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AP Macroeconomics › Unit 5
AP Macroeconomics Unit 5: Long-Run Consequences of Stabilization Policies
20 to 30% of the exam · 180 practice questions · 12 free-response questions
What happens after a policy works in the short run? This unit combines fiscal and monetary policy, then adds the Phillips curve, the quantity theory of money, deficits and debt, crowding out, and economic growth. Questions ask you to link an AD-AS shift to a move along the short-run Phillips curve, or to show crowding out with loanable funds. Many students forget that the long-run Phillips curve is vertical at the natural rate of unemployment. Others confuse the deficit, a one-year gap, with the debt, the total owed.
Practice this unit
White belt covers core terms and foundational ideas, Regular is set at exam level, and Black belt has harder multi-step questions.
Topics in this unit
- 5.1 Fiscal and Monetary Policy Actions in the Short Run (30 questions)
- 5.2 The Phillips Curve (30 questions)
- 5.3 Money Growth and Inflation (18 questions)
- 5.4 Government Deficits and the National Debt (21 questions)
- 5.5 Crowding Out (24 questions)
- 5.6 Economic Growth (26 questions)
- 5.7 Public Policy and Economic Growth (31 questions)
Free-response questions
- The Phillips Curve and Expectations (Long question, 10 points)
- Four Years of Unemployment and Inflation (Short question, 5 points)
- An Oil Price Shock (Long question, 10 points)
- Deficits, Crowding Out, and Growth (Long question, 10 points)
- Deficits and Debt (Short question, 5 points)
- Expansionary Monetary Policy: Short Run and Long Run (Long question, 10 points)
- Policies to Raise Long-Run Supply (Short question, 5 points)
- Growth in Two Countries (Short question, 5 points)
- Bringing Inflation Down (Short question, 5 points)
- Investing Today for Growth (Short question, 5 points)
- A Policy Mix to Shrink the Deficit (Short question, 5 points)
- Money, Velocity, and the Price Level (Short question, 5 points)
Sample questions
These are taken from the Regular set, with the answer and explanation shown.
Topic 5.2 The Phillips Curve
1. An increase in expected inflation will cause the short-run Phillips curve to shift
- Adown, and the LRPC shifts left
- Bdown, with no change in the LRPC
- Cup, and the LRPC shifts right
- Dup, with no change in the LRPC
- Eneither curve changes
Answer: D. If people expect higher inflation, wages and prices rise faster at every unemployment rate, so the SRPC shifts up (to the right). The LRPC depends on the natural rate of unemployment, which does not change.
Common trap: Shifting the LRPC too. The LRPC moves only when the natural rate changes.
Topic 5.4 Government Deficits and the National Debt
2. During a recession, a government's budget balance tends to
- Amove toward a surplus, as tax revenue rises and transfers fall
- Bstay the same, because tax rates and benefit rules are fixed
- Cmove toward a deficit, because the central bank lowers interest rates
- Dmove toward a surplus, as government purchases are cut automatically
- Emove toward a deficit, as tax revenue falls and transfers rise
Answer: E. Automatic stabilizers work through the budget: lower incomes reduce tax revenue, and more people qualify for unemployment and other benefits. Both push the budget toward a deficit even without any new law.
Common trap: Choosing "move toward a surplus." That happens in expansions.
Topic 5.7 Public Policy and Economic Growth
3. Supply-side fiscal policies are designed mainly to
- Aincrease aggregate demand during recessions
- Braise incentives to work, save, and invest
- Creduce the money supply to fight inflation
- Draise tariffs to protect domestic industries
- Eincrease transfer payments to the unemployed
Answer: B. Supply-side policies include lower marginal tax rates and tax incentives for investment. They aim to increase the quantity and quality of resources, which shifts LRAS to the right.
Common trap: Choosing "increase AD during recessions." That's demand-side policy.