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Aggregate Models Flashcards

7 cards from real AP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. If the MPC is 0.75, what is the value of the simple spending multiplier?

    Answer: 4

    The multiplier = 1/(1-MPC) = 1/(1-0.75) = 1/0.25 = 4.

  2. In the AD-AS model, which of the following best explains why the AD curve slopes downward?

    Answer: Higher price levels reduce real wealth, raise interest rates, and make exports less competitive

    The downward slope of AD reflects the wealth effect, interest rate effect, and net export effect — all of which reduce spending when the price level rises.

  3. The 'crowding out' effect of expansionary fiscal policy refers to:

    Answer: Higher interest rates caused by government borrowing reducing private investment

    When government borrows to finance spending it competes for loanable funds, driving up interest rates and reducing private sector investment.

  4. According to the Classical model, if wages and prices are perfectly flexible, a recessionary gap will:

    Answer: Automatically self-correct as falling wages shift SRAS rightward

    Classical economists believe that wage and price flexibility will automatically restore full employment as lower wages reduce costs and shift SRAS right.

  5. Which of the following correctly describes the difference between the short-run and long-run aggregate supply curves?

    Answer: SRAS is upward sloping because input prices are sticky; LRAS is vertical at potential GDP

    SRAS slopes upward because wages and input prices are sticky in the short run, while LRAS is vertical because all prices adjust fully in the long run.

  6. An economy experiences a simultaneous decrease in AD and SRAS. What is the certain outcome?

    Answer: Real GDP falls and the price level is indeterminate

    Both shifts reduce real GDP, so output certainly falls; but AD falling lowers prices while SRAS falling raises them, leaving the net price level effect ambiguous.

  7. In the Keynesian model, autonomous consumption refers to:

    Answer: Spending that occurs even when disposable income is zero

    Autonomous consumption is the baseline level of consumption that exists regardless of income, often financed by dissaving or borrowing.