AP Macroeconomics MC Test 2000, MacroExam 2012, 2008 AP Macro Test, AP Macro MC 2010 COMBINED
Based on the economic figures in the table above, what is the value of gross domestic product, in billions of dollars? figure on doc
$4, 500
#21 refer to google doc
$500 (To determine the minimum increase in government spending necessary to reach full employment, we must first calculate the spending multiplier. The spending multiplier (m) = [1 / (1 - MPC)], where MPC is the marginal propensity to consume. MPC (b) is simply the slope of the expenditures function. The slope of the line above is (1000 - 500) / (1000 - 0) = 500/1000 = 1/2. Thus, the spending multiplier (m) = [1 / (1 - ½)] = [1 / (1/2)] = 2. Now that we know the multiplier and know that we want to increase income by 1000 (2000 -1000), we can simply solve for the change in government spending. 1000 = 2 x (Change in government spending). Therefore, the change in government spending to eliminate this recessionary gap must be 1000 / 2 = $500)
Assume that Jane's marginal propensity to consume equals 0.8, and that in 2004 Jane spent $36, 000 from her disposable income of $40, 000. If her disposable income in 2005 increased to $50, 000, her consumption spending increased by
$8, 000
assume that the reserve requirement is 20%. if a bank initially has no excess reserves and $10,000 cash is deposited in the bank, the maximum amount by which this bank may increase its loans is
$8,000 (The bank may increase its loans by the amount of its excess reserves. Since the reserve requirement is 20%, this bank must keep 20% x $10,000 = $2000 on hand as required reserves. Thus, it can loan out $10,000 - $2,000 = $8,000.)
Suppose that in an economy with lump-sum taxes and no international trade, autonomous investment spending increases by $2 million. If the marginal propensity to consume is 0.75, equi-librium gross domestic product will change by a maximum of
$8.0 million
Assume that the required reserve ratio is 10 percent, banks keep no excess reserves, and borrowers deposit a ll loans made by banks. Suppose you have saved $100 in cash at home and decide to deposit it in your checking account. As a result of your deposit, the money supply can increase by a maximum of
$900
57. An increase in aggregate demand will cause which of the following?
(A) A movement along a given short-run Phillips curve
26. Which of the following will cause the United States dollar to depreciate relative to the euro?
(A) An increase in household income in the United States
37. Which type of unemployment would increase if workers lost their jobs because of a recession?
(A) Cyclical
43. An economy is in a short-run equilibrium at a level of output that is less than full-employment output. If there were no fiscal or monetary policy interventions, which of the following changes in output and the price level would occur in the long run?
(A) Increase in Output and Decrease in Price Level
20. In an economy in which all prices, including wages, are completely flexible, an increase in labor productivity will result in which of the following changes in output and real wages?
(A) Increase in output and Increase in Real Wages
18. Which of the following sequences of events would occur if the Federal Reserve implemented contractionary monetary policy?
(A) Interest rates increase, investment and consumption spending decrease, aggregate demand decreases, and output and prices decrease.
6. If an economy is operating with significant unemployment, an increase in which of the following will most likely cause employment to increase and the interest rate to decrease?
(A) Purchases of government bonds by the central bank
5. If the exchange rate between the United States dollar ($) and the British pound (£) changed from $2 per £1 to $3 per £1, and domestic prices in both countries stayed the same, then the United States dollar would
(A) depreciate, making United States imports from Britain more expensive
33. The theory of comparative advantage implies that Alpha would find it advantageous to
(A) export grain and import steel
32. Before specialization and trade, the domestic opportunity cost of producing 1 ton of grain in Alpha and in Beta is which of the following?
(B) 1 ton of steel (Alpha) 2 tons of steel (Beta)
34. At what real exchange ratio, also referred to as the terms of trade, between grain (G) and steel (S) would both Alpha and Beta find it mutually advantageous to specialize and trade?
(B) 1G = 1.5S
12. Which of the following is most likely to occur if the Federal Reserve engages in open market operations to reduce inflation?
(B) A decrease in reserves in the banking system
44. Assume that the world operates under a flexible exchange rate system. If the central bank of Mexico increases its money supply but other countries do not change theirs, Mexico's inflation rate and the international value of the Mexican peso will most likely change in which of the following ways?
(B) Increase in Inflation Rate and International Value of the Peso Depreciates
7. An increase in which of the following is most likely to promote economic growth?
(B) Investment tax credits
38. Which of the following is true about the marginal propensity to consume?
(B) It determines the size of the simple spending multiplier.
21. When the average price level increases by 10 per- cent in a given year, which of the following must increase by 10 percent for real output to remain constant?
(B) Nominal national income
10. An appreciation of the United States dollar on the foreign exchange market could be caused by a decrease in which of the following?
(B) The United States consumer price index
11. Which of the following would indicate that economic growth has occurred?
(B) The long-run aggregate supply curve shifts to the right.
60. In an open economy, an increase in government budget deficit tends to cause the international value of a country's currency and its trade deficit to change in which of the following ways?
