AP Macro Final Exam Review

Assume the government decreases its deficit spending. What is the likely result in the money market?

(A) Decrease in Demand for Money and Decrease in Nominal Interest Rates

If a country imposes a tariff on a product which they produce as well as import, which of the following will most likely occur?

(A) Employment in the domestic production of the product will increase

Which of the following is true of a floating exchange rate system?

(A) Equilibrium exchange rates are determined by the free market

Which of the following is NOT a criticism of gross domestic product (GDP) as a measure of a nation's well-being?

(A) GDP measures only the value of final goods and services and not intermediate goods and services.

Nations can benefit from free trade mainly because

(A) It allows each nation to consume beyond its production possibilities curve.

Which of the following would be most likely to cause the long run output of an economy to decrease ?

(A) Negative net capital stock investment

Which of the following is most likely to improve an economy's productivity?

(A) Positive net capital stock investment

Which of the following is true of the short run Phillips curve, but not true for the long run Phillips curve?

(A) There is a tradeoff between the unemployment rate and the inflation rate

Which of the following will be the result of a decrease in input prices in the short run?

(E) No change in Aggregate Demand Curve and Shift to the right on Aggregate Supply Curve

Which of the following could decrease to cause the demand for money to fall?

(E) Price level

In an economy is at full employment with a vertical aggregate supply curve and aggregate demand is continuing to increase, which of the following monetary policy actions would be an appropriate response?

(E) Selling government securities in the open market

Which of the following groups would most likely be hurt by the depreciation of the Canadian dollar in the international market?

(E) Swiss ski manufacturers that market their products in Canada

Which of the following would cause a nation's real output level at full employment to decrease?

(B) A sustained increase in resource costs

In the AS/AD model, which of the following shifts would be the likely result of an increase in personal income taxes?

(B) Aggregate demand shifts to the left

If a country is experiencing a recessionary gap, which of the following fiscal and monetary policy combinations would be most likely to move the nation closer to full employment with a minimum change in interest rates?

(B) An increase in government spending and the purchase of bonds on the open market

Which of the following best defines investment as a component of GDP?

(B) Buying new plants, machinery, tools and inventory

If the U.S. Federal Reserve engages in expansionary monetary policy by purchasing government securities through the open market, what will be the likely result on the nominal interest rate, aggregate demand and the unemployment rate?

(B) Decrease in Nominal Interest Rate, Increase in Aggregate Demand, Decrease in Unemployment Rate

A decrease in government deficit spending will have which of the following effects in the short term?

(B) Decrease nominal interest rates

According to rational expectations theory

(B) Expected inflation often leads to actual inflation as individuals and businesses changes their behavior.

Who demands the factors of production in the circular flow diagram?

(B) Firms

An increase in which of the following would likely lead to a decrease in national income?

(B) Imports

What will happen to the equilibrium price and equilibrium quantity of a good if there is a simultaneous increase in input costs while the product is gaining popularity among consumers?

(B) Increase Equilibrium Price and Indeterminate Equilibrium Quantity

If the Federal Reserve engages in open market operations to buy government securities what will be the resulting change in the money supply, interest rates and bond prices?

(B) Increase in Money Supply, Decrease in Interest Rates, and Increase in Bond Prices

If the aggregate supply curve is upward sloping and there is an increase in exports to foreign countries, what will be the resulting change in real gross domestic product (RGDP) and price level in the short run?

(B) Increase in RGDP and Increase in Price Level

What is likely to happen to the value of the Mexican Peso and capital flow in Mexico if there is an increase in real interest rates in Mexico relative to real interest rates in the rest of the world?

(B) Inflow Capital Flow and Value of the Peso Appreciate

Answer the questions using the chart below illustrating disposable income and consumption. Assume the marginal propensity to consume is 0.80. Disposable Income Consumption $1,500 $1,510 $1,550 $1,550 $1,600 $1,590 $1,650 $1,630 $1,700 $1,670

(A) $1,500

If disposable income is $5,000 billion, personal taxes are $1,000 billion, and the marginal propensity to consume (MPC) is 0.8, what is personal income equal to?

(A) $6,000 billion

Which of the following is an example of frictional unemployment?

(A) A recent graduate, looking for their first job.

In the graph above, assume wages and prices are perfectly flexible, and a starting equilibrium point of AD2 and SRAS2. If this economy experiences demand-pull inflation, identify both the short run and long run shifts in the aggregate demand and short run aggregate supply curves.

(A) AD2 to AD3 Short Run and SRAS2 to SRAS3 Long Run

Which of the following would be an appropriate fiscal policy to close a recessionary gap of $100 billion assuming an MPC of 0.80?

