Part 4/Unit V 495
2003- identify expansionary OMO and shows SR effects on AS/AD price levels and
output as well as interest rates
2004, impact of federal deficit on loanable fund markets and impact on real interest rate
with economic growth and the foreign exchange market.
2005, impact on the money market graph (demand and MS) given sales of market stocks;
explain linkage to foreign exchange market and AS/AD product markets
2006B, graph loanable fund market given a changes in savings rate of consumers and
impact on real interest rates; explain impact on LRAS; explains impact on the MS given a
new DD; explains leakages within the banking system and impact on loans and new MS
created; explains impact on MS and MD with an increase in government spending
I. Teach Inflation
Recommended sequence of instruction for inflation Teach policy concepts in this sequence
Chapter 15
Stabilization Policy, Output and Employment
1. ECONOMIC FLUNCTUATIONS THE PAST 100 YEARS, P. 296
2. CAN DISCRETIONARY POLIYC PROMOTE ECONOMIC STABILITY, P. 297
Define the consensus goals of economists studying macroeconomic policy
Activist view
Non-activist view
496 Part 4/Unit V
3. FORECASTING TOOLS AND MACRO POLICY, P. 298
4. HOW ARE EXPECTATONS FORMED? P. 300
5. MACRO POLICY IMPLICATIONS OF ADAPTIVE AND RATIONAL
EXPECTATIONS, P. 302
Using the AS/AD model, show expansionary policies, using adaptive expectations and rational
expectations.
6. THE PHILLIPS CURVE: THE VIEW OF THE 1960S VERSUS TODAY., P. 303
Define and model the use of the Phillips Curve analysis to explain expansionary and restrictive
policies
Define and show short run Phillips curve
o Using a SR Phillips Curve Analysis, describe the short run trade off of inflation
and unemployment
Compare and contrast the tradeoffs using the Phillips curve analysis with trade-offs with that of
using the AS/AD model
7. WHAT HAVE WE LEARNED ABOUT MACRO POLICY? , P. 307
Summarize the major agreements and disagreements concerning macro policy
III. Assess Inflation & Unemployment Suggestions for determining what and how much
students have learned concerning inflation and unemployment policy
Key conceptual questions related to inflation: Students demonstrate their understanding of
the material by answering the following key conceptual questions
Part 4/Unit V 497
1. How do economists measure inflation?
2. What causes (and does not cause) inflation?
3. What is the tradeoff between unemployment and inflation?
4. What is the role of expectations in accelerating (or decelerating) inflation?
5. What are the causes of inflation?
6. What models can be used to describe and prescribe for inflation?
7. What policies best combat inflation?
8. How are inflation and unemployment related?
9. What are the effects of an accelerating inflation?
10. What has been the U.S. experience since 1980?
PRACTICE COURSEBOOK, Chapter 15, Problems & Projects: The following exercises are
representative of the type of task that students will be expected to analyze on the AP* Macro
examination
1-Calculte of rate of inflation and real interest rates, given novel data.
2- Using an AS/AD model in a variety of economic situations , identify actual short run
Past Objective AP* Test: Based upon released objective examinations, the students have been
required to demonstrate the following content related to inflation policy
understand the Phillips Curve model and what model illustrates
recognize tradeoffs within the Phillips Curve model
recognize assumptions of rational expectations
recognize event that will cause lower inflation and lower unemployment (related to long
Past Free Response AP* Questions: Based upon released free response questions, the students
have been required to demonstrate the following content related to inflation policy
2003, explain effects of unanticipated inflation on fixed savings; loans; use fiscal and
monetary policies to correct inflation; explain affects of inflation affect nominal interest rates
and, as a consequence, international value of currencies.
2003B, draw and label short run and long run Phillips curve; show how government spending
and inflationary expectations change positions on the SR Phillips Curve.
498 Part 4/Unit V
2003, know effects of unanticipated inflation on fixed savings; loans; fiscal and monetary
policies to correct inflation; explain effects of inflation on nominal interest rates and, as a
consequence, on international value of currencies.
