macro econ AP classroom missed questions

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.

Which of the following changes in the United States will most likely increase aggregate demand in Japan? - A decrease in the United States real gross domestic product - An appreciation of the United States dollar relative to the yen - An increase in the demand for Japanese financial assets by American investors

An appreciation of the United States dollar relative to the yen An appreciation of the dollar is a depreciation of the yen, which makes Japanese goods (Japanese exports) relatively less expensive than American goods; this increases net exports in Japan and so increases aggregate demand in Japan.

Which of the following will most likely cause an inflow of financial capital to Canada? - An increase in the Canadian federal budget deficit - An increase in the Canadian money supply - An increase in real interest rates of Canada's trading partners

An increase in the Canadian federal budget deficit - An increase in the budget deficit increases the demand for loanable funds (or reduces the supply of loanable funds), which increases real interest rates in Canada and attracts financial capital from abroad.

If nominal wages are fixed by labor contracts, then which of the following explains why the aggregate supply curve is upward sloping? - A decrease in the price level will increase profits and production. - An increase in the price level will decrease real wages and decrease production. - An increase in the price level will increase profits and production.

An increase in the price level will increase profits and production. With fixed nominal wages, an increase in the price level will increase profits, to which firms respond by hiring more workers and increasing production.

Which of the following is adjusted by the actual inflation rate? Nominal wages Automatic stabilizers Unemployment rate Price of previously issued bonds Real interest rates

Real interest rates

Suppose that an economy with flexible wages and prices is in long-run equilibrium when the central bank contracts the money supply. What is the long-run effect on real output in the economy? - Real output falls. - Real output is unchanged. - Real output falls as price levels fall.

Real output is unchanged. When the economy is at full employment, changes in the money supply have no effect on real output in the long run.

Which of the following is the correct calculation of Real Gross Domestic Product (GDP)? - RealGDP=NominalGDP×GDPdeflator - RealGDP=Nominal GDP−GDPdeflator - RealGDP=NominalGDP/GDPdeflator

RealGDP=NominalGDP/GDPdeflator

Suppose that Angola's economy is booming resulting in an increase in the income of domestic residents. How will the increase in income most likely affect the foreign exchange value of the Angolan currency, the kwanza, and the Angolan net exports?

The kwanza will depreciate and net exports will decrease. An increase in domestic income will increase the demand for imports of foreign goods and will result in an increase in the supply of the kwanza, which will depreciate the currency. An increase in the demand for imports will increase imports and will decrease net exports.

Suppose a country's government increases the allowable deduction for individual retirement accounts per person. Holding all other influences constant, how would this policy action affect the country's loanable funds market, its production possibilities curve, and its long-run aggregate supply (LRAS) curve? - Private savings would increase and real interest rates would decrease in the loanable funds market, the nation's production possibilities curve would shift outward, and its LRASLRAS curve would shift to the right. - Private savings would decrease and real interest rates would increase in the loanable funds market, the nation's production possibilities curve would shift inward, and its LRASLRAS curve would shift to the left.

- Private savings would increase and real interest rates would decrease in the loanable funds market, the nation's production possibilities curve would shift outward, and its LRASLRAS curve would shift to the right. - Private savings would increase and real interest rates would decrease in the loanable funds market, which would increase investment spending in plant and equipment. With more physical capital accumulation, the nation's production possibilities curve would shift outward and its LRASLRAS curve would shift to the right.

Suppose that the exchange rate between the United States dollar ($) and the Thai currency, baht (฿), is ฿1=$0.05. Leticia wants to buy a ฿600 souvenir from Thailand. What is the souvenir's price in dollars? - $600 - $30 - $12 000

30 The souvenir's price in dollars == the souvenir's price in baht ×× the exchange rate ($/฿) =฿600×0.05($/฿)=$30($/฿) =฿600×0.05($/฿)=$30.

As a measure of economic performance, the United States gross domestic product (GDP) accounts for which of the following? - The use of open-source, free Web browsers - The cleanup of an oil spill - The production of vegetables grown in the backyard and consumed by the family

The cleanup of an oil spill

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.When the central bank buys government bonds, the money supply increases, which decreases the nominal interest rate. This increases interest-sensitive spending and increases aggregate demand, real output, and the price level.

