AP Macro Unit 3

Which of the following will happen when the actual inflation rate exceeds the expected inflation rate?

This will harm lenders with fixed-interest rate loans.

Which of the following is true for both stocks and bonds?

They are easily converted to cash.

Assume the economy of Country A is in long-run equilibrium. Which of the following will happen in the short run in Country A if one of its major trading partners, Country B, experiences a recession?

Aggregate demand will decrease and the price level will decrease.

If nominal wages are fixed by labor contracts, then which of the following explains why the aggregate supply curve is upward sloping?

An increase in the price level will increase profits and production.

The imposition by the United States of a tariff on imported steel from the European Union will likely have what impact on the short-run aggregate supply (SRAS) curve in the United States?

It will cause the (SRAS) curve to shift leftward.

Which of the following is classified as a discouraged worker?

Sara has been unable to find a job and abandoned her job search.

What type of unemployment describes the situation of factory workers displaced by automation?

Structural

Which of the following describes the relationship between the nominal interest rate and the quantity of money people want to hold as depicted by the money demand curve?

Inverse, and the money demand curve is downward sloping.

Which of the following is true about the loanable funds market?

Investment is financed by national savings in a closed economy.

Which of the following best describes the aggregate demand curve?

It is a curve that shows the level of spending by consumers, businesses, the government, and the foreign sector at different price levels.

Suppose the consumer price index (CPI) was 100 on January 1st, 2017 and 110 on January 1st, 2018 with no changes in nominal wages. Which of the following is definitely true about the economy between January of 2017 and January of 2018?

The inflation rate was 10 percent.

If the interest rate on a one-year loan is 5% and the expected inflation rate is −2% for the same period, what is the expected real interest rate on the loan?

7%

According to the expenditure multiplier, if the marginal propensity to consume is greater than zero, a one-dollar change in autonomous expenditures will result in which of the following?

A greater-than-one-dollar increase in aggregate demand for goods and services.

Which of the following explains why the amount predicted by the value of the simple money multiplier may be overstated?

It does not take into account a bank's desire to hold excess reserves.

Jan works a 30-hour week for a minimum wage of $10 an hour. Suppose that last year is the base year for the Consumer Price Index (CPI). Which of the following is true about Jan's real wage if at the end of this year the CPI is 125 ?

Jan's real wage is $8 per hour at the end of the year.

Which statement is true about the approaches used to measure the value of a nation's gross domestic product (GDP) ?

The expenditure approach to calculating GDP sums consumption spending, investment spending, government spending, and net exports.

Which of the following is adjusted by the actual inflation rate?

Real interest rates

Which of the following is the correct calculation of Real Gross Domestic Product (GDP)?

RealGDP=NominalGDP/GDPdeflator

Suppose Miguel wants to know the value of real gross domestic product (GDP) for 2011 in terms of the base year 1984 dollars. In 1984 nominal GDP was $10 billion. In 2011 nominal GDP was $15 billion and the price deflator was 200. Real GDP in 1984 dollars would be equal to which of the following?

$7.5 billion

Which of the following represents an appropriate fiscal policy for the given economic conditions?

A contractionary fiscal policy is appropriate to reduce inflation when there is an inflationary gap.

Which of the following explains the relationship between the price level and real output along the aggregate demand curve?

At a lower price level, domestic goods will become less expensive compared to foreign goods, which causes an increase in spending on domestic goods.

Suppose a nation opened its borders to the free flow of workers from other nations. How would this event likely affect the long-run aggregate supply (LRAS) curve and the production possibilities curve of the nation?

Both curves would shift to the right.

Assume that stock prices and home values have increased, raising household wealth. At the same time, productivity increased due to new technology. What is the likely short-run impact on the economy?

Both the aggregate demand (AD) and the short-run aggregate supply (SRAS) curves shift right, resulting in a higher output level and indeterminate price level.

Which of the following is true about gross domestic product (GDP)?

Calculations of GDP include the unsold inventories of goods produced within the borders of the country.

Which of the following is included in the monetary base?

Currency held by the public and commercial bank reserves held with the central bank.

The government of Olympia is considering a fiscal policy action to slow the economy and curb inflation. If the marginal propensity to consume is 0.8, which of the following responses correctly identifies a policy action that would help the government achieve its goals and the impact of that action on Olympia's real gross domestic product (GDP)?

Decreasing government spending by $10 billion decreases real GDP by a maximum of $50 billion.

Suppose that the economy has entered a recession. Which of the following is a monetary policy action a central bank can take to restore full-employment output?

Decreasing the discount rate

Which of the following terms describes a slowdown in the rate of increase in the consumer price index?

Disinflation

Which of the following is true about the equilibrium real output in the aggregate demand-aggregate supply (AD-AS) model in the short run?

Equilibrium real output can be above, equal to, or below full employment.

Cash, a house, bonds, and a savings account are all financial assets. Which of the following rankings lists these assets from the least liquid to the most liquid?

House, bonds, savings account, cash.