(B) Value of Currency will Appreciate and Trade Deficit will Become larger
23. A short-run Phillips curve shows an inverse relationship between
(B) inflation and unemployment
15. If the real interest rate in the United States increases relative to that of the rest of the world, capital should flow
(B) into the United States and the dollar will appreciate
9. The concept of opportunity cost would no longer be relevant if
(B) the supply of all resources were unlimited
31. Suppose that the Federal Reserve buys $400 billion worth of government securities from the public. If the required reserve ratio is 20 percent, the maximum increase in the money supply is
(C) $2,000 billion
54. Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains. The legal reserve requirement is 10 percent. If Maggie deposits the $100 bill she received as a graduation gift from her grandmother into her checking account, the maximum increase in the total money supply will be
(C) $900
28. Assume that the nominal interest rate is 10 percent. If the expected inflation rate is 5 percent, the real interest rate is
(C) 5%
Labor Market Data for Country X (in millions of persons) Population 180 Employed 94 Unemployed 6 Not in labor force 80 46. Based on the information in the table above, what is the unemployment rate for Country X?
(C) 6.0%
50. When an economy is at full employment, which of the following will most likely create demand- pull inflation in the short run?
(C) A decrease in the real rate of interest
49. Which of the following is NOT a function of fiat money?
(C) A source of intrinsic value
36. An increase in personal income taxes will most likely cause aggregate demand and aggregate supply to change in which of the following ways in the short run?
(C) Decrease in Aggregate Demand and No change in Aggregate Supply
40. Assume that the economy is at full employment. Policymakers wish to maintain the price level but want to encourage greater investment. Which of the following combinations of monetary and fiscal policies would best achieve this goal?
(C) Expansionary for Monetary Policy and Contractionary for Fiscal Policy
55. Assuming fixed exchange rates, if country Z's rate of inflation increases relative to its trading partners, Country Z's imports and exports will most likely change in which of the following ways?
(C) Increase in Imports and Decrease in Exports
51. Under rational expectations, an announced expansion in the money supply will change nominal and real gross domestic products (GDP) in which of the following ways?
(C) Increase in Nominal GDP and No change in Real GDP
16. Which of the following policy choices represents a combination of fiscal and monetary policies designed to bring the economy out of a recession?
(C) Increasing government spending and decreasing the federal funds rate
25. If the federal government reduces its budget deficit when the economy is close to full employ- ment, which of the following will most likely result?
(C) Interest rates will decrease.
53. In the long run, if aggregate demand decreases, real gross domestic product (GDP) and the price level will change in which of the following ways?
(C) No change in Real GDP and Price Level Decreases
17. Which of the following will be counted as unemployed by the United States Bureau of Labor Statistics?
(C) Persons who were fired from their previous jobs and are actively applying for work
1. If a certain combination of goods or services lies outside the production possibilities curve of an economy, which of the following is true?
(C) Resources are not available to achieve that combination of goods or services.
41. In one year, spending on consumption, investment, and government purchases was equal to 103 percent of a country's gross domestic product. This would be possible only if
(C) net exports were negative
14. Crowding out refers to the decrease in
(C) private investment due to increased borrowing by the government
24. Which of the following can be expected to cause an increase in gross domestic product in the short run?
(D) Equal increases in both taxes and government expenditures
29. Which of the following will lead to an increase in the United States gross domestic product?
(D) Foreign companies build new assembly plants in the United States.
8. An appropriate fiscal policy to combat a recession would be to increase which of the following?
(D) Government spending
2. Which of the following groups would most likely gain from unanticipated inflation?
(D) Individuals who have borrowed money at fixed interest rates
39. When an economy is operating below the full- employment level of output, an appropriate monetary policy would be to increase which of the following?
(D) Open market purchases of government bonds
22. Which of the following will occur in a competi- tive market when the price of a good is less than the equilibrium price?
(D) Price will increase to eliminate the shortage and restore equilibrium.
13. Which Federal Reserve action can shift the aggregate demand curve to the left?
(D) Raising the discount rate
42. When firms restructure their operations to decrease production costs, the aggregate supply curve, the price level, and real output will change in which of the following ways?
(D) Shift to the right in AS curve, Price level Decrease, and Increase in Real Output
27. Stagflation is most likely to be caused by
(D) a decrease in aggregate supply
48. In a closed economy with only lump-sum taxation, if the marginal propensity to con- sume is equal to 0.75, a $70 billion increase in government spending could cause a max- imum increase in output of
(E) $280 billion
58. Which of the following would cause the short-run aggregate supply curve to shift to the right?
(E) A decrease in the expected price level
56. Which of the following household purchases will be counted as part of gross private investment in a country's gross domestic product?
(E) A newly constructed home
35. According to the graph above, which of the following is true about the long-run equilibrium of the economy depicted?
(E) As wages increase, the short-run aggregate supply curve will shift to the left to restore long-run equilibrium.
59. A decrease in business taxes would lead to an increase in national income by increasing which of the following?
(E) Both aggregate demand and aggregate supply
3. With a constant money supply, if the demand for money decreases, the equilibrium interest rate and quantity of money will change in which of the following ways?
(E) Decrease in interest rates and No change in quantity of money
4. According to the graph above, an increase in aggregate supply will most likely cause income and employment to change in which of the following ways
(E) Increase in income and increase in employment
47. Suppose that the government decreases taxes and at the same time the central bank decreases the discount rate. The combined actions will result in
(E) an increase in the real gross domestic product and an indeterminate change in the interest rate
45. The Federal Reserve decreases the federal funds rate by
(E) buying government bonds on the open market
30. An advance in technology will cause the
(E) long-run aggregate supply curve to shift to the right
52. A decrease in labor productivity will shift the
(E) short-run aggregate supply curve to the left
The shifting of a country's production possibilities curve to the right will most likely cause
(E) the long-run aggregate supply curve to shift to the right
Refer to the picture. If the economy is currently producing 10 units of good A and 90 units of good B, the opportunity cost of increasing the production of good A from 10 units to 20 units is how many units of good B?