Which of the following is true for both stocks and bonds? - They are interest-bearing assets. - They are easily converted to cash. - They are risk-free assets. - They are equity. - They are the most liquid form of financial assets.

They are easily converted to cash.

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 better off, and the employers would be worse off. - Workers and employers would be equally well off. - Workers would be worse off, and the employers would be unaffected. - Workers would be worse off, and the employers would be better off.

Workers would be worse off, and the employers would be better off. When the actual rate of inflation (4%) is greater than the expected inflation rate (3%), the real value of worker income is reduced, which means that workers are worse off and employers are better off.

To reduce the size of a country's national debt, a government could potentially take all of the following actions EXCEPT - decrease the supply of government bonds - decrease borrowing of private loanable funds - finance spending by borrowing

finance spending by borrowing. Borrowing to finance spending will increase the size of the national debt.

An increase in household savings will shift the supply curve of loanable funds to the-------, which results in a (lower/higher) real interest rate

right, lower

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 economy is producing at its potential output level. - The unemployment rate is lower than the natural rate of unemployment.

- There is a recessionary gap. At the trough of a business cycle, there is a recessionary gap because, at the trough, actual output is below potential output.

An increase in the expected inflation rate will cause which of the following? - A rightward shift in the aggregate demand curve - A leftward shift in the long-run Phillips curve - A rightward shift in the short-run Phillips curve

A rightward shift in the short-run Phillips curve The short-run Phillips curve is drawn for a given expected inflation rate and so it shifts as inflationary expectations change. An increase in the expected inflation rate shifts the short-run Phillips curve to the right, which implies a higher unemployment rate for any given expected inflation rate.

Which of the following terms describes a slowdown in the rate of increase in the consumer price index? - Deflation - Disinflation - Stagflation

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

Equilibrium real output can be above, equal to, or below full employment. Short-run equilibrium in the (AD-AS)(AD-AS) model occurs when the aggregate demand and short-run aggregate supply curves intersect. This can occur below, above or at the long-run aggregate supply curve. Therefore equilibrium real output can be below, above, or at full employment in the short run.

Which of the following transactions is recorded as a credit entry in the country's current account? - Imports of capital goods - Exports of consumer goods - Purchases of foreign government bonds

Exports of consumer goods Exports are recorded in the current account balance and increase a country's current account balance because exports cause money to flow into the country and therefore they are a credit entry in its current account.

Which of the following is true about the loanable funds market? - The demand for loanable funds shows a positive relationship between real interest rates and the quantity demanded of loanable funds. - The supply of loanable funds shows an inverse relationship between real interest rates and the quantity supplied of loanable funds. - Investment is financed by national savings in a closed economy. - Investment is financed by government borrowing in an open economy.

Investment is financed by national savings in a closed economy. In a closed economy, Y = C + I + GY = C + I + G, and national savings is S = Y −C − GS = Y −C − G. Therefore, Y − C − G= IY − C − G= I; i.e., S=IS=I.

Which of the following transactions will keep M1 unchanged? - Sam transferred money from his savings account to his checking account. - Mike purchased government bonds and paid with a check. - Leila deposited coins from her piggy bank into her checking account. - Sandy withdrew money from her savings accounts. - Patty increased her monthly cash deposits to her retirement funds.

Leila deposited coins from her piggy bank into her checking account. M1 is composed of currency in circulation and checkable deposits. This transaction will keep M1 unchanged because currency will decrease and checkable deposits will increase by the same amount.

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. M1 is composed of currency in circulation and demand deposits. M2 is composed of M1 and other short term and long term savings accounts. Therefore, transferring money from checking accounts to savings accounts will reduce M1 but will not affect M2

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? - The short-run aggregate supply curve will shift to the right. - Nominal wages will increase. - There will be cyclical unemployment. - The aggregate demand curve will shift to the left.

Nominal wages will increase. When the natural rate of unemployment exceeds the actual rate of unemployment, the economy is in an inflationary gap. Inflation will cause nominal wages and input prices to increase, and the short-run aggregate supply curve will shift to the left.

