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Practice AP Macroeconomics Test 1. Which of the following correctly describes the components of Aggregate Demand? . If a 100 deposit in a bank leads to a 1000 increase in the money A. Consumption expenditures + Investment expenditures + supply, the reserve requirement must have been: Government expenditures + Exports + Imports A. .10% B. Consumption expenditures + Investment expenditures + B. 10% Government expenditures + Exports - Imports C. 100% C. Consumption expenditures + Investment expenditures + D. 1000% Government expenditures - Exports - Imports cannot be determined from the information given. D. Consumption expenditures + Investment expenditures + Government expenditures + Savings + Exports - Imports 7. Long run economic growth in a country would be encouraged E. Consumption expenditures + Investment expenditures + through which of the following combinations of events? Government expenditures + Business expenditures + Savings + Exports + Imports Investment interest rates savings rate A. high high high 2. Which of the following formulas is correctly stated? B. high high low A. Real interest rate = nominal interest rate + anticipated C. high low low inflation. B. Nominal interest rate = real interest rate + anticipated D . low low low inflation. E . high low high C. Real interest rate = nominal interest rate + actual inflation. D. Nominal interest rate = real interest rate + actual inflation. A. A E. Nominal interest rate = real interest rate - actual inflation. B. B C. 3. Which of the following would not affect the size of real GDP? D. D A. Consumer purchase of a new car for personal use. . Government purchase of a new car for the military. - Business purchase of a new car for a delivery vehicle. 3. Which of the following people would be considered structurally D. Consumer purchase of a rare renaissance painting. unemployed? E. Consumer purchase of a haircut. A. Unemployed auto assembly line factory worker during a recession. 4. If an autonomous increase in spending in an economy of 100 B. Unemployed auto assembly line factory worker who was leads to an increase in real GDP of 500 then for that economy the replaced with a robot. marginal propensity to consume must have been: C. An auto assembly line worker who quit her job to go back to A. 4/5 school full-time to improve her job skills. B. 5 D. A high school student who mows lawns during the summer, 100 but is out of work because it is winter. D. 400 E. A high school economics teacher who is not working during E. 500 the summer, but plans to go back and teach in the fall. If the government increased spending by 10 and increased taxes 9. Which combination of events described below would be the most by 10 to pay for the increased spending then which of the expansionary for an economy, assuming that they all happened at the following combinations would correctly explain the effect on same time? the budget and GDP? Budget GDP Taxes Government Net exports reserve unchanged decrease spending requirement A. decrease increase increase decrease surplus decrease B. increase increase increase decrease unchanged no change C. decrease increase decrease decrease surplus increase D. decrease decrease decrease decrease monMOOD unchanged increase increase decrease decrease increase 10. If an economy is suffering from inflation, what fiscal policy measure could be taken to help alleviate the problem? A. Increase money supply B. Increase government spending C. Increase taxes D. Increase the reserve requirement E. Increase deficit spending AP Macro MC Practice test with AKey.docx11. Which of the following would be an appropriate monetary policy measure to combat inflation? 14. Based on Figure 2 the size of the simple multiplier is: A. increase taxes A. one B. decrease taxes B. two C. sell bonds C. three D. buy bonds D. four E. lower the reserve requirement E. five 15. Based on Figure 2 the economy shown is experiencing a/an: A. inflationary gap B. recessionary gap C. unemployment gap D. stagflation C2 disinflation CACOCA Co 16. Based on Figure 2 the MPC is: Real Consumer Spending A. 0% B. 25% C1 C. 50% D. 75% E. 100% 17. A production possibility curve is most closely related to which Real GDP Real GDP of the following? (8) (b) Figure 1 A. short run aggregate supply curve B. long run aggregate supply curve 12. Based on Figure I a movement from CO to C2, in both diagrams, C. aggregate demand curve would be consistent with which of the following? D. aggregate expenditure diagram A. fixed tax cut and cut in tax rate E. Keynesian cross diagram B. fixed tax increase and increase in tax rate C. fixed tax cut and increase in tax rate 18. Which of the following combinations of policy moves would be D. fixed tax increase