2003B, Draw and label short run and long run Phillips Curve; show how government spending
I. Teach long run growth
Recommended sequence of instruction for long run growth Teach growth concepts in this
sequence
Chapter 16
Creating an Environment for Growth and Prosperity
1. ECONOMIC GROWTH, PRODUCTION POSSIBILITIES, AND THE QUALITY OF LIFE,
P. 318
2. KEY SOURCES OF ECONOMIC GROWTH AND HIGH INCOMES, P. 320
Review the concept of potential output (LRAS) and of increasing production possibility frontiers.
Explain the concept of economic growth
Explain the rule of ’70
3. WHAT INSTITUTIONS AND POLICIES WILL PROMOTE GROWTH? P. 323
Part 4/Unit V 499
Chapter 17
Institutions, Policies, and Cross Differences in Income and Growth
1. HOW LARGE ARE THE INCOME DIFFERENCES ACROSS COUNTRIES? P. 335
2. HOW DO GROWTH RATES VARY ACROSS COUNTRIES ES?, P.336
3. INSTITUTIONS, POLICIES, AND ECONOMIC PERFORMANCE, P. 339
4. ECONOMIC FREEDOM, INSTITUTIONS, AND INVESTMENT, PP. 341
5. ORGINS OF INSTITUTIONS, P. 343
6. THE DECLINING ECONOMIC FREEDOM OF THE UNITED STATES, P. 346
7. RICH AND POOR NATIONS REVISITED, P. 348
8. ECONOMIC RULES AND POLITICAL DECISIONMAKING, P. 348
Identify sources of economic growth and theories of economic growth
Describe policies that have the greatest likelihood of promoting economic growth
III. Assess Growth & Policy Suggestions for determining what and how much students have
learned related to growth
Key conceptual questions related to growth: Students demonstrate their understanding of the
material by answering the following key conceptual questions
1. What is economic growth?
2. What factors can result in economic growth?
3. What government policies can be used to stimulate economic growth
4. How can long run economic growth occur?
5. What are the sources of economic growth?
6. What policies promote economic growth?
7. Show long run growth and effects on the following
Past Objective AP* Test: Based upon released objective examinations, the students have been
required to demonstrate the following content related to this unit of instruction.
Illustrate how growth with a production possibilities curve
predict the long run changes in AS/AD model, given a novel graph of AS/AD
understand factors that increase the LR growth rate of an economy
recognize polices that would encourage long run economic growth
500 Part 4/Unit V
Past Free Response AP* Questions: Based upon released free response questions, the students
have been required to demonstrate the following content related to growth policy
1998, apply production possibilities to long run economic growth
2000, use PPF to show LR effects of an increase in investment
2001 use PPF to show effects of an increase in LRAS as a result of a government policy
Sample Multiple-Choice Questions for Macro Unit V
1. When an economy is operating well below its full-employment capacity and the marginal
propensity to consume is 3/4, a $10 billion increase in autonomous investment will cause the
equilibrium income to rise by
(A) $5 billion.
(B) $10 billion.
(C) $20 billion.
(D) $30 billion.
(E) $40 billion.
2. When the federal government is running a budget deficit,
(A) government revenues exceed government expenditures.
(B) government expenditures exceed government revenues.
(C) the economy must be in an economic recession.
(D) the size of the national debt will decline.
(E) the Fed must be buying bonds.
Part 4/Unit V 501
3. Which of the following will be most likely to dampen the expansionary effects of an increase
in government spending financed by borrowing?
(A) The resulting budget deficit will cause business decision makers to become more
optimistic.
(B) The resulting budget surplus will cause business decision makers to become more
optimistic.
(C) The increase in demand for loanable funds as the result of the additional borrowing will
cause interest rates to rise and private investment to fall.
(D) The increase in government spending will cause the money supply to expand, thereby
causing an inflationary boom.
(E) The additional borrowing will cause the central bank to buy more bonds, which will
reduce aggregate demand.
4. Which of the following is an example of an automatic stabilizer?
(A) Congress legislates lower tax rates to increase consumption and investment.
(B) Tax rates are increased during a recession to maintain a balanced budget.
(C) A regressive income tax system reduces tax revenues (as a share of income) as income
expands.
(D) A flat tax smoothes out the business cycle.
(E) Revenues from the corporate income tax increase sharply during a business boom but
decline substantially during a recession, even though no new tax legislation has been
enacted.
5. When an economy dips into recession, automatic stabilizers will tend to
(A) ensure that the budget remains in balance.