(A) Increase government expenditures by $20 billion.

If society experiences an increase in human capital but nominal wages remain the same, what will happen to real gross domestic product (RGDP) and real wages?

(A) Increase in RGDP and Increase in wages

Which of the following would be the result if the United States (US) dollar depreciated relative to other currencies?

(A) Increase in US Net Exports and Increase in US Employment

If a nation's economy is experiencing a recessionary gap what will happen to the short run aggregate supply curve (SRAS) in the long run if it is assumed that wages and prices are flexible?

(A) SRAS will shift right as wages eventually decrease, returning the economy to full employment.

If a nation's nominal gross domestic product (NGDP) increased by 6%, while its real rate of GDP growth (RGDP) was 2%, which of the following must be true?

(A) The GDP deflator increased by 4%

Fiscal policy measures that work counter- cyclically without overt government action are known as

(A) non-discretionary fiscal policies

Assume that the velocity of money is constant in the equation of exchange. Which of the following must be true if the GDP deflator is equal to 200 while the economy is operating with a vertical aggregate supply curve?

(A) the money supply has doubled

In the equation of exchange, according to the quantity theory of money, the quantity of money and velocity of money are directly related to

(A) the value of production

If a nation imports fewer goods and services than it exports, what must be true of that nation's balance of payments accounts?

(A)The trade balance is in surplus

Given a required reserve ratio of 0.10, suppose that Paula's bank has $50,000 in demand deposits and has loaned out all of its excess reserves. If Paula withdraws $2,000 from the bank how much does her bank need to increase its reserves to meet the reserve requirement?

(B) $1,800

If the federal government taxes all income at a flat rate of 20% and the marginal propensity to consume (MPC) is 0.75. If Daniel's gross income increases by $1,000, how much will his consumption expenditures increase?

(B) $600

The table below represents a simplified bank balance sheet, or T-Account, for a commercial bank. Use the information in the table to answer the following question.

(B) 10% Required Reserve Ration and $10,000 Additional Loans

A country's currency might appreciate in value because of which of the following?

(B) A higher real interest rate relative to the rest of the world

Scarcity is the condition in which

(D) human wants are beyond society's production

Which of the following would most likely result in cost-push inflation?

(B) A significant increase in union wages

Assume that there is no unanticipated inflation and that wages and prices are flexible. What will happen to short run real gross domestic product (RGDP) and the price level in the long run if the Federal Reserve purchases government securities in the open market?

(B) No change in RGDP and Increase in Price Level

A decrease in which of the following might cause a decrease in real per capita income?

(B) Output per unit of input

Which of the following characteristics best defines the free market system?

(B) Private property and competition

If the country of Alpha is experiencing an inflationary gap, which of the following monetary and fiscal policy combinations is most likely to move the nation toward long run equilibrium?

(B) Sell securities on the open market and Decrease spending

If the country is currently operating at point D on PPC2, which of the following changes would illustrate actual economic growth had occurred?

(B) Shifting from PPC2 to PPC3

Which of the following is illustrated by the short-run Phillips curve?

(B) There is a trade-off between the unemployment rate and the inflation rate

Which of the following groups would benefit in the short run from an unanticipated rise in the inflation rate?

(B) Young people repaying fixed-interest-rate student loans

When the U.S. Federal Reserve engages in open market operations it is

(B) buying or selling government securities

Crowding out is when government borrowing limits private investment by

(B) increasing the real interest rate

The opportunity cost of holding money in the form of cash increases when

(B) interest rates increase

A country's national debt is defined as

(B) the amount of money owed to holders of government securities.

Given the production and price information listed in the table above, and assuming 2015 is the base year, calculate the Real Gross Domestic Product (RGDP) for 2016 and the GDP deflator for 2016.

(C) $ 40 RGDP and 125 Deflator

Assume the economy of the nation of Cliffland is operating short of full employment output and economists agree that it would take $400 million dollars of additional spending to bring the economy to long run equilibrium. If the marginal propensity to consume is 0.75, what is the least amount of government spending that could bring the nation back to long run equilibrium?

(C) $100 million

Given a required reserve ratio of 20 percent and assuming banks hold no excess reserves, a central bank purchases $1000 of bonds in open market operations. What is the maximum change in each of the following?

(C) $5,000 Demand Deposits, $4,000 Loans, and $1,000

Assume that the nominal interest rate is 10 percent. If the expected inflation rate is 3 percent, the real interest rate is

(C) 7%

Which of the following best describes the concept of inflation?

(C) A steady rise in the general level of prices

Which of the following is the best example or structural unemployment?