10
if on receiving a checking deposit of $300 a bank's excess reserve increased by $255, the required reserve ratio must be
25% (If a $300 deposit increased excess reserves by $225, then $75 must be the required reserves from that deposit ($300 - $225). So, the reserve ratio (the % of reserves that can't be loaned out) is simply $75 / $300 = 25%.)
The annual inflation rate is expected to be 5 percent over the next 3 years. Juan plans to take out a 3-year loan to purchase an automobile. If Juan decides not to take out the loan if the interest rate exceeds 3 percent, the highest nominal interest rate he is willing to pay is
8 percent
Which of the following is an example of foreign direct investment?
A United States automobile manufacturer building a steel plant in Russia
Which of the following would be a current account transaction?
A United States firm sells $500 million of its products to a Chinese company
The value of which of the following is counted in the United States' gross domestic product?
A car produced in the United States and sold in Europe
Which of the following will most likely lead to a decrease in inflationary expectations?
A decrease in the money supply
A commercial bank's ability to create money depends on which of the following?
A fractional reserve banking system
A high marginal propensity to consume implies which of the following?
A low marginal propensity to save
Which of the following individuals is considered unemployed?
A recent college graduate who is looking for her first job
in the short run, a restrictive fiscal policy will cause aggregate demand, output, and the price level to change in which of the following ways?
AD: decrease, output: decrease, price level: decrease (A restrictive fiscal policy entails decreasing government spending and/or increasing taxes. The result of these policies is a decrease in aggregate demand. As AD shifts to the left (decreases), output and price level both decrease.)
If marginal business tax rates are decreased, how will the aggregate supply and employment change in the long run?
Aggregate Supply: Increase Employment: Increase
31. If Country Alpha has been experiencing a higher inflation rate than Country Beta over the past decade, which of the following is true?
Alpha's currency will have depreciated relative to Beta's currency.
Which of the following changes would cause an economy's aggregate demand curve to shift to the right?
An increase in autonomous consumption spending
Which of the following best illustrates an improvement in a country's standard of living?
An increase in real per capita gross domestic product
Which of the following will lead to a decrease in a nation's money supply?
An increase in reserve requirements
Assume that an economy is currently in long-run equilibrium and the short-run aggregate supply curve is upward sloping. An adverse supply shock, such as a drought, will most likely cause which of the following to the economy in the short run?
An increase in the price level and a decrease in the real wage
Based on the balance sheets a bove for three different banks, which of the following is true, if the reserve requirement is 10 percent? Check doc for balance sheets
Bank B can increase its loans by $40.
In the short run, which of the following would occur to bond prices and interest rates if a central bank bought bonds through open-market operations?
Bond Prices - Increase. Interest rates - Decrease
An increase in net investment leads to faster economic growth because capital per worker and output per worker will change in which of the following ways?
Capital per worker - Increase. Output per Worker - Increase
Which of the following best explains the increase in national income that results from equal increases in government spending and taxes?
Consumers do not reduce their spending by the full amount of the tax increase.
With an increase in the real interest rate, consumption and real gross domestic product will most likely change in which of the following ways?
Consumption: Decrease RGDP: Decrease
Using equal amounts of labor hours, Country X and Country Y can each produce the number of watches and radios shown in the production possibilities curves above. Based on the information, which of the following is true? (Refer to picture)
Countries X and Y can engage in a mutually advantageous trade by exchanging 1 watch for 1 radio
The table below shows the production alternatives of Country A and Country B for producing computers and cars with equal amounts of resources that are fully and efficiently employed. (ON DOC) Which of the following is true according to the data in the table?
Country B has an absolute and comparative advantage in the production of computers.
19. Suppose that autonomous consumption is $400 and that the marginal propensity to consume is 0.8. If disposable income increases by $1,200, consumption spending will increase by
D) $ 960
Which of the following are the most likely short-run effects of an increase in government expenditures?
Decrease in Unemployment Rate, Increase in Inflation Rate, and Increase in Real GDP
If two nations specialize according to the law of comparative advantage a nd then trade with each other, which of the following would be true?
Each nation would increase its consumption possibilities.
Suppose the Federal Reserve is committed to keeping the nominal interest rate fixed. To maintain the interest rate target in the face of an expansionary fiscal policy, the Federal Reserve can do which of the following?
Engage in open-market purchases
A reduction in inflation can best be achieved by which of the following combinations of fiscal and monetary policy?
Fiscal Policy - increase taxes. Monetary policy - sell government bonds.
Which of the following combinations of changes in government spending an d taxes is necessarily expansionary?
Government Spending: Increase Taxes: Decrease
A country's government runs a budget deficit when which of the following occurs in a given year?
Government spending exceeds tax revenues.
Which of the following statements about the circular flow model of a market economy is correct?
Households are on the demand side of the product market and the supply side of the resource market
For an economy consisting of households and businesses only, which of the following is consistent with the circular flow of income and production?
Households are suppliers of resources and consumers of goods and services.
