AP Macroeconomics chapter practice15 questions

17 Policy Mix, Transmission, Rules, and Lags

These questions come directly from the chapter practice in the book. Choose the best answer, check your reasoning, and use the explanation to correct any gap.

Question 1

Question 1 of 15

Stabilization policy runs into several distinct delays. The time needed to establish that a recession has already started is the

Diagnosis comes first: data have to accumulate and be revised before anyone can say a downturn began. B and C name the stages that follow the diagnosis, D names the delay in the economy's own response, and E names the statistical revision process that causes the recognition lag rather than the lag itself.
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A. recognition lag

Diagnosis comes first: data have to accumulate and be revised before anyone can say a downturn began. B and C name the stages that follow the diagnosis, D names the delay in the economy's own response, and E names the statistical revision process that causes the recognition lag rather than the lag itself.

Question 2

Question 2 of 15

Which of the following policy actions faces the clearest legislative decision lag?

Changing government purchases takes a vote, and waiting for that authorization is what a decision lag measures. A, C, and D are central-bank actions, taken by a committee that meets on its own schedule. E moves without any new decision, under rules enacted years earlier.
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B. A discretionary increase in government purchases

Changing government purchases takes a vote, and waiting for that authorization is what a decision lag measures. A, C, and D are central-bank actions, taken by a committee that meets on its own schedule. E moves without any new decision, under rules enacted years earlier.

Question 3

Question 3 of 15

Through what channel does expansionary monetary policy raise net exports?

Lower domestic rates send financial capital abroad, the currency weakens, and domestic goods become cheaper to foreign buyers. A and B reverse both the rate movement and the currency movement that easing sets off. D names a foreign development the central bank does not cause, and one that would cut exports rather than raise them; E is trade policy, not a monetary channel.
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C. Depreciation of the domestic currency

Lower domestic rates send financial capital abroad, the currency weakens, and domestic goods become cheaper to foreign buyers. A and B reverse both the rate movement and the currency movement that easing sets off. D names a foreign development the central bank does not cause, and one that would cut exports rather than raise them; E is trade policy, not a monetary channel.

Question 4

Question 4 of 15

In a liquidity trap, why does additional central-bank liquidity produce so little additional spending?

Extra liquidity matters only if someone borrows it and spends it, and in a trap that response is close to nothing. A reverses what low rates do to present values, B reverses the opportunity cost of holding money, C misdescribes bank lending, which creates deposits rather than handing reserves to customers, and E reverses the direction of deposit adjustment.
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D. Borrowing and investment barely respond to further easing.

Extra liquidity matters only if someone borrows it and spends it, and in a trap that response is close to nothing. A reverses what low rates do to present values, B reverses the opportunity cost of holding money, C misdescribes bank lending, which creates deposits rather than handing reserves to customers, and E reverses the direction of deposit adjustment.

Question 5

Question 5 of 15

A government widens its budget deficit while the central bank tightens. Interest rates then face

A deficit reduces national saving and shifts loanable-funds supply left, while a tighter monetary stance drains liquidity, so both actions push rates upward. A reverses both effects, B misreads tightening as easing, C assumes an exact offset that nothing guarantees, and D applies the long-run link between inflation and nominal rates to an immediate liquidity effect.
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E. upward pressure from both policies

A deficit reduces national saving and shifts loanable-funds supply left, while a tighter monetary stance drains liquidity, so both actions push rates upward. A reverses both effects, B misreads tightening as easing, C assumes an exact offset that nothing guarantees, and D applies the long-run link between inflation and nominal rates to an immediate liquidity effect.

Question 6

Question 6 of 15

Fiscal policy expands while monetary policy contracts, and no magnitudes are given for either change. The effect on real output is

One policy adds to demand and the other subtracts, so the net direction turns on relative sizes the item never supplies. A and B each assume one side always wins. D builds an arithmetic rule out of two multipliers that were never given, and E assumes the two effects cancel exactly.
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C. indeterminate without the size of each change

One policy adds to demand and the other subtracts, so the net direction turns on relative sizes the item never supplies. A and B each assume one side always wins. D builds an arithmetic rule out of two multipliers that were never given, and E assumes the two effects cancel exactly.

Question 7

Question 7 of 15

Some policies expand capacity and others only move spending. Which of the following aims most directly at long-run aggregate supply?

Training raises what a worker can produce in an hour, which moves the capacity constraint rather than current spending. B and D put money in households' hands and work through consumption, C works through interest rates and demand, and E lengthens job search, which raises the natural rate and lowers capacity instead.
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A. Public training that raises worker skill

Training raises what a worker can produce in an hour, which moves the capacity constraint rather than current spending. B and D put money in households' hands and work through consumption, C works through interest rates and demand, and E lengthens job search, which raises the natural rate and lowers capacity instead.

Question 8

Question 8 of 15

Policy lags are measured between distinct events. At what moment does the impact lag end?

The impact lag runs from the change in the tool to the moment behavior actually changes, so it closes when spending and output move. A and B close the recognition and decision lags. C marks where the impact lag starts, not where it ends, and D is an announcement, which is neither a change in the tool nor a response to one.
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E. When spending and output respond

The impact lag runs from the change in the tool to the moment behavior actually changes, so it closes when spending and output move. A and B close the recognition and decision lags. C marks where the impact lag starts, not where it ends, and D is an announcement, which is neither a change in the tool nor a response to one.

