AP Macroeconomics Unit 3: National Income and Price Determination practice questions

Question 1

In micro, you have supply and demand for one good. What’s the macro equivalent that measures total spending across the ENTIRE economy?

Accepted Answer

Aggregate Demand (AD) — total spending at each price level. It's C + I + G + Xn summed across every possible price level.

Answer

Aggregate Supply — it measures total spending by consumers

Answer

GDP — it’s the same thing as AD

Answer

The Phillips Curve — it shows total spending vs unemployment

Question 2

Consumer confidence surges, businesses invest in new equipment, and Congress passes a spending bill. What do all three have in common in the AD-AS model?

Accepted Answer

All three shift AD right — more C, I, and G boost spending. More consumer spending, investment, and government purchases all increase total spending.

Answer

They all shift SRAS right because they increase production

Answer

Only the government spending shifts AD — the others shift SRAS

Answer

They shift AD left because more spending causes inflation

Question 3

The U.S. dollar appreciates (gets stronger) against other currencies. What happens to AD?

Accepted Answer

AD shifts left because a stronger dollar reduces U.S. net exports (Xn). Exports get pricier abroad, imports get cheaper, so Xn falls and AD drops.

Answer

AD shifts right because a stronger dollar means Americans are wealthier

Answer

AD doesn't change because currency values don't affect domestic spending

Answer

AD shifts right because cheaper imports mean consumers spend less

Question 4

What is the spending multiplier, and how do you calculate it?

Accepted Answer

Spending multiplier = 1 / MPS. That's 1/(1−MPC); if MPC is 0.8 it equals 5, showing how GDP changes from an initial spending change.

Answer

Spending multiplier = MPC / MPS

Answer

Spending multiplier = 1 / MPC

Answer

Spending multiplier = MPC × GDP

Question 5

How is the tax multiplier different from the spending multiplier?

Accepted Answer

The tax multiplier is weaker by exactly 1. Tax multiplier = −MPC / MPS, or equivalently: −(spending multiplier − 1). If the spending multiplier is 5, the tax multiplier is −4.

Answer

The tax multiplier is larger because tax cuts affect everyone

Answer

The tax multiplier equals the spending multiplier — both have the same impact

Answer

The tax multiplier = 1 / MPC

Question 6

There's a $50 billion recessionary gap. MPC = 0.75. How much should the government SPEND to close it? How much should it CUT TAXES to close it?

Accepted Answer

Spend $12.5B (multiplier 4); cut taxes $16.67B (tax multiplier 3). Gap ÷ multiplier: $50B/4 spending or $50B/3 tax cuts — tax cuts cost more from savings leakage.

Answer

$50B in spending and $50B in tax cuts — the gap equals the solution

Answer

$12.5B in spending and $12.5B in tax cuts — same multiplier for both

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$200B in spending — multiply the gap by the multiplier

Question 7

Prices rise 10% but your boss says ‘no raises this year.’ Why would your company actually produce MORE in this situation?

Accepted Answer

SRAS shows total output produced at each price level in the short run. It slopes upward because when the price level rises but wages/input costs haven't adjusted yet, firms earn higher profits and produce more.

Answer

SRAS slopes upward because higher prices always mean more demand

Answer

SRAS is vertical because output can't change in the short run

Answer

SRAS slopes upward because workers demand higher wages when prices rise

Question 8

Workers negotiate higher wages across the economy. What happens to SRAS and LRAS?

Accepted Answer

SRAS shifts left (higher production costs → firms produce less at every price level). LRAS does NOT change — the economy still has the same number of workers and resources.

Answer

Both SRAS and LRAS shift left because the economy is less productive

Answer

SRAS shifts right because workers spend more with higher wages

Answer

LRAS shifts left because higher wages reduce the economy's potential output

AP Macroeconomics — Unit 3: National Income and Price Determination

What AP Macroeconomics Unit 3 covers

AP Macroeconomics Unit 3 practice questions

Key terms in Unit 3

Drill all of Unit 3 with spaced repetition