and decrease in tax rate recommended for an economy experiencing an annual increase in E. none of the above correctly describe the movement from Co the inflation rate of 6% and an unemployment rate of 5% ? to C2 A. increase government spending and increase the discount rate 13. Over the long run, the rate of growth of real wages is B. decrease government spending and decrease the reserve approximately equal to the rate of: requirement C. increase income tax rates and sell bonds A. inflation. B. unemployment. D. decrease income tax rates and buy bonds E. C. growth of labor productivity plus the rate of inflation. increase government transfer payments and increase the D. growth of labor productivity minus the rate of inflation. reserve requirement E. growth of labor productivity. 19. The Keynesian monetary policy transmission mechanism would correctly be described in which of the following? Expenditures Full Employment 450 Money supply Interest rate Investment GDP A increase increase increase increase increase increase increase decrease C. increase decrease increase increase AE D. increase decrease decrease decrease decrease decrease decrease decrease 1000 4000 5000 Real GDP Figure 2 AP Macro MC Practice test with AKey.doex20. Crowding out describes a relationship among deficits, interest 23. In a typical circular flow model describing the interaction of rates, and private spending. Which of the following describe that businesses and households, which of the following is/are true? relationship? Deficit interest rate private spending 1. Households buy factors of production and goods II Firms buy factors of production and goods increase increase increase III. Households buy factors of production decrease decrease decrease IV. Firms buy factors of production increase increase decrease V. Firms buy goods increase decrease increase VI. Households buy goods increase decrease decrease A. I only 21. Which of the following correctly describe the concept of the B. II only multiplier? C. III and IV only D. IV and VI only I. It takes time for the multiplier to work. The impact of an V and VI only independent change in investment during the first six months will be considerably smaller than the multiplier 24. If Americans suddenly decide to hold more cash for carrying analysis implies. on transactions and for precautionary reasons, which of the II. When the marginal propensity to consume is 0.8, an following is most likely to result? independent increase in investment of $10 billion will A. Increase in interest rates cause the aggregate income of a fully employed economy B. Decrease in interest rates to rise to $50 billion. C. Dollar depreciates in value III. The multiplier effect may be even larger over time as its D. Exports will rise effect is supported by the interest rate and foreign E. Gross private domestic investment will rise purchases effect. 25. If the federal government and the Federal Reserve both attempt A. I, II, and III are all true to contract the economy, which of the following sets correctly 3. I is true, II and III are false describes the probable results of these actions? (FP = fiscal policy, MP = monetary policy) C. I and II are true, III is false D. I and III are true, II is false Interest rates Price level Output E. I, II, and III are all false FF MP FP MP FP MP A. increase increase increase increase increase increase 22. "In the first half of 1973, prices rose at an annual rate of 8 B. decrease decrease decrease decrease decrease decrease percent and real output at 4.5 percent, while unemployment fell from C. increase decrease decrease decrease decrease decrease 5.0 percent to 4.8 percent. From June 1972 to June 1973, the money D. decrease increase decrease decrease decrease decrease supply increased 11 percent, while the U.S. government ran a deficit E. decrease increase decrease increase decrease increase equal to 2 percent of GDP." Since unemployment was already at or near its natural rate during 1972-73, 26. The Keynesian model would find monetary policy to be less effective if: A. greater monetary expansion was necessary to stabilize A. Interest rates fell prices. B. Interest rates rose B. monetary and fiscal policy of the period added to the C. Investment demand is elastic inflationary pressure already plaguing the economy. D. Investment demand is inelastic C. $14 billion budget deficit probably caused unemployment to E. Fiscal policy remains neutral fall and real income to expand without adding to the inflation problem. 