AP EXAM: Unit 5

Question 1

Are monetary/fiscal policy demand-side or supply side?

Answer 1

Demand side- shifts AD

Question 2

What constrains an economy in the long run?

Answer 2

Available factors of production

Question 3

What are demand side policies effective and ineffective at?

Answer 3

Effective at closing output gaps, but not at achieving long run economic growth

Question 4

How does the LRAS shift?

Answer 4

Changes in an economy’s long run output are made possible through the factors that create economic growth

Question 5

What does the SRPC illustrate?

Answer 5

Trade off between unemployment and inflation in the short run

Question 6

Where is the LRPC vertical?

Answer 6

At the NRU

Question 7

When does the NRU shift?

Answer 7

Changes made to structural/frictional unemployment

Question 8

What’s the result of AD shifting faster than SRAS?

Answer 8

Increase in inflation over time

Question 9

How is economic growth facilitated?

Answer 9

Increases in the quantity or quality of factors of production (land, labor, capital)

Question 10

Why can monetary growth never equal economic growth?

Answer 10

Supplying more money to an economy facilitates more transactions, but doesn’t CREATE transactions

Question 11

What does the growth rate of the money supply determine, according to the quantity theory of money?

Answer 11

The growth rate of the price level

Question 12

Monetary equation of exchange

Answer 12

MV = PQ

Question 13

How are bond markets affected by deficit spending?

Answer 13

More bonds must be issued to investors who lent money

Question 14

What are the economic consequences of crowding out?

Answer 14

The expansionary effect of a fiscal stimulus will be smaller than expected, long run economic growth is hurt (less capital accumulation)

Question 15

Define economic growth.

Answer 15

An increase in an economy’s actual and potential output over time.

Question 16

GDP growth rate

Answer 16

GDP in year 2 - GDP in year 1 / GDP in year 1 x 100

Question 17

Consequences of economic growth

Answer 17

1. More jobs
2. Higher living standards
3. Higher income

Question 18

What is the economic theory of aggregate production function?

Answer 18

A country’s rate of economic growth is a function of the allocation of the factors of production, including labor, capital, land, and technology

Question 19

Define productivity in an economy.

Answer 19

The amount of output attributable to a single unit of input

Question 20

Difference between forms of economic growth

Answer 20

Economic growth (increases in labor) and economic growth (increase in quality of human capital) will both lead to total output increase, but the latter will be the only one to lead to higher per capita GDP

Question 21

What models show long run economic growth?

Answer 21

1. PPC
2. Business cycle
3. AD/AS

Question 22

Goals of supply side policies

Answer 22

Increasing productivity, labor force participation, infrastructure or tech in an economy, and increasing AS

Question 23

What supply side policies achieve

Answer 23

Increased productivity, reduced production costs (shifts SRAS and LRAS)

Question 24

Ways supply side policies impact aggregate supply positively

Answer 24

1. Reduced costs of doing business
2. More household incentive to work

Question 25

Supply side labor market reforms

Answer 25

1. Reducing/eliminating the minimum wage
2. Weakening labor union power
3. Reducing gov’t spending

Question 26

Benefits of trade liberalization

Answer 26

Provide a country’s producers access to imported raw material and other factors of production

Question 27

Government investments in the economy

Answer 27

1. Public resources
2. Public education
3. Increased tax revenue