AP Economics Final Review
Assume a closed economy with no government and a marginal propensity to consume of 0.80. *Disposable Income/Consumption* $620/@624 $640/$640 $660/$656 $700/$688 $720/$704 $740/$720 $760/$736 8. Dissaving occurs when disposable income is A. $620 B. $640 C. $660 D. $700 E. $1,000
A. $620
59. If the value of the United States dollar increases on the foreign exchange market, which of the following is most likely to occur in the short run? A. Aggregate demand will decrease. B. Aggregate demand will increase. C. Aggregate supply will decrease/ D. Both aggregate demand and aggregate supply will decrease E. Both aggregate demand and aggregate supply will increase
A. Aggregate demand will decrease
24. Which of the following actions by the Federal Reserve of the United States increases the money supply? A. Buying government bonds on the open market B. Selling government bonds on the open market C. Increasing the reserve requirement D. Increasing the discount rate E. Increasing the federal funds rate
A. Buying government bonds on the open market
10. An increase in government spending will affect the demand for money and nominal interest rates in which of the following ways? *Demand for Money/Nominal Interest Rates* A. Increase/Increase B. Increase/Decrease C. Increase/Indeterminate D. Decrease/Increase E. Decrease/Decrease
A. Increase/Increase
54. For an economy that is operating inside its production possibilities curve, which of the following is true? A. It can increase the production of both goods. B. Its population is growing faster than the economy's ability to increase production. C. It is using all available resources efficiently. D. It cannot move to a point on the production possibilities curve with available technology E. It lacks the resources to increase production beyond its current output
A. It can increase the production of both goods
36. assume that the aggregate supply curve is upward sloping. If both aggregate supply and aggregate demand increase, what will happen to the equilibrium output and price level? *Output/Price Level* A. Decrease/Decrease B. Decrease/Increase C. Indeterminate/Increase D. Increase/Indeterminate E. Increase/Increase
D. Increase/Indeterminate
21. Suppose that Country A is experiencing high inflation relative to Country B, which is enjoying steady growth with a stable price level. Which of the following would occur in the foreign exchange market? A. An increase in the demand for Country A's currency B. An increase in the supply of Country B's currency C. A decrease in the supply of Country A's currency D. A decrease in the demand for Country B's currency E. A depreciation of Country A's currency
E. A depreciation of Country A's currency
5. A contraction in the money supply will most likely change the nominal interest rate and aggregate demand in which of the following ways in the short run? *Nominal Interest Rate/Aggregate Demand* A. Increase/Decrease B. Increase/Increase C. Increase/Not change D. Decrease/Decrease E. Decrease/Increase
A. Increase/Decrease
45. Public policy that generates an unexpected increase in consumer prices will inflict short-run costs on all of the following EXCEPT A. borrowers B. workers with fixed incomes C. savers holding non-interest-bearing money D. taxpayers shifted into higher tax brackets E. people whose incomes are not adjusted for inflation
A. borrowers
33. On the graph above (LRAS, SRAS, and AD are all in equilibrium), stagflation will be caused by a A. leftward shift in the short-run aggregate supply curve only B. rightward shift in the short-run aggregate supply curve only C. leftward shift in the aggregate demand curve only D. rightward shift in the aggregate demand curve only E. rightward shift in both the short-run aggregate supply and aggregate demand curves
A. leftward shift in the short-run aggregate supply curve only
27. The short-run aggregate supply curve would be vertical if A. nominal wages adjust immediately to changes in the price level B. nominal wages adjust slowly when there is unemployment C. both nominal wages and prices adjust slowly to changes in aggregate demand D. the spending multiplier is very low E. investment demand is very responsive to changes in interest rates
A. nominal wages adjust immediately to changes in the price level
29. The consumer price index (CPI) is criticized for A. overstating the true burden of inflation because it does not recognize consumers' ability to substitute goods and services as prices change B. overstating the true burden of inflation because it recognizes consumers' ability to substitute goods and services as prices change C. understating the true burden of inflation because it does not recognize consumers' ability to substitute goods and services as prices change D. understating the true burden of inflation because it recognizes consumers' ability to substitute goods and services as prices change E. overstating the true burden of inflation because it reflects the prices of both intermediate goods and final goods
A. overstating the true burden of inflation because it does not recognize consumers' ability to substitute goods and services as prices change
46. If aggregate demand is growing faster than long-run aggregate supply, the Federal Reserve is most likely to A. sell securities on the open market B. increase bond prices C. increase income taxes D. decrease the discount rate E. decrease the required reserve ratio
A. sell securities on the open market
19. Which of the following will cause an increase in aggregate demand A. An increase in the price level B. A decrease in income taxes C. An in crease in the demand for money D. A decrease in the supply of money E. A decrease in government transfer payments