17. An increase in which of the following would cause the aggregate demand curve to shift to the left?
Income taxes
Which of the following is an example of fiscal policy?
Increasing government expenditures to build highways
A simultaneous increase in inflation and unemployment could be explained by an increase in which of the following?
Inflationary expectations
Which of the following is most likely to occur when the Federal Reserve buys government bonds on the open market?
Interest rates will decrease
Which of the following is true of the quantity of money demanded?
It falls when interest rates rise, because the opportunity cost of holding money increases
Which of the following statements is true of unanticipated inflation?
It increases the economic well-being of net debtors.
Which of the following is true about the national debt of the United States?
It is the accumulation of past and current budget deficits and surpluses
Which of the following is true of a horizontal aggregate supply curve?
It suggests that increases in output can occur without increases in price levels
Advocates of a monetary rule recommend increasing the money supply at a rate that is equal to the rate of increase in which of the following?
Long-run real gross domestic product
Which of the following occurs as investment becomes more responsive to changes in the interest rate?
Monetary policy becomes more effective at changing real gross domestic product.
Which of the following changes in the supply of and the demand for a good will definitely result in a decrease in both the equilibrium price and quantity of the good?
No change in supply and decrease in demand
Assume that the economy is in equilibrium. If aggregate demand increases, nominal interest rates and bond prices will most likely change in which of the following ways?
Nominal interest rates: increase Bond Prices: decrease
If the Federal Reserve pursues a contractionary monetary policy, output and price level will change in which of the following ways in the short run?
Output: decrease Price level: decrease
Which of the following individuals is considered officially unemployed?
Pat, who recently left a job to look for a different job in another town
The diagram above shows the production possi-bilities curve for an economy that produces only consumption and capital goods. All of the following statements about this economy are true EXCEPT: DOC
Point X represents the most efficient combination of the two goods that can be produced by this economy.
In the short run, an expansionary monetary policy would most likely result in which of the following changes in the price level and real gross domestic product (GDP) ?
Price level - increase. Real GDP - increase
If labor costs rise in the automobile industry, which of the following will happen to car prices and the quantity of cars sold?
Price: Increase Quantity sold: Decrease
If an effective price floor is removed from a market for a good, then the price and quantity of the good sold will change in which of the following ways?
Price: decrease Quantity: increase
One explanation for the downward slope of the aggregate demand curve is that when the price level increases, which of the following will decrease?
Real value of assets
An increase in which of the following would be most likely to increase long-run growth?
Subsidies to businesses for purchases of capital goods
Assume that the inflation rate in Country X is very high relative to the inflation rates in all of its trading partners. Which of the following is likely to happen to Country X's currency on the foreign exchange market?
The demand for the currency will shift to the left, and the currency will depreciate
An increase in which of the following would LEAST likely increase labor productivity?
The labor force
If a reduction in aggregate supply is followed by an increase in aggregate demand, which of the following will definitely occur?
The price level will increase.
An increase in the government budget deficit is most likely to result in an increase in which of the following?
The real interest rate
Which of the following would be the initial impact on an economy if wages were to increase more than worker productivity?
The short-run aggregate supply curve would shift to the left, increasing the price level.
If economic agents perfectly anticipate policy changes and if all prices, including wages, are completely flexible, which of the following will be true in the long run?
There will be no trade-off between inflation and unemployment.
Which of the following is true about changes in tax rates, changes in the level of government expenditures, and change s in the money supply?
They have different lag times between implementation of a policy and its effects on aggregate demand.
Policies intended to re duce demand-pull inflation are most likely to increase which of the following in the short run?
Unemployment
For which of the following sets of unemployment and inflation rates will a central bank be most reluctant to increase the rate of growth in the money supply?
Unemployment rate 5%. Inflation rate 10%.
An increase in the international value of the United States dollar will tend to cause
United States exports to fall
Which of the following is likely to occur following the depreciation of the United States dollar?
United States exports will increase
Which of the following statements concerning economic growth is true?
With long-run economic growth, there is an increase in aggregate supply
a contractionary supply shock will most likely result in
a decrease in employment (A contractionary supply shock is something that decreases aggregate supply. The result of this would be an increase in the general price level and a decrease in employment.)
Which of the following most undermines the ability of a nation's currency to store value?
a decrease in the purchasing power of the currency
Which of the following would best explain an inward shift of the production possibilities curve?
a decrease in the quality of human capital
which of the following arguments is typically associated with classical economics?
a market economy is self-correcting and thus will not remain in a recession indefinitely (Classical economists are all about self-correction. They believe there is virtually no need for government involvement. In addition, they feel that prices and wages are flexible.)
Economic Growth is best defined as
a sustained increase in real gross domestic product per capita
Which of the following statements best describes the impact of a decrease in Japanese income on aggregate demand in the United States?
aggregate demand will decrease because the demand for United States exports decreases
which of the following would most likely cause a rightward shift in an economy;s aggregate supply curve?
an across-the-board reduction of wages in the manufacturing sector (Since wages represent a cost of production, if wage are reduced then aggregate supply will increase (shift to the right). Increased taxes or mandates would result in a decrease in aggregate supply (shift to the left). Likewise, if plants shutdown the aggregate supply curve would decrease (shift to the left).)
According to the short-run Phillips' curve, a decrease in unemployment is expected to be accompanied by
an increase in inflation
an infaltionary gap can be eliminated by all of the following except
an increase in the money supply (An inflationary gap means that there is too much spending. An increase in the money supply would result in lower interest rates and more investment. This would not eliminate, but rather worsen our inflationary problem.)