(B) stimulate aggregate demand by expanding the supply of money.
(C) enlarge the budget deficit (or reduce the surplus).
(D) reduce the budget deficit (or increase the surplus).
(E) keep the budget in balance but speed up long-run economic growth.
6. A supply-side economist would stress which of the following attributes of fiscal policy?
(A) the impact of marginal tax rates on the supply and productivity of resources
(B) the impact of government spending on aggregate demand, output, and employment
(C) the impact of budget deficits on interest rates and aggregate demand
(D) the impact of budget deficits on the rate of taxation in the future
(E) the impact of tax changes on aggregate demand
7. The crowding-in effect suggests that,
(A) a budget deficit will be highly effective against inflation.
(B) expansionary fiscal policy will be a highly effective weapon for fighting a recession.
(C) a budget deficit is likely to stimulate aggregate demand and cause inflation.
(D) a budget surplus will decrease real interest rates and thereby expand private spending.
(E) a budget deficit will increase real interest rates and thereby stimulate private spending.
502 Part 4/Unit V
8. In a world where capital moves rapidly across national boundaries, if a larger budget deficit
leads to higher real interest rates,
(A) there will be an inflow of foreign capital, which will cause the dollar to appreciate and
net exports to decline.
(B) there will be an outflow of foreign capital, which will cause the dollar to depreciate and
net exports to increase.
(C) there will be an inflow of foreign capital, which will cause the dollar to depreciate and
net exports to increase.
(D) there will be an outflow of foreign capital, which will cause the dollar to appreciate and
net exports to decline.
(E) there will be an inflow of foreign capital, which will cause the dollar to appreciate and
net exports to increase.
9. If the marginal propensity to consume (MPC) is 0.6, what is the expenditure multiplier?
(A) 0.4
(B) 0.6
(C) 2.5
(D) 4.0
(E) 6.0
10. Most economists would agree with which of the following?
(A) The self-corrective mechanism of a market economy works quickly.
(B) Macro policy should seek to minimize economic fluctuations, keep the inflation rate
low, and establish an environment consistent with strong economic growth.
(C) Discretionary monetary policy can be used successfully to speed the adjustment process
and reduce the swings of the business cycle.
(D) Discretionary fiscal policy can be used successfully to speed the adjustment process and
reduce the swings of the business cycle.
(E) Policies that stimulate aggregate demand can reduce the long-term rate of
unemployment.
11. The Phillips curve illustrates the relationship between
(A) change in the money supply and change in unemployment.
(B) tax rates and tax revenues.
(C) the equilibrium level of income and the employment rate.
(D) inflation and unemployment.
(E) fiscal policy and monetary policy.
12. Which of the following is most likely to cause a rightward shift in the Phillips curve?
(A) expansionary fiscal policy
(B) expansionary monetary policy
(C) an increase in aggregate demand
(D) an increase in aggregate supply
(E) an increase in the expected rate of inflation
Part 4/Unit V 503
13. When graphed, the long-run Phillips curve is most likely to be
(A) an upward-sloping line.
(B) a downward-sloping line.
(C) a bowed line that is concave to the origin.
(D) a bowed line that is convex to the origin.
(E) a vertical line.
14. When the federal government stimulates the economy through expansionary fiscal policy,
(A) real interest rates are likely to rise due to an increased demand in the loanable funds
market.
(B) real interest rates are likely to rise due to an increased supply in the loanable funds
market.
(C) real interest rates are likely to be indeterminate due to an increased demand and an
increased supply in the loanable funds market.
(D) real interest rates are likely to fall due to a decreased demand in the loanable funds
market.
(E) real interest rates are likely to fall due to a decreased supply in the loanable funds
market.
15. When per capita real GDP is increasing, real output is growing
(A) more rapidly than prices.
(B) more rapidly than population.
(C) less rapidly than prices.
(D) less rapidly than population.
(E) less rapidly than unemployment.
16. In a country that is experiencing economic growth at 7 percent per year, per capita income will
double in approximately
(A) seven years.
(B) ten years.
(C) fourteen years.
(D) twenty-one years.
(E) seventy years.
17. Which of the following is most likely to be a major source of long-term growth in per capita
GDP?