B. A decrease in income taxes
44. Assume that the marginal propensity to consume out of disposable income is 0.8 and that the government taxes all income at a constant rate of 30%. If gross income increases by $100, consumption will initially increase by A. $44 B. $56 C. $70 D. $80 E. $100
B. $ 56
32. Frictional unemployment occurs when which of the following happens? A. A worker is replaced by robots on factory assembly lines B. A worker voluntarily quits a job to search for a better one C. A worker is laid off because of a downturn in economic activity D. A worker undergoes on-the-job training E. A worker switches from working full-time to part-time
B. A worker voluntarily quits a job to search for a better one
42. An increase in the price level will most likely cause which of the following? A. A leftward shift of the aggregate demand curve B. An increase in the demand for money C. An increase in the real interest rate D. A decrease in the nominal interest rate E. An increase in the supply of money
B. An increase in the demand for money
39. According to the graph above and starting with equilibrium point R, which of the following shifts identifies the short-run and the long-run impact of a demand-pull inflation? *Short Run/Long Run* A. R to N/M to N B. R to M/R to N C. R to Q/Q to N D. R to M/R to Q E. R to N/N To Q
B. R to M/R to N
2. Inflation occurs when there is a sustained increase in which of the following? A. Real gross domestic product B. The average price level C. The price of any commodity D. Labor productivity E. The unemployment rate
B. The average price level
47. Assume that Country A exports one bushel of wheat in exchange for 2.5 bushels of corn from Country B. If the terms of trade are beneficial to both countries, which of the following must be true? A. Country A has an absolute advantage in the production of wheat. B. The cost of producing a bushel of wheat in Country A is less than 2.5 bushels of corn. C. The cost of producing a bushel of wheat in Country A is greater than 2.5 bushels of corn D. Country A is producing inside its current production possibilities curve. E. Country A needs to uses more resources to produce wheat than to produce corn.
B. The cost of producing a bushel of wheat in Country A is less than 2.5 bushels of corn.
38. Country A's growth rate in per capita real gross domestic product (GDP) has been consistently higher than that of Country B. Which of the following factors can account for these differences in the per capita GDP growth rates? A. Country B's government gives more investment tax credits. B. The labor force of Country A is becoming more skilled than the labor force of Country B. C. The natural rate of unemployment is higher in Country A. D. Country A's central bank is less effective at controlling the inflation rate. E. Although the populations of Countries A and B are the same, Country A has twice as many people who are retired.
B. The labor force of Country A is becoming more skilled than the labor force of Country B.
17. The graph above shows two aggregate demand curves, AD1 and AD2, and an aggregate supply curve, AS. The shift in the aggregate demand curve from AD1 to AD2 (AD2 is to the left of AD1) could be caused by A. a decrease in taxes B. a decrease in the money supply C. an increase in government spending D. an increase in consumption spending E. an increase in price level
B. a decrease in the money supply
7. Of the following, the most liquid asset is A. mutual funds B. currency C. time deposits D. demand deposits E. savings deposits
B. currency
43. The purchase of United States government bonds by Japanese investors will be included in Japan's A. current account B. financial account (formerly called capital account C. trade deficit D. foreign direct investment E. imports
B. financial account (formerly called capital account)
11. Which of the following policies, if appropriately sized, would provide expansion during a recession with the smallest change in interest rates? A. An open-market purchase of government securities by the central bank and a decrease in the federal funds rate B. An open-market sale of government securities by the central bank and an increase in the federal funds rate C. A decrease in taxes and an open-market purchase of government securities by the central bank D. An increase in government spending and an open-market sale of government securities by the central bank E. An increase in taxes and an increase in the federal funds rate
C. A decrease in taxes and an open-market purchase of government securities by the central bank
26. An increase in which of the following will most likely increase productivity? A. Population growth rate B. Aggregate demand C. Capital stock D. Consumption E. Employment
C. Capital stock
37. Which of the following will lead to a depreciation of a nation's currency? A. Lower inflation in the nation than in the rest of the world B. Higher required reserve ratio in the nation than in the rest of the world C. Decreased real interest rates in the nation compared with the rest of the world D. Increased demand for the nation's currency E. Decreased supply of the nation's currency
C. Decreased real interest rates in the nation compared with the rest of the world
25. If the production technology of a good improves and at the same time the number of consumers willing and able to buy the good in the market increases, which of the following will definitely occur? A. Equilibrium price will increase. B. Equilibrium price will decrease. C. Equilibrium quantity will increase. D. Equilibrium quantity will decrease. E. Equilibrium quantity will remain the same.