27. Banks create money when they: D. monetary and fiscal policy of the period probably helped A. collect interest on loans to the public stabilize the growth rate of aggregate demand and promote B. buy government securities from the Federal Reserve price stability in the long run. C. allow customers to transfer money from time accounts to E. Expansionary fiscal policy was necessary to stabilize prices demand accounts D. keep required reserves as vault cash E. loan excess reserves to the public 28. Which of the following would be hurt the most by unanticipated inflation? A. borrowers with fixed B. borrowers with variable rate loans C. creditors D. both borrowers and creditors are hurt the same E. neither borrowers nor creditors are hurt by unanticipated inflation, they both benefit AP Macro MC Practice test with AKey.docx45. Suppose that the Fed decides to decrease the growth rate of the 39. An adverse supply shock: money supply in the U.S. What is most likely to happen to the U.S. A. Can be anticipated and decreases aggregate supply trade deficit, and to GDP? B. Can be anticipated and increases aggregate supply A. The trade deficit will rise, GDP will rise. . Cannot be anticipated but decreases aggregate supply B. The trade deficit will fall, GDP will rise. D. Cannot be anticipated but increases aggregate supply C. The trade deficit will rise, GDP will fall. E. Cannot be anticipated but decreases aggregate demand D. The trade deficit will fall, GDP will fall. E. The trade deficit will rise, GDP will be unaffected. 40. All of the following are currently part of the United States money supply, 46. Gross domestic product (GDP) EXCEPT: A. is the sum of all exchanges of goods and services during a A. Coins period. B. Currency B. includes financial transactions such as the purchase of C. Checkable accounts stocks or bonds traded during a period. D. Credit cards C. includes the purchases of goods at intermediate stages of E. Demand deposits production. D. is the sum of the total spending on all final-user goods and 41. If the Federal Reserve sells bonds in the open market, which of services produced domestically during a period. the following will result? E. includes all goods and services exchanged during a A. Decreased demand for money and lower interest rates period. . Increased demand for money and higher interest rates . Increased money supply and lower interest rates 47. Which of the following is/are correct? D. Decreased money supply and higher interest rates E. Increased demand for and supply of money and an increase (X) Your spouse cleans your house every Thursday. in interest rates (Y) You sell your old economics book for $25. (Z) Your economic textbook is revised and you buy a new edition. 42. Based on the data from table below we can conclude that: A. All three events increase GDP. Output Per Unit of Labor Input B. Only (X) increases GDP England Portugal C. Only (Y) increases GDP Cloth 20 24 D. Only (Z) increases GDP Wine 12 E. (X) and (Y) increase GDP, (Z) reduces GDP A. Portugal has a comparative advantage in the production of 48. Which of the following best illustrates the difference between cloth and wine GDP and GNP? B. England has a comparative advantage in the production of A. GDP measures the goods and services consumed by the cloth and wine citizens of a country, while GNP measures output exported C. Portugal has a comparative advantage in cloth and England to other countries. has a comparative advantage in wine GDP measures output produced by the citizens within a . England has a comparative advantage in cloth and Portugal country, while GNP measures output produced by non- has a comparative advantage in wine citizens within a country. E. England has an absolute advantage in the production of C. GDP measures the output produced by the citizens of a cloth and wine country, while GNP measures output produced within the borders of a country. 43. On day 1, it cost $.7354 U.S. to buy one Canadian dollar. How D. GDP measures the output produced within the borders of a many Canadian dollars would $1 U.S. buy? country, while GNP measures output produced by the A. 1.36 citizens of a country. B. 1.27 E. GDP measures goods produced by the citizens of a . 1.11 country, while GNP measures the output of goods and D. 0.84 services produced by the citizens of a country. E. 0.73 49. If decision makers underestimate inflation, the real wage will 44. On the next day (see Question 43) it cost $.845 U.S. to buy one A. rise, increasing unemployment Canadian dollar. From this information we can conclude that: B. rise, reducing unemployment A. The U.S. dollar got stronger and U.S. exports will rise C. fall, increasing unemployment B. The U.S. dollar got weaker and U.S. exports will rise D. fall, reducing unemployment C. The U.S. dollar got stronger and U.S. exports will fall E. Is as likely to rise or fall making the effect on D. The U.S. dollar got weaker and U.S. exports will fall unemployment indeterminate E. The U.S. dollar got stronger and U.S. exports will be unaffected