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AP MACRO: Unit 4 Study Guide Spring 2022 MULTIPLE CHOICE (30 questions, 2 points each) Focus Areas: 1. What happens to YE and PLs if there is an equal tax cut and spending cut? 2. How would a change in income transfers effect rGDP? 3. How would an overcorrection in expansionary policy for a recessionary gap affect the economy in the long run? 4. Contrast the impact of an equal tax hike and increase in government spending on equilibrium GDP. 5. What fiscal policy actions would be most effective in combating a recession? To fight inflation? 6. What is the cyclical deficit? The structural deficit? 7. What is the true burden of the national debt? 8. Given a recessionary or inflationary gap and an MPC or MPS, calculate the appropriate change in government spending to close the gap. 9. Given a recessionary or inflationary gap and an MPC or MPS, calculate the appropriate change in taxes or transfers to close the gap. 10. Define automatic stabilizers. How do they alter the cyclical deficit? 11. How do economists expect budget deficits will change over the course of the business cycle? 12. Why do changes in G have a different effect than an equal change in taxes? 13-15. Given a graph showing various phases in the macro model (IG, equilibrium, RG), identify how the model will change in response to various policy choices. 16-17. Using the loanable funds market, explain how changes in the supply or demand for loanable funds alter real interest rates. 18. How does the rate of return (ROR) alter businesses’ willingness to proceed with investment spending? Unit 4 Assessment—Short Answer (30 points) 1. Use the graph at left to answer the questions below: a. Is the economy depicted experiencing a recessionary or inflationary gap? Explain. b. Identify all the fiscal policy options available to the government in the situation above. Fully explain how each tool be would used. c. Suppose the fiscal policy described in part (b) is implemented by the government. How will this affect the graph above, the level of rGDP, price level and the unemployment rate? 2. How does each of the following affect the loanable fund market? Which curve will shift and how will real interest rates change? a. Firms are optimistic about investment opportunities. b. Foreign investors decrease capital flows into the economy. c. Households increase the rate of savings. d. The government decreases borrowing. 3. Fully explain the concept of crowding out. In your response, consider the following points. a. Define crowding out. b. Explain how opportunity cost relates to crowding out. c. Explain how interest rates relate to crowding out. d. What is the long run of result of crowding out for the economy? e. Include fully labeled graphs of the production possibilities curve and loanable funds market to support your response. APPLICATION (10 points) The Unit 4 application will look the same as the practice problems completed for stimulus and restraint in class.