(C) A worker is replaced by machines that are cheaper and more productive.

Which of the following is most likely to cause an increase in potential gross domestic product?

(C) An increase in government expenditures on infrastructure projects

Which of the following is MOST likely to promote economic growth?

(C) An increase in investment in tools and machinery

Which of the following policy combinations would foster long run growth of an economy without increasing the price level?

(C) Buy bonds and Decrease government spending

If the real interest rate in the United States decreases relative to the rest of the world what will be the resulting changes in U.S. capital flow, net exports and aggregate demand?

(C) Capital Flow Outflow, Increase in Net Exports, Increase in Aggregate Demand

Country X can produce either 2 tons of corn or 4 scooters with 20 units of labor. Country Y can produce either 5 tons of corn or 25 scooters with 20 units of labor. Based on this information, which of the following is true. (A) Country X has an absolute advantage in the production of corn, while Country Y has a comparative advantage in the production of scooters.

(C) Country X has a comparative advantage in the production of corn, while Country Y has a comparative advantage in the production of scooters.

Given a required reserve ratio of 10% and banks loan out all of their excess reserves, if the Federal Reserve chooses to engage in contractionary monetary policy by selling $1,000 of Treasury Bills to commercial banks, what will be the resulting change in the money supply?

(C) Decrease by $10,000

A contractionary monetary policy will have what effect on aggregate demand, price level and real output?

(C) Decrease in Aggregate Demand, Decrease in Price Level, Decrease in Real Output

If the economy is operating below full- employment output, assuming that wages and prices are flexible, long run equilibrium can be restored by which of the following?

(C) Enacting no policy since lower wages will result in a return to full employment

Which of the following is the best definition of disposable income?

(C) Income minus tax liabilities

In the midst of a $300 billion recessionary gap, the federal government decides to use fiscal policy to bring the economy back to long run equilibrium. If society's marginal propensity to consume (MPC) is 0.80, which of the following could the government do to reach full employment assuming no crowding out or leakages?

(C) Increase government expenditures $60 billion.

Which of the following changes in the short run aggregate supply curve and the aggregate demand curve would cause an increase in real gross domestic product without a corresponding increase in the price level?

(C) Increase in Short Run Aggregate Supply and No Change in Aggregate Demand

If an economy experiences an increase in net capital inflows by foreign investors, which of the following will be the resulting change in the market for loanable funds and the real interest rate?

(C) Increase in supply for Market of Loanable Funds and Decrease in Real Interest Rate

A decrease in which of the following is most likely to increase long run economic growth?

(C) Interest rates

Which of the following is a reason why one nation's economic growth rate might be higher than another nation?

(C) Larger per capita government subsidies for education and worker training programs

If the country is currently operating at point D on PPC2, which of the following changes would foster future economic growth?

(C) Moving from point D to point B

Which of the following is most likely to occur if the international value of the Canadian dollar appreciates relative to the Euro?

(C) The Canadian balance of trade will move toward a deficit

Stagflation is the result of which of the following shifts in the AD/AS model?

(C) The aggregate supply curve shifting to the left

If a country's economy is currently operating inside of its production possibilities curve, what must be true?

(C) The country's resources are not fully employed.

What must be true if a nation's economy is operating inside of its production possibilities curve?

(C) The nation is using resources and technology inefficently

The natural rate of unemployment is

(C) The rate of unemployment when the economy is in long run equilibrium

Which of the following is an example of cyclical unemployment?

(C) Zelda lost a job with the recent downturn in the economy.

If foreign investors purchase U.S. government treasury bills, those purchases will be included in their nation's

(C) financial account

If James deposits $1,000 cash in his checking account and the required reserve ratio is 0.10, what is the maximum resulting change in the money supply from his deposit?

(D) $9,000

Which of the following would cause an inward shift of the production possibilities curve?

(D) A decrease in the size of the labor force

If the relative price level in Canada is higher than in Mexico, what is the likely result in the foreign exchange market?

(D) A depreciation of the Canadian dollar

A rise in a nation's real interest rate might be fueled by which of the following events?

(D) A perceived increase in the country's political and economic turmoil

Good X and Good Y are substitutes. An increase in the price of Good Y will result in which of the following?

(D) An increase in the demand for Good X

What will be the resulting change in Japan's aggregate supply and aggregate demand if the value of the Japanese yen increases in the foreign exchange market?

(D) Decrease Aggregate Demand and No Change in Aggregate Supply

Assume the inflation rate in Mexico is significantly higher than its trading partners. Which of the following will occur to the demand, supply, and international value of the Mexican Peso?