C. Equilibrium quantity will increase.
3. Which of the following is LEAST likely to promote economic growth? A. Investment in tools and machines B. Investment in training of labor C. Increase in consumption of non-durable goods D. Tax credit for technology improvement E. Increase in the labor force participation rate
C. Increase in consumption of non-durable goods
52. Following a decrease in the real interest rate, there is an increase in financial capital outflows from Country A. The increase in capital outflows will most likely have which of the following effects on Country A's net exports and aggregate demand? *Net Exports/Aggregate Demand* A. Decrease/Decrease B. Decrease/No change C. Increase/Increase D. Increase/Decrease E. Increase/No change
C. Increase/Decrease
6. If the economy is in a severe recession, which of the following policy actions is most appropriate? A. Keeping the money supply constant and reducing budget deficits B. Decreasing government spending and taxes by the same amount C. Increasing both the money supply and government spending D. Increasing both the federal funds rate and taxes E. Decreasing the money supply and increasing the taxes
C. Increasing both the money supply and government spending
56. Which of the following is true of the Phillips curve? A. It is vertical in the short run, but is upward sloping in the long run. B. It is upward sloping in the short run, but is downward sloping in the long run. C. It is downward sloping in the short run, but is vertical in the long run. D. It shows trade-offs between unemployment and inflation in the long run but not in the short run. E. It is upward sloping both in the short run and in the long run if inflation is anticipated correctly.
C. It is downward sloping in the short run, but is vertical in the long run.
The diagram above shows three production possibility curves (PPCs). If the current PPC is PPC1, which of the following changes indicates a recession? A. Movement from point X to point Y B. Movement from point Y to point X C. Movement from point Y to point X D. Shift from PPC1 to PPC0 E. Movement from point Z to point X
C. Movement from point Y to point Z
12. In the circular flow diagram of a market economy, which of the following supplies the factors of production? A. The business sector B. The government C. The household sector D. Financial sector E. The foreign sector
C. The household sector
49. The natural rate of unemployment can be defined as the A. unemployment rate consistent with accelerating inflation B. unemployment rate of the least-skilled workers C. economy's long-run equilibrium rate of unemployment D. labor force participation rate plus the unemployment rate E. labor force participation rate minus the unemployment rate
C. economy's long-run equilibrium rate of unemployment
34. As a component of aggregate demand, investment refers to the A. purchase of raw land for later resale B. purchase of stocks and bonds C. purchase of new equipment and additional inventories D. difference between people's income and spending E. dividends paid out to shareholders
C. purchase of new equipment and additional inventories
41. In the short run, government deficit spending will most likely A. raise the unemployment rate B. lower the inflation rate C. raise nominal interest rates D. lower private savings E. raise net exports
C. raise nominal interest rates
13. If the velocity of money is constant and the aggregate supply curve is vertical, a doubling of the money supply would most likely result in a doubling of A. the unemployment rate B. real output C. the price level D. nominal interest rates E. real interest rates
C. the price level
53. If the reserve required ratio is 10%, actual reserves are $10 million, and currency in circulation is equal to $20 million, M1 will at most be equal to A. $20 million B. $30 million C. $90 million D. $120 million E. $150 million
D. $120 million
31. If the marginal propensity to consume is 0.75, then a $100 increase in equilibrium real gross domestic product of A. $40.00 B. $100.00 C. $133.33 D. $400.00 E. $500.00
D. $400.00
Assume a closed economy with no government and a marginal propensity to consume of 0.80. *Disposable Income/Consumption* $620/@624 $640/$640 $660/$656 $700/$688 $720/$704 $740/$720 $760/$736 9. The marginal propensity to save for this economy is A. 4.0 B. 1.0 C. 0.8 D. 0.2 E. 0
D. 0.2
20. If wages are sticky, which of the following policies will be most effective in raising real gross domestic product to the full-employment level? A. Doing nothing, since there are automatic stabilizers B. The sale of bonds by the Federal Reserve C. An increase in the income tax D. An increase in government spending E. An increase in the discount rate
D. An increase in government spending
22. Which of the following will most likely cause an increase in real output in the long run? A. A decrease in the labor force participation rate B. An increase in the velocity of money C. An open-market sale of government bonds by the central bank D. An increase in immigration from abroad E. An increase in the price level
D. An increase in immigration from abroad
35. If a contractionary fiscal policy is followed by an expansionary monetary policy, nominal interest rate and employment would most likely be affect in which of the following ways in the short run? *Nominal Interest Rate/Employment* A. Increase/Increase B. Increase/Decrease C. Decrease/Decrease D. Decrease/Indeterminate E. Indeterminate/Decrease
D. Decrease/Indeterminate
14. An increase in which of the following would most likely result in an increase in aggregate supply? A. The price level B. Aggregate demand C. Unemployment compensation D. Labor-force participation rate E. The minimum wage