Which of the following will most likely occur if a country's government is continuously borrowing to finance its spending without changing taxes? - The economy will experience an inflationary gap in the long run. - The government budget will be in surplus and the national debt will increase. - Private investment in plant and equipment will decrease, resulting in a lower rate of economic growth in the long run. - Private investment in plant and equipment will increase, resulting in a higher rate of economic growth in the long run.

Private investment in plant and equipment will decrease, resulting in a lower rate of economic growth in the long run.

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)(GDP) rises, which dampens consumption spending. - Tax payments increase automatically as GDPGDP falls, which decreases short-run aggregate supply. - Tax payments decrease automatically as GDPGDP falls, which encourages consumption spending.

Tax payments increase automatically as gross domestic product (GDP)(GDP) rises, which dampens consumption spending. During an expansion, aggregate demand increases, resulting in higher income. Because taxes are based on personal income and corporate profits, a rise in aggregate demand results in an increase in tax payments, which dampens consumption spending.

If the current exchange rate for one Swiss franc is 0.84 euro and the equilibrium exchange rate for one Swiss franc is 0.88 euro, which of the following will occur in the flexible exchange market for the Swiss franc? - There will be a shortage of euros. - The euro will appreciate. - The Swiss franc will depreciate. - The Swiss franc will appreciate.

The Swiss franc will appreciate. The exchange rate of 0.84 euro per Swiss franc is a disequilibrium exchange rate that creates a shortage of Swiss francs in the foreign exchange market and an upward pressure on the exchange rate. Market forces drive exchange rates up toward equilibrium at 0.88 euro per Swiss franc. Therefore, the Swiss franc will appreciate.

How will an increase in private savings in the United States most likely affect financial capital flows and the value of the dollar in foreign exchange markets? - The United States will experience financial capital inflows, and the dollar will appreciate. - The United States will experience financial capital outflows, and the dollar will appreciate. - The United States will experience financial capital outflows, and the dollar will depreciate.

The United States will experience financial capital outflows, and the dollar will depreciate. An increase in private savings will increase the supply of loanable funds and will cause real interest rates to decrease in the United States, triggering an outflow of financial capital, which will increase the supply of dollars on the foreign exchange market and will cause the value of the dollar to depreciate.

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 nominal interest rate was 3%. - The nominal interest rate was 5% - The actual inflation rate was 2% - The actual inflation rate was 4%. - The actual inflation rate was 6%

The actual inflation rate was 6%. The actual inflation rate is the difference between the nominal interest rate and the actual real interest rate, 9%−3%=6%

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. The money multiplier is the inverse of the required reserve ratio and is equal to 10/.05=20. The bank can lend out its excess reserves up to $8 million. When the bank lends out all its excess reserves, loans in the banking system can increase by a maximum of $160 million which is equal to the product of the bank's excess reserves and the money multiplier; $8million×20 = $160million

Assume policy makers increased spending and cut taxes to stimulate the economy. If the government's budget was initially in balance, which of the following will occur? - There will be a budget deficit, real interest rates will decrease, and investment spending will increase. - There will be a budget surplus, real interest rates will decrease, and investment spending will increase. _ There will be a budget deficit, real interest rates will increase, and investment spending will be crowded out.

There will be a budget deficit, real interest rates will increase, and investment spending will be crowded out. Starting from a balanced budget, an increase in government spending accompanied by a decrease in taxes will result in a government budget deficit. To finance the deficit the government will have to borrow, which increases the demand for loanable funds causing an increase in real interest rates and crowding out investment spending.

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. The increase in foreign financial capital increases the supply of loanable funds, which lowers the real interest rate. The increase in government borrowing increases the demand for loanable funds, which increases the real interest rate. Thus, the overall impact on the equilibrium real interest rate is indeterminate.

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 a downward movement along the short-run aggregate supply curve and real output will decrease. - There will be an upward movement along the short-run aggregate supply curve and real output will increase. - The short-run aggregate supply curve will shift to the left and real output will decrease.

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