(D) Decrease in Demand, Increase in Supply, and Value Depreciates

If a nation's central bank buys government securities in the open market what will be the resulting change in that nation's interest rate, the value of the country's currency, and the change in the nation's exports and imports?

(D) Decrease in Interest Rates, Depreciates Value of Currency, Increase in Exports, and Decrease in Imports

Assuming flexible prices, a recessionary gap caused by a shift in the aggregate demand curve will cause which of the following changes in price level and real gross domestic product (RGDP) in the long run?

(D) Decrease in Price Level and No change in RGDP

If aggregate demand were to unexpectedly increase, what would be the resulting change in the price level and unemployment rate?

(D) Increase in Price Level and Decrease in Unemployment Rate

Avery can make 30 tacos in a day or 20 burritos in a day, while Jessie can make 20 tacos in a day or 10 burritos. Which of the following must be true?

(D) Jessie has a comparative advantage in making tacos.

Which of the following is true regarding the consumer price index (CPI)

(D) The CPI measures prices of a specific market basket of goods and services purchased by consumers

Which of the following would cause the shift illustrated in the money market graph above?

(D) The Federal Reserve selling bonds on the open market

If David's grandfather promises to give him a crisp, new $100 bill on his twelfth birthday one year from today, which of the following describes the present value of that money received one year from now?

(D) The present value is worth less than $100 received today.

All of the following are true of the loanable funds market EXCEPT?

(D) The supply of loanable funds is vertical and is set by the Federal Reserve

The central problem in economics is

(D) scarcity; the use of limited resources.

Workers who have lost their jobs because of technological improvements in the economy are said to be

(D) structurally unemployed.

Full employment takes place when

(D) the economy is experiencing structural and frictional unemployment only.

A rightward shift in the aggregate demand curve could most likely be caused by which of the following?

(D) the purchase of government securities by the central bank

The classical economists believe that the economy is self-correcting to full employment output because

(D) wages and prices are flexible

The short run aggregate supply curve would shift to the left in response to which of the following?

(E) An increase in the cost of resources

Assuming the country is experiencing a recessionary gap, which of the following actions would the central bank most likely engage in?

(E) Buy bonds in open market operations and decrease the discount rate

Assume a recession causes jobless workers to grow more discouraged and give up their search for work. What will be the resulting change in the labor force participation rate and unemployment rate?

(E) Decrease in Labor Force Participation Rate and Decrease in Unemployment Rate

Assuming no crowding out, if the federal government engages in deficit spending, what would be the resulting change in the unemployment rate and price level?

(E) Decrease in Unemployment Rate and Increase in Price Level

In a perfectly competitive market, if both the supply of a good as well as the demand for the good decrease at the same time, what will be the resulting change in the equilibrium price and equilibrium quantity of the good?

(E) Indeterminate Price and Decrease in Quantity

If nominal wages and prices are not flexible, which of the following must be true when the economy has a severe recessionary gap?

(E) The short run aggregate supply curve is horizontal

Real gross domestic product (RGDP) is defined as

(E) The value, adjusted for changes in price level, of all final goods and services produced within a nation's borders in a given year.

An increase in the expected rate of inflation is most likely to cause which of the following changes in the Phillips curve?

(E) a shift of the entire short run Phillips curve to the right

Expansionary fiscal policy will have what effect on the short-run Phillips curve?

(E) an increase in inflation, coupled with a decrease in unemployment

A leftward shift in the short-run aggregate supply curve could be the result of

(E) an increase in input prices

The spending multiplier is the result of

(E) consumer expenditures rising as incomes rise.

Which of the following assets would be characterized as having the most liquidity?

(E) paper currency

Which of the following helps explain why the aggregate demand curve is downward sloping?

(E) real wealth, and thus consumption, is affected by changes in price level

In the graph above, economic growth could be illustrated by a

(E) rightward shift of the long-run aggregate supply curve

If a country is experiencing a significant recessionary gap, which of the following combinations of fiscal and monetary policies would be most likely to move the nation toward long-run equilibrium?

D. Increase Government Spending for Fiscal Policy and Buy government securities in the open market for Monetary Policy

When Daniel purchased his house, he took out a 30 year, fixed-rate mortgage loan for 8%. At the time inflation was expected to be 4%. If the actual inflation rate turned out to be 5% who benefited from this unexpected change and what was the real interest rate?

Daniel Benefited, 3% Real Interest Rate

If the reserve requirement increases from 5 percent to 10 percent, and assuming the general public holds a portion of its money in cash, what will happen to the money multiplier and the money supply?

E. Decrease Money Multiplier and Decrease Money Supply by less than half