(A) a high investment/GDP ratio
(B) a high rate of inflation
(C) rapid population growth
(D) rapid growth in the money supply
(E) high marginal tax rates
504 Part 4/Unit V
18. Which of the following is true?
(A) Nations achieve high rates of economic growth primarily because of their natural
resource endowments.
(B) Human and physical capital investments exert little or no impact on economic growth.
(C) Poor nations grow slowly because they do not have access to modern technology.
(D) A favorable institutional environment will tend to attract more investment in human and
physical capital.
(E) Nations achieve high rates of economic growth primarily when they exercise
expansionary fiscal and monetary policies.
19. Which of the following would be most likely to encourage capital formation?
(A) the expectation of sustained high inflation
(B) the expectation that property rights will be highly secure in the years ahead
(C) the imposition of high tariffs and other restraints limiting imports
(D) higher personal and corporate tax rates
(E) high levels of government expenditures and extensive regulation of labor markets
20. Which of the following indicates that long-term economic growth has occurred?
(A) a rightward shift of the aggregate demand curve
(B) a leftward shift of the aggregate demand curve
(C) a rightward shift of the short-run aggregate supply curve
(D) a leftward shift of the short-run aggregate supply curve
(E) a rightward shift of the long-run aggregate supply curve
21. According to the crowding-out theory, expansionary fiscal policy will lead to
(A) higher interest rates, an appreciated dollar, and reduced net exports.
(B) higher interest rates, an appreciated dollar, and increased net exports.
(C) reduced interest rates, an appreciated dollar, and reduced net exports.
(D) reduced interest rates, an appreciated dollar, and increased net exports.
(E) reduced interest rates, a depreciated dollar, and increased net exports.
22. The crowding-out effect stresses that increased government borrowing to cover a budget
deficit will cause
(A) a higher interest rate and depreciation of the U.S. dollar.
* (B) a higher interest rate and appreciation of the U.S. dollar.
(C) a lower interest rate and depreciation of the U.S. dollar.
(D) a lower interest rate and appreciation of the U.S. dollar.
(E) no change in the interest rate and depreciation of the U.S. dollar.
23. The modern view of the Phillips curve indicates that in the long run there
* (A) is no trade-off between inflation and unemployment.
(B) is a definite trade-off between unemployment and inflation.
(C) is the same trade-off as in the short run.
(D) may be a long-run trade-off between unemployment and inflation, but there is no such
trade-off in the short run.
(E) is no trade-off between inflation and unemployment just like in the short run.
Part 4/Unit V 505
24. If heavy federal borrowing pushes up real interest rates in the United States, which of the
following will most likely result?
* (A) an inflow of capital and an appreciation in the foreign exchange value of the dollar
(B) an outflow of capital and a depreciation in the foreign exchange value of the dollar
(C) an inflow of capital and a depreciation in the foreign exchange value of the dollar
(D) an outflow of capital and an appreciation in the foreign exchange value of the dollar
(E) an inflow of capital and an indeterminate effect on the foreign exchange value of the
dollar
25. If there is an increase in foreign financial investment in the United States as the result of
large U.S. budget deficits and attractive interest yields,
(A) fiscal policy will be more expansionary since there will be no crowding-out effect.
(B) fiscal policy will be more expansionary since U.S. residents will increase their savings
so they can repay the foreigners in the futuse.
(C) foreign exchange value of the dollar will depreciate, which will lead to an increase in net
exports and aggregate demand.
* (D) foreign exchange value of the dollar will appreciate, which will lead to a decrease in net
exports and aggregate demand.
(E) foreign exchange value of the dollar will depreciate, which will lead to a decrease in net
exports and aggregate demand.
Answers to Multiple-Choice Sample Questions for Macro Unit V
ample Free-Response Question for Macro Unit V
1. Use a correctly labeled aggregate-supply, aggregate-demand graph of a country in long-run
equilibrium to demonstrate the impact of long-run economic growth.
(A) List two factors that would contribute to long-run economic growth.
(B) Use the production possibilities framework to demonstrate long-run economic growth.
506 Part 4/Unit V
Answers to Free-Response Sample Question for Macro Unit V
This question would be graded using a 7 point rubric.
1. One point for a correctly labeled graph of aggregate supply and aggregate demand