
(d) Assume that this country produces two goods, X and Y. Draw a correctly labeled production possibilities
curve for this economy. Now show on the graph how this decrease in corporate-profits taxes will affect this
economy’s production possibilities curve. (+1)
FRQ #2: ( ____/5)
Explain how each of the following will affect long-run aggregate supply (potential real gross domestic
product).
(a) A decrease in the labor force participation rate. (+1 – two things will happen; you need both)
(b) An increase in the government deficit following a reduction in personal income taxes. (+1)
(c) A decrease in the quantity of inputs required to produce a unit of output (+1 – two things will happen;
you need both)
(d) An increase in the quantity and quality of education. (+1 – two things will happen; you need both)
(e) An increase in the rate of savings. (+1 – two things will happen; you need both)