AP Macroeconomics — Unit 5: Long-Run Consequences of Stabilization Policies

What AP Macroeconomics Unit 5 covers

The College Board Course and Exam Description breaks Unit 5 into 6 topics:

1. 5.1 Fiscal and Monetary Policy Actions in the Short Run
2. 5.2 The Phillips Curve
3. 5.3 Money Growth and Inflation
4. 5.4 Government Deficits and the National Debt
5. 5.5 Crowding Out
6. 5.6 Economic Growth

AP Macroeconomics Unit 5 practice questions

• The economy is in a recessionary gap. If the government increases spending AND the Fed buys bonds at the same time, what happens to output, the price level, and interest rates?

  Both are expansionary → AD shifts right → output rises, price level rises. Government spending alone would raise interest rates (more borrowing), but the Fed buying bonds pushes rates down. Net effect on interest rates depends on which policy is stronger.

• The government cuts taxes (expansionary fiscal) while the Fed sells bonds (contractionary monetary). What is the effect on output and interest rates?

  Output indeterminate; rates definitely rise. Fiscal pushes AD right, monetary left (output unclear); both push rates up.

• What's the general rule for combined policy questions on the AP exam: when is a variable 'indeterminate'?

  A variable is indeterminate when the policies push it opposite ways. Same-direction policies make output definite, rates indeterminate; opposite directions flip that.

• As unemployment drops during an expansion, inflation tends to creep up. What curve captures this short-run tradeoff — and which direction does it slope?

  The SRPC shows the short-run trade-off between inflation and unemployment. It slopes downward: when unemployment falls, inflation rises, and vice versa.

• The government keeps pumping money into the economy trying to hold unemployment below 4%. In the short run it works. Why doesn’t it work in the long run?

  The LRPC is vertical at the natural rate (NRU). Long run, there's no inflation-unemployment trade-off; the economy returns to the NRU.

• Where is long-run equilibrium on a Phillips curve graph?

  Long-run equilibrium is where the SRPC intersects the LRPC. At this point, actual inflation equals expected inflation, and unemployment is at the natural rate.

• On a Phillips curve graph, the economy is at a point to the RIGHT of the LRPC. What type of gap is this, and what's happening?

  Recessionary gap — unemployment is above the natural rate. Right of the LRPC means high unemployment and lower inflation — a recessionary gap in AD/AS.

• The government increases spending (demand shock). What happens on the Phillips curve graph?

  Movement ALONG the SRPC — up and to the left. Unemployment falls and inflation rises. Demand shocks cause movement along the existing SRPC, not a shift.

+ 22 more AP Macroeconomics cards in the app.

Key terms in Unit 5

These 12 terms show up in the Unit 5 cards. Each one links to its definition in the AP Macroeconomics key-term reference.

• crowding out
• equilibrium
• fiscal policy
• full employment
• indeterminate
• loanable funds market
• monetary policy
• money supply
• natural rate of unemployment
• opportunity cost
• Phillips curve
• structural unemployment