All of the following changes will shift the investment demand curve to the right EXCEPT
an increase in the real interest rate
A decrease in the prices of inputs will cause which of the following to occur in the short run?
an increase in the short-run aggregate supply and a decrease in the price level
which of the following would most likely cause the united states to fall into a recession?
an open market sale by the federal reserve (An open market sale by the Fed would decrease the money supply and cause interest rates to increase. As interest rates rise, investment decreases thereby decreasing aggregate demand. And, if aggregate demand decreases, chances are the economy will fall into a recession. All of the other choices would result in aggregate demand increasing. If aggregate demand increases, we may experience an inflationary period.)
an increase in japan's demand for united states goods would cause the value of the dollar to
appreciate because japan would be buying more united states dollars (If Japan is demanding more U.S. goods, they will also be demanding more dollars so that they can buy our goods. This increased demand for dollars would cause the value of the dollar to appreciate (increase in value) since the demand curve for dollars is shifting to the right.)
If a worker's nominal wage rate increases from $10 to $12 per hour and at the same time the general price level increases by 10 percent, the worker's real wage has
approximately increased by 10%
In the measurement of gross domestic product, investment includes spending by
businesses on capital goods and changes in inventories
the federal reserve can increase the money supply by
buying government bonds on the open market (The Fed can increase the money supply by buying government bonds on the open market, decreasing the discount rate, or decreasing the reserve ratio.)
which of the following constitutes the largest component of the united states money supply? (m1)
checkable deposits (demand deposits) (M1 consists of currency (coins and paper money) and checkable (demand) deposits. Out of these two components, checkable (demand) deposits constitute the largest component of the United States money supply.)
Aggregate demand may be measured by adding
consumption, investment, government spending, and net exports
suppose that disposable income is $1000, consumption is $700, and MPC is .6. if disposable income then increases by $100, consumption and savings will equal which of the following?
consumption: $760, savings: $340 (Remember, you can either save or consume your income. Y = C + S. Thus, $1,000 = $700 + S. So, S = $1,000 - $700 = $300. If the MPC = 0.6 and income increases by $100, you would consume .60 x $100 = $60 of the $100 increase. Since you are consuming $60, you must be saving the other $40. Therefore, consumption now equals $700 + $60 = $760 and savings now equals $300 + $40 = $340.)
Hyperinflation is typically caused by
continuous expansion of the money supply to finance government budget deficits
The consumer price i ndex (CPI) is designed to measure changes in the
cost of a select market basket of goods and services
A country can have an increased surplus in its balance of trade as a result of
declining imports and rising exports
The amount of money that the public wants to hold in the form of cash will
decrease if interest rates increase
If the economy was in a severe recession, the most expansionary fiscal policy would be to
decrease personal income taxes and increase government spending by equal amounts
which of the following policies would a keynesian recommend during a period of high unemployment and low inflation?
decrease taxes to stimulate aggregate demand (If unemployment is high, a Keynesian is going to want to stimulate the economy with some form of expansionary fiscal policy. Thus, they would decrease taxes and/or increase government spending. They would run on a budget deficit during this time.)
unexpected increases in inventories usually precede
decreases in production (As businesses produce too much, inventories begin to pile up. When these increases are unexpected, we can predict that there will soon be a decrease in production since there will no longer be the need to produce as much.)
Which of the following would be included as a liability on a commercial bank's balance sheet?
demand deposits
which of the following changes will occur to the demand for the united states dollars and the international value of the dollar in the short run if investors in the united states and abroad increase their purchases of united states government bonds?
demand for dollars: increase, international value of the dollar: increase (If investors increase their purchases of United States government bonds, they are going to be demanding more dollars. As the demand for dollars increases (demand curves shifts to the right), the international value of the dollar also increases.)
If a French firm buys computers from the United States, there would be an increase in which of the following in the foreign exchange market?
demand for the United States dollars and supply of euros
The value of a country's currency will tend to appreciate if
demand for the country's exports increases
one way in which the federal reserve works to change the united states money supply is by changing the
discount rate (The tools of the Fed consist of buying/selling government securities on the open market, lowering/raising the discount rate (the interest rate the Fed charges banks for loans), or lowering/raising the reserve requirement (the % of reserves that banks can't loan out).)
Which of the following would cause the official unemployment rate to understate the problem of unemployment
discouraged workers
Tariffs are different from assigned import quotas in that tariffs will
generate additional revenue for the domestic government
a major advantage in automatic stabilizers in fiscal policy is that they
go into effect without passage of new legislation (Automatic stabilizers don't require any action in order to take effect. They are automatically built into the economy and, thus, work without the passage of new legislation.)
Crowding out occurs when
government borrowing to finance its spending decreases private sector investment
under which of the following conditions would a restrictive monetary policy be most appropriate?
high inflation (A restrictive monetary policy is used to slow down an economy that is growing too fast. Thus, it would be most appropriate if we were experiencing high inflation.)
compared to expansionary monetary policies adopted to counteract a recession, expansionary policies tend to result in
higher interest rates (Expansionary fiscal policies result in the government running on a budget deficit since G > T. As the government borrows money to finance their budget, the demand for loanable funds increases (shift to the right). This increased demand causes interest rates to rise (thereby crowding out some private investors). So, while expansionary monetary policy results in lower interest rates due to an increase in the money supply, expansionary fiscal policy results in higher interest rates (thereby negating some of the intended effect of the policy).)
crowding out due to government borrowing occurs when
higher interest rates decrease private sector investment (Government borrowing causes the demand for loanable funds to increase. It is this increase in demand that causes interest rates to rise. Higher interest rates, in turn, decrease private sector investment. This decrease in private investment is known as crowding out.)