D. Labor-force participation rate
55. If unemployed workers become discouraged and give up trying to find work, the number of workers employed and the unemployment rate would change in which of the following ways? *Number of Workers Employed/Unemployment Rate* A. Decrease/Decrease B. Decrease/Increase C. Decrease/No change D. No change/Decrease E. No change/Increase
D. No change/Decrease
58. If wages and prices are perfectly flexible and inflation is correctly anticipated, then an expansionary monetary policy will affect the real output and price level in which of the following ways? *Real Output/Price Level* A. Increase/Increase B. Increase/Decrease C. Increase/Not change D. Not change/Increase E. Not change/Not change
D. Not change/Increase
28. Increases in the real per capita income of a country are most closely associated with increases in which of the following? A. The labor force B. The price level C. The money supply D. Productivity E. Tax rates
D. Productivity
23. Potential gross domestic product will decrease under which of the following conditions? A. The growth rate of the population increases more rapidly than the growth rate of gross domestic product. B. Nominal gross domestic product increases more than real gross domestic product. C. The natural rate of unemployment decreases. D. The country's annual depreciation is greater than its annual gross investment E. The monetary authorities adopt an easy monetary policy
D. The country's annual depreciation is greater than its annual gross investment
30. A rightward shift of the short-run Phillips curve is most likely due to A. an increase in aggregate demand B. a decrease in aggregate demand C. a decrease in the expected rate of inflation D. an increase in the expected rate of inflation E. an increase in aggregate supply
D. an increase in the expected rate of inflation
4. An increase in spending in an economy will cause a multiplied increase in gross domestic product because A. government spending is greater than zero B. investment is greater than zero C. investment increases as income decreases D. consumption increases as income increases E. taxes increase an income increases
D. consumption increases as income increases
60. Assume that the reserve requirement for demand deposits is 20% percent, that banks hold no excess reserves, and that the public holds no currency. If the central bank sells $10,000 worth of government securities to commercial banks, the total money supply will A. increase by $10,000 B. increase by $50,000 C. decrease by $10,000 D. decrease by $50,000 E. not change
D. decrease by $50,000
15. The main benefit of free trade between two countries is that A. income distribution in each country will become more equitable B. employment in each country will increase C. migration from one country to the other will increase D. each country can consume beyond its constraints of resources and productivity E. each country will become more self-sufficient
D. each country can consume beyond its constraints of resources and productivity
50. In the long run, an increase in aggregate demand due to an expansion in the money supply will increase A. price level and real output B. nominal output and real output C. nominal output but not the price level D. nominal output and the price level E. real output but not the price level
D. nominal output and the price level
51. Rational expectations theory suggest that people A. do not estimate future inflation rates because it is impossible to do so B. believe that current inflation should be the same as last year's C. assume that current inflation will be the same for next year D. use all available information in forming their expectations about future inflation E. assume that current inflation will be equal to the average inflation of the past decade
D. use all available information inf forming their expectations about future inflation
40. If the central bank raises the require reserve ratio, the money multiplier and the money supply will change in which of the following ways? *Money Multiplier/Money Supply* A. Increase/Increase B. Increase/Decrease C. Increase/No change D. Decrease/No change E. Decrease/Decrease
E. Decrease/Decrease
48. Which of the following is true of the opportunity cost of holding cash? A. B. It is represented by the value of the dollar. C. It is equal to the price level. D. It decreases as the price level rises. E. It increases as the interest rate rises.
E. It increases as the interest rate rises.
1. Which of the following is the most fundamental issue that economics addresses? A. Choice of appropriate technology B. Reduction of unemployment C. Reduction of budget deficit D. Promotion of privatization E. Use of scarce resources
E. Use of scarce resources
16. Assume that the public holds part of its money in cash and the rest in checking accounts. If the central bank lowers the reserve requirement from 16% to 8%, the money supply will A. decrease by more than half B. decrease by half C. decrease by less than half D. exactly double E. increase by less than double b
E. increase by less than double
18. An increase in the international value of the United States dollar will most likely benefit A. domestic producers of premium wines sold to people in other countries B. currency traders holding large quantities of yen C. German citizens vacationing in the United States D. Canadian citizens expecting to purchase real estate in the United States E. retired United States citizens living overseas on their social security checks
E. retired United States citizens living overseas on their social security checks