Suppose an economy is operating above full employment. Which of the following fiscal policy actions and resulting changes in aggregate demand will move the economy back towards full employment?

Increasing taxes, which will shift the AD curve leftward.

Which of the following transactions will keep M1 unchanged?

Leila deposited coins from her piggy bank into her checking account.

Last year, Myron purchased a $10,000 certificate of deposit with a 3% rate of interest from his bank. The government reported that prices, on average, have fallen by 5% during the current year. Which of the following can be concluded as a result of this transaction?

Myron gains, while the bank loses.

Nathan has been unable to trust banks since the failure of his savings and loan bank. He claims that storing his hard-earned money at home is costless. Is Nathan correct?

No, because the opportunity cost of holding money is the lost interest he could have earned on other financial assets.

Which of the following describes a difference between nominal gross domestic product (GDP) and real GDP?

Nominal GDP uses current prices to measure the value of final output, while real GDP uses constant prices.

If the natural rate of unemployment exceeds the actual rate of unemployment, which of the following will occur in the long run in the absence of government intervention?

Nominal wages will increase.

Which of the following best explains how income taxes can moderate a business cycle during an expansion?

Tax payments increase automatically as gross domestic product (GDP) rises, which dampens consumption spending.

As a measure of economic performance, the United States gross domestic product (GDP) accounts for which of the following?

The cleanup of an oil spill

The output gap is measured by which of the following?

The difference between actual and potential GDP .

Northern City Bank keeps no excess reserves. Assume Northern City Bank receives a deposit of $50 million dollars. As a result of the deposit, Northern City Bank's required reserves increase by $10 million. What is the maximum possible change in the money supply in the banking system that could result from the $50 million deposit?

The money supply will increase by a maximum of $200 million.

An increase in the price level will affect the money market and bond market in which of the following ways?

The nominal interest rate rises, and the price of previously issued bonds falls.

Country X is currently in long-run macroeconomic equilibrium. If the country's economy experiences a significant increase in the price of energy, a major input in production, which of the following will occur in the short run?

The short-run aggregate supply curve will shift to the left, and the actual rate of unemployment will exceed the natural rate of unemployment.

When an economy is at the trough of the business cycle, which of the following is then true about the state of the economy?

There is a recessionary gap.

The government of Euroland is considering increasing government spending to avoid a recession. What is the most likely effect on aggregate demand in Euroland?

There will be a rightward shift in the AD curve.

Country X's economy is enjoying political stability and attracting foreign financial capital. At the same time Country X's government is borrowing to finance spending. How will these changes affect the loanable funds market in Country X?

There will be an indeterminate effect on the equilibrium real interest rate.

In an economy where wages and prices are sticky, which of the following will happen as a result of an increase in the price level?

There will be an upward movement along the short-run aggregate supply curve and real output will increase.

A country's central bank purchased government bonds from the public in the open market. How would this action affect the nominal interest rate and the price level in the short run?

There would be a decrease in the nominal interest rate and an increase in the price level.

How will automatic stabilizers affect the economy during a recession?

They will shift the aggregate demand curve to the right, increasing real output.

Mia transferred $1,000 from her checking account to her savings account. How will M1 and M2 measures of the money supply change?

M1 will decrease and M2 will not change.

Which of the following describes a limitation of gross domestic product (GDP)?

It does not account for the distribution of income in a nation or income inequality.

What is an automatic stabilizer?

It is a program or policy that counteracts the business cycle without any new government action required.

Assume an economy is currently at full employment. Which of the following best describes the long-run adjustments that will occur in the economy following a negative aggregate demand shock with no government intervention?

Nominal wages will decrease and short-run aggregate supply will increase until full employment is restored in the long run.

Assume the marginal propensity to consume is 0.75. What will happen if government spending increases by $100 billion?

Real output will increase by a maximum of $400 billion.

Spencer took a 9 percent one-year fixed-rate loan to buy a new car. He expected to pay a real interest rate of 5 percent. If at the end of the year Spencer only paid a 3 percent real interest rate, which of the following is true?

The actual inflation rate was 6% .

Suppose that the prices of labor and inputs to production are fixed in the short run but not in the long run. What is a consequence of this flexibility in the long run?

The long-run aggregate supply curve is vertical and there is no trade-off between inflation and unemployment in the long run.

Which statement is true about the circular flow diagram of an economy?

The market for factors of production connects spending by firms to household income.

Which of the following is illustrated by the long-run aggregate supply (LRAS) curve and the production possibilities curve (PPC)?

The maximum sustainable capacity.

Southern City Bank has $100 million in deposits and has $8 million in excess reserves. If the required reserve ratio is 5%, which of the following is true?

The money multiplier is 20, and loans can increase in the banking system by a maximum of $160 million.

Labor unions negotiated a 3-year contract with employers in the automobile industry. They agreed to a 3 percent per year increase in pay over the 3 years. How would each group be affected by an actual inflation rate of 4% next year?

Workers would be worse off, and the employers would be better off.