According to the short-run Phillips curve, lower inflation rates are associated with
higher unemployment rates
as a measure of economic welfare, GDP underestimates a country's production of goods and services when there is an increase in
household production (GDP underestimates a country's production of goods and services when there is an increase in household production since these goods and services produced within a house are excluded from GDP (because they don't involve a market transaction).)
which of the following is true according to the circular flow model?
households are demanders in the product markets and suppliers in the factory markets (Households demand products produced by firms, yet at the same time, they supply their resources (labor) to firms.)
as nations specialize in production and trade in international markets, they can expect which of the following domestic improvement? i: allocation of domestic resources, ii: standard of living, iii: self-sufficiency
i and ii (Trade results in specialization and, thus, an improved allocation of domestic resources and an increased standard of living (since more can be produced as a result of trade). Trade means that you are depending on someone else for a good or service. Therefore, trade does not result in self-sufficiency.)
#16 refer to google doc
i, ii, and iii (Opportunity cost is a measure of what must be forgone in order to have more of something else. When moving from point P to R we must give up units of Y (10 units) to have more X, and when moving from point R to P we must give up units of X (8 units) to have more Y. The opportunity cost of moving from Q to R is nothing simply because at Q some of our resources were underemployed. This means that we won't have to give up anything to produce more of X or Y.)
in a closed economy with no taxes in which the average propensity to consume is .75, which of the following is actually true?
if income is $200, then saving is $50 (If APC = 0.75, APS = 1 - 0.75 = 0.25. Remember, APC = Consumption / Income. And, APS = Savings / Income. By trial and error, you'll find that the correct choice is "c." If income is $200 and APS = 0.25, simply solve for the amount of savings. 0.25 = Savings / $200. Savings = 0.25 x $200 = $50.)
The official unemployment rate understates the unemployment level in the economy because the official unemployment rate
ignores underemployed and discouraged workers
if the money stock decreases but nominal GDP remains constant, which of the following has occured?
income velocity of money has increased (MV = PQ. Since PQ does not change and M ↓, V must ↑ in order for the equation to remain balanced.)
which of the following best explains why equilibrium income will rise by more than $100 in response to a $100 increase in government spending?
incomes will rise, resulting in higher consumption (The $100 increase in government spending will increase AD and, thus, incomes will increase. As incomes rise, consumers will spend more on consumption thereby causing equilibrium income to rise by more than the initial $100 increase in government spending. This process is known as the consumer re-spending effect.)
according to the keynsian savings schedule, when aggregate income increases by a given amount, savings will
increase by less than the amount of the change in income (Remember, you can do two things with your income: spend or save it. Y = C + S. Thus, if income increases by a given amount, savings will increase, but not by the entire amount since you will consume some of that additional income.)
If the velocity of money is stable, the quantity theory of money predicts that an increase in the money supply will lead to a proportional
increase in the nominal output
With an upward-sloping short-run aggregate supply curve, an increase in government expenditure will most likely
increase real gross domestic product
Which of the following actions by the Federal Reserve reduces the ability of the banking system to create money?
increasing the reserve requirement
which of the following will most likely occur in an economy if more money is demanded than is supplied?
interest rates will increase (If more money is demanded than supplied, this means we are to the right of the intersection of the supply and demand curves of money. Since people demand more money, they will sell bonds and such to obtain money. This causes us to move up along the demand curve until equilibrium is restored.)
A barter economy is different from a money economy in that a barter economy
involves higher costs for each transaction
according to monetarists, which of the following is true of expansionary fiscal policy?
it will cause interest rates to rise and crowd out private investment spending (Monetarists dislike expansionary fiscal policy because of crowding out. In addition, they dislike fiscal policy in general because it is too slow!)
assume that the reserve requirement is 15% and that a bank receives a new checking deposit of $200. which of the following will most likely occur in the bank's balance sheet.
liabilities: increase by $200, required reserves: increase by $30 (With a 15% reserve requirement and a deposit of $200, a bank's required reserves will increase by 15% x $200 = $30. And, the bank's liabilities have increased by $200 since that is the amount of the new demand deposit.)
in the keynesian model, an expansionary monetary policy will lead to
lower real interest rates and more investment (Expansionary monetary policy increases the money supply. This causes interest rates to fall and, thus, investment to increase.)
If a country's economy is operating below the full-employment level of output at a very low inflation rate, the central bank of the country is most likely to
lower the discount rate and buy bonds on the open market to generate an increase in output
mary jane is a lawyer who can earn $150 per hour in her law practice. she is also an excellent carpenter who can build cabinets 3x as fast as the best carpenter, whose hourly wage is $20 per hour. which of the following is the correct economic statement?
mary jane has a comparative advantage in law so she should specialize in law and hire a carpenter to make her cabinets ( If Mary Jane were to build the cabinets herself, she would save $60/hr on carpenter fees, but she would give up her lawyer salary of $150/hr during that time. Thus, it would actually cost her $150 - $60 = $90/hr to build the cabinets herself. Since it only costs her $20/hr to hire a carpenter, she should specialize in law and hire a carpenter (despite the fact that she has an absolute advantage in both).)