Question 9

Question 9 of 15

Aggregate demand expands while the economy already sits near full employment. Compared with the same expansion during a deep recession, the result is

Near capacity the short-run supply curve is steep, so extra spending bids up prices more than it draws out output. A reverses that split, C treats short-run supply as flat at every level of output, D turns a demand change into a capacity change, and E reverses the direction of prices.
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B. a smaller output gain and more inflation

Near capacity the short-run supply curve is steep, so extra spending bids up prices more than it draws out output. A reverses that split, C treats short-run supply as flat at every level of output, D turns a demand change into a capacity change, and E reverses the direction of prices.

Question 10

Question 10 of 15

Automatic stabilizers and discretionary fiscal policy differ in how quickly they act. Which of the following describes automatic stabilizers?

Stabilizers are already written into tax and transfer rules, so they respond the moment incomes change, with no diagnosis and no vote. A denies they act at all. B overstates them, since they damp swings in disposable income without erasing them. C misses that induced income taxes are their main channel, and E describes discretionary policy.
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D. They involve almost no recognition or decision lag.

Stabilizers are already written into tax and transfer rules, so they respond the moment incomes change, with no diagnosis and no vote. A denies they act at all. B overstates them, since they damp swings in disposable income without erasing them. C misses that induced income taxes are their main channel, and E describes discretionary policy.

Question 11

Question 11 of 15

A central bank shifts to a contractionary stance. The first link in the transmission chain is that

Draining reserves or raising the administered rate lifts short-term financing costs first; borrowing, spending, and prices follow later. A and E reverse what a contractionary operation does to rates and to reserves, B puts the real response ahead of the financial one, and C jumps to the last step in the chain.
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D. short-term interest rates rise

Draining reserves or raising the administered rate lifts short-term financing costs first; borrowing, spending, and prices follow later. A and E reverse what a contractionary operation does to rates and to reserves, B puts the real response ahead of the financial one, and C jumps to the last step in the chain.

Question 12

Question 12 of 15

A government removes regulatory barriers to productive investment. What is that policy mainly meant to accomplish?

Cheaper conditions for building capital raise the stock of productive equipment, and a larger capital stock moves potential output out. B has the right curve family but the wrong direction and the wrong horizon, D reverses the labor-market effect, A moves a money-market schedule, and E treats a real capacity policy as a purely nominal one.
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C. Shift long-run aggregate supply right

Cheaper conditions for building capital raise the stock of productive equipment, and a larger capital stock moves potential output out. B has the right curve family but the wrong direction and the wrong horizon, D reverses the labor-market effect, A moves a money-market schedule, and E treats a real capacity policy as a purely nominal one.

Question 13

Question 13 of 15

Monetary policy is said to have a variable impact lag. Which of the following explains that variability?

A rate change reaches output only through decisions to borrow and invest, and confidence and balance-sheet strength differ from one episode to the next. A denies central-bank independence, C reverses the order of events, D pretends there is no financial channel to vary, and E attaches a fiscal parameter to a monetary timeline.
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B. Borrowing depends on expectations and balance sheets.

A rate change reaches output only through decisions to borrow and invest, and confidence and balance-sheet strength differ from one episode to the next. A denies central-bank independence, C reverses the order of events, D pretends there is no financial channel to vary, and E attaches a fiscal parameter to a monetary timeline.

Question 14

Question 14 of 15

Policy tools can pull together or against each other. Which of the following pairs reinforces an expansion of aggregate demand?

More government purchases add to demand directly while an open-market purchase supplies reserves and eases credit, so the two push the same way. A and B pair an easier monetary action with a contractionary fiscal one; picking either means reading lower government purchases or higher taxes as a boost to demand. C is contractionary on both sides, and D pairs a fiscal expansion with a higher reserve requirement, which shrinks lending rather than expanding it.
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E. Higher government purchases and an open-market purchase

More government purchases add to demand directly while an open-market purchase supplies reserves and eases credit, so the two push the same way. A and B pair an easier monetary action with a contractionary fiscal one; picking either means reading lower government purchases or higher taxes as a boost to demand. C is contractionary on both sides, and D pairs a fiscal expansion with a higher reserve requirement, which shrinks lending rather than expanding it.

Question 15

Question 15 of 15

Which of the following explains why a deficit-financed rise in government purchases raises output by less than the simple multiplier predicts?

Financing the deficit reduces public and national saving, shifting loanable-funds supply left; rates rise, and private investment that would otherwise have gone ahead does not. B confuses the multiplier with the marginal propensity to consume; in the simple model 1/(1-MPC) exceeds one. C imposes a balanced-budget requirement that the stem rules out by making the increase deficit financed. D applies a long-run debt argument to a short-run demand question, and E reverses the trade leakage, since higher income pulls in more imports and net exports fall.
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A. Higher interest rates crowd out private investment.

Financing the deficit reduces public and national saving, shifting loanable-funds supply left; rates rise, and private investment that would otherwise have gone ahead does not. B confuses the multiplier with the marginal propensity to consume; in the simple model 1/(1-MPC) exceeds one. C imposes a balanced-budget requirement that the stem rules out by making the increase deficit financed. D applies a long-run debt argument to a short-run demand question, and E reverses the trade leakage, since higher income pulls in more imports and net exports fall.

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