The transaction demand for money is very closely associated with money's use as a
medium of exchange
policymakers concerned about fostering long-run growth in an economy that is currently in a recession which would most likely recommend which of the following combinations of monetary and fiscal policy actions?
monetary policy: buy bonds, fiscal policy: no change (If we are in a recession, we are going to want to implement expansionary policies. Thus, we would want to buy bonds and do nothing with regards to fiscal policy. The effects of expansionary fiscal policy are partially negated due to the crowding-out effect. In addition, since fiscal policy results in higher interest rates, our long-run growth would actually be slowed since investment would decrease.)
in a flexible system of exchange rates, an open market sale of bonds by the federal reserve will most likely change the money supply, the interest rate, and the value of the united states dollar in which of the following ways?
money supply: decrease, interest rate: increase, value of the dollar: increase (An open market sale of bonds by the Fed will decrease the money supply. As the money supply decreases (shifts left), interest rates will increase. Higher interest rates in the U.S. entice foreigners to invest in our markets. In order to invest, foreigners will need to have dollars. Thus, there will be an increase in the demand for dollars. It is this increased demand for dollars that results in the value of the dollar increasing.)
Unlike a market economy, a command economy uses
more centralized planning in economic decision making
When the Federal Reserve increases the money supply to stimulate aggregate demand, workers believe that this action will cause inflation in the future and ask for higher wages to offset the expected increase in inflation. This is an example of
national expectations
which of the following would best explain a decline in potential GDP?
negative net investment (A discovery of vast new oil deposits, a decrease in the infant mortality rate, or a decrease in wages would result in an increase in AS (and, therefore, an increase in GDP). If net investment is negative, then our supply of capital stock is decreasing thereby explaining a decline in potential GDP (our ability to produce more in the future).)
which of the following best explains how an economy could simultaneously experience high inflation and high unemployment?
negative supply shocks cause factor prices to increase (High inflation and high unemployment is known as stagflation. An economy could experience stagflation if aggregate supply (AS) decreased. Negative supply shocks that cause factor prices to increase would result in AS decreasing.)
no item scored
no item scored
In the narrowest definition of money, M1, savings accounts are excluded because they are
not a medium of exchange
if purchases of education and medical care were counted as investment rather than consumption, GDP would
not change, because there is no change in total expenditures (It would not change because investment and consumption are both components of aggregate demand. Thus, in the end, it wouldn't matter how you classify them.)
the money-creating ability of the banking system will be less than the maximum amount indicated by the money multiplier when
people hold a portion of their money in the form of currency (The money-creating ability of the banking system is based on the money multiplier and the fact that banks will lend out all of their excess reserves and that people will deposit all of their money into a bank. If people hold a portion of their money in the form of currency, the banks' lending potential has been reduced (they don't have as much excess reserves to loan out) and, therefore, the money creating ability of the banking system will be less than the maximum amount indicated by the money multiplier.)
if the economy is operating in the intermediate range of the aggregate supply curve and if aggregate demand increases due to an increase in net exports, then the price level, output, and the unemployment rate are most likely to change in which of the following ways?
price level: increase, output: increase, unemployment rate: decrease (If aggregate demand increases, the AD curve shifts to the right. Since we know that we are on the upward sloping portion of the AS curve (intermediate range), we know that prices and output will increase while unemployment will decrease (because we are producing more).)
an increase in energy costs will most likely cause the price level and real GDP to change in which of the following ways?
price level: increase, real GDP: decrease (An increase in energy costs, increase the costs of production. This means the aggregate supply curve will shift to the left thereby causing prices to rise and real GDP to fall.)
an important assumption in keynesian theory is that
prices are rigid downward and decreases in aggergate demand will lead to an increase in unemployment (Keynesians believe that prices and wages are not flexible downwards due to minimum wage laws, unions, and the nature of our businesses in general. In addition, since prices are rigid downward, the economy will not be capable of self-correction.)
if at full employment, the government wants to increase its spending by $100 billion without increase inflation in the short-run, it must do which of the following?
raise taxes by more than $100 billion (If the government does not want to increase inflation, it must increase taxes so that the policies are completely offset. Remember, changes in government spending have a direct effect, whereas changes in taxes have an indirect effect. Changes in taxes affect aggregate demand by changing incomes and, thus, consumer spending. However, people don't spend all of their income (they do save some portion of it). Thus, the actual change in consumption is equal to the marginal propensity to consumer (MPC) times the change in taxes. So, in order for no inflation to occur, the government is going to have to raise taxes by more than the $100 billion (which is the amount that they increased government spending by).)
an increase in the money supply is most likely to have which of the following short-run effects on real interest rates and real output?
real interest rate: decrease, real output: increase (An increase in the money supply shifts the money supply curve to the right. This causes real interest rates to fall. As real interest rates fall, the level of investment demand increases (since the interest rate represents the cost of investing). And, since investment (I) is one of the components of aggregate demand (AD), it will cause AD to increase (shift to the right) thereby increasing real output.)
Under a flexible exchange-rate system, the Indian rupee will appreciate against the Japanese yen when
real interest rates in India increase relative to those in Japan
the intersection of the aggregate supply curve and the aggregate demand curve occurs at the economy's equillibrium level of
real national output and the price level (In other words, what are the axes on the AD/AS model? On the vertical axis, we have price level. And, on the horizontal axis, we have real national output (real GDP).)
#19 refer to google doc
recession (Since our income is currently $1000 while the full employment level is $2000, we are experiencing a recession.)
The Federal Reserve can cause an increase in interest rates in an attempt to
reduce inflation
Which of the following government policies to reduce the rate of inflation in the short run
selling bonds on the open market
when consumers hold money rather than bonds because they expect the interest rate to increase in the future, they are holding money for which of the following purposes?
speculation (If people hold money because they think interest rates are going to rise in the future, they are speculating that rates will increase so that they will benefit from holding the money. Thus, the purpose of money is that of speculation.)
An industry historically used employees with specific skills. If this industry experiences technological advances that require new skills there will most likely be
structural unemployment
Which of the following would most likely stimulate economic growth?
technological progress
the value of the spending multiplier decreases when
the MPS increases (The spending multiplier (m) = [1 / (1 - MPC)], where MPC = marginal propensity to consume. In addition, since 1 - MPC = MPS (marginal propensity to save), the spending multiplier can be re-written as m = 1 / MPS. So, if MPS ↑, the value of the spending multiplier must decrease.)
which of the following changes in the aggregate demand and aggregate supply curves is likely to result in stagflation?
the aggregate supply curve shifts to the left (Stagflation occurs when there are simultaneous increases in price level and unemployment. This occurs when there is a decrease (shift left) in aggregate supply.)
Which of the following will most likely occur if a government adopts an annually balanced budget rule that requires the government to eliminate any deficits or surpluses?
the automatic stabilizing effect of fiscal policy will be eliminated
open market operations refer to which of the following activities?
the buying and selling of government securities by the federal reserve (Open market operations are the buying and selling of government securities (bonds) by the Fed.)
the short-run aggregate supply curve is likely to shift to the left when there is an increase in
the cost of productive resources (An increase in the cost of productive resources would likely shift the SRAS curve to the left. An increase in productivity would shift the SRAS curve to the right. An increase in the money supply would result in the AD curve shifting to the right. Also, if we are running on a budget deficit, chances are that AD is shifting to the right (increasing). In addition, if the number of imports increases, AD would shift to the left, as Net Exports would be declining (Exports - Imports).)
the price of one nation's currency expressed in the terms of another nation's currency is called
the exchange rate
which of the following transactions would represent an addition to a nation's current GDP?
the government decreases its domestic purchases of food for use by the military (A nation's current domestic product includes final goods and services produced during that year. It does not include financial transactions like the purchase of stock simply because that is just a transfer of ownership (nothing has been produced). Second hand sales also aren't included since the product was originally counted when it was first produced (nothing has been added to our economy). If a retailer increases her stock of imported shoes (she is buying goods not produced in the U.S. and, therefore, they aren't counted in GDP). If the government increases its purchases, GDP will increase since production has obviously increased.)
in the simple keynesian aggregate expenditure model of an economy, changes in investment of government spending will lead to a change in which of the following?
the level of output and employment (Investment spending is one of the components of aggregate demand. Thus, a change in investment will result in a change in the level of output and employment since the AD curve will be shifting)
#20 refer to google doc
the money supply (Since we want to stimulate the economy so that we reach full employment, the appropriate monetary policy would be to increase the money supply. The ways the Fed can increase the money supply include buying bonds, lowering the discount rate, or lowering the reserve requirement.)
the official unemployment rate is not an actual indicator of actual unemployment in the economy because
the official rate does not include persons who have given up for work (First off, the full employment rate of unemployment equals the natural rate of unemployment. Second, the official unemployment rate underestimates the actual level of unemployment since it does not include discouraged workers as part of the labor force. Discouraged workers are those who have simply given up looking for work.)
If the nominal GDP of the nation of Hypothetica increased in 2007 relative to the previous year, it must be true that in Hypothetica in 2007
the price level and/or the real GDP has increased
if real GDP is increasing at 3% per year and nominal GDP is increasing at 7% per year, which of the following is necessarily true?
the price level is increasing (Real = Nominal - Inflation. Thus, if real GDP is increasing at 3% and nominal GDP is increasing at 7%, inflation must be 7% - 3% = 4%. Therefore, price levels are increasing. Remember, inflation is a general increase in the price level.)
which of the following will occur if the federal government runs a budget deficit?
the size of the national debt will increase (If we run on a budget deficit, that means our expenditures are greater than our revenues. If this happens the size of the national debt will increase (since it is the total accumulation of all deficits and surpluses).)
Which of the following best describes human capital?
the training and education of workers
which of the following would be most likely to occur if the united states placed high tarriffs on imported goods?
the united states economy would become less efficient (High tariffs on imported goods would result in increased domestic production. An indirect effect of this tariff is simply the fact that inefficient industries are expanding while efficient industries abroad are being forced to contract. Thus, the United States economy would become less efficient. The number of job in the U.S. may increase, but only temporarily since our trading partners will be weakened (since their exports will be down) and, thus, they will be unable to buy our products causing our exports to decrease. This would result in less production and employment in the long run.)
Comparative advantage implies that
two countries should benefit from trade unless both have equal opportunity costs in every good