AP MACRO TEST 2

Same graph as 19 The minimum increase in government spending necessary to reach full employment is

$500

Assume that the reserve requirement is 20 percent. 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

If on receiving a checking deposit of $300 a bank's excess reserves increased by $255, the required reserve ratio must be

15%

Which of the following arguments is typically associated with classical economists?

A market economy is self-correcting and thus will not remain in a recession indefinitely

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

Which of the following would most likely cause the United States economy to fall into a recession?

An open market sale by the Federal Reserve

Assume that the reserve requirement is 15 percent 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?

B,B Increase by $200 Increase by $30

An increase in energy costs will most likely cause the price level and real gross domestic product to change in which of the following ways?

B,B Increase, Decrease

Policymakers concerned about fostering long-run growth in an economy that is currently in a recession would most likely recommend which of the following combinations of monetary and fiscal policy actions?

Buy Bonds / No Change

Which of the following constitutes the largest component of the United States money supply (M1)?

Checkable deposits (demand deposits)

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?

Decrease Decrease 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?

Decrease increase Increase

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?

Decrease, Increase

Which of the following policies would a Keynesian recommend during a period of high unemploy-ment and low inflation?

Decreasing taxes to stimulate aggregate demand

Suppose that disposable income is $1,000, consumption is $700, and the marginal propensity to consume (MPC) is 0.6. If disposable income then increases by $100, consumption and savings will equal which of the following?

E,E $760, $340

Under which of the following conditions would a restrictive monetary policy be most appropriate?

High inflation

Which of the following is true according to the circular flow model?

Households are demanders in the product markets and suppliers in the factor markets

As nations specialize in production and trade in international markets, they can expect which of the following domestic improvements? I. Allocation of domestic resources II. Standard of living III. Self-sufficiency

I and II only

On the basis of the diagram above showing an economy's production possibilities curve for two goods, which of the following statements must be true? I. The opportunity cost of moving from point P to point R is 10 units of Y. II. The opportunity cost of moving from point R to point P is 8 units of X. III. The opportunity cost of moving from point Q to point R is 0 units of Y.

I, II, and III

In a closed economy with no taxes in which the average propensity to consume is 0.75, which of the following is true?

If income is $200, then saving is $50

If the money stock decreases but nominal gross domestic product remains constant, which of the following has occurred?

Income velocity of money has increased

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

Which of the following changes will occur to the demand for 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?

Increase Increase

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?

Increase Increase Decrease

Which of the following will most likely occur in an economy if more money is demanded than is supplied?

Interest Rates Will Increase

According to the monetarists, which of the following is true of expansionary fiscal policy?

It will cause interest rates to rise and crowd out private investment spending

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 three times as fast as the best carpenter, whose hourly wage is $20 per hour. Which of the following is a 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

Which of the following would best explain a decline in potential gross domestic product?

Negative net investment

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

If, at full employment, the government wants to increase its spending by $100 billion without increasing inflation in the short run, it must do which of the following?

Raise taxes by more than $100 billion

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

Which of the following would be most likely to occur if the United States placed high tariffs on imported goods?

The United States economy would become less efficient

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

Open market operations refer to which of the following activities?

The buying and selling of government securities by the Federal Reserve

Which of the following transactions would represent an addition to a nation's current gross domestic product?

The government increases its domestic purchases of food for use by the military.

In the simple Keynesian aggregate expenditure model of an economy, changes in investment or government spending will lead to a change in which of the following?

The level of output and employment

If real gross domestic product is increasing at 3 percent per year and nominal gross domestic product is increasing at 7 percent per year, which of the following is necessarily true?

The price level is increasing

Which of the following will occur if the federal government runs a budget deficit?

The size of the national debt will increase

A contractionary supply shock would most likely result in

a decrease in employment

An inflationary gap can be eliminated by all of the following EXCEPT

an increase in the money supply

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

The Federal Reserve can increase the money supply by

buying government bonds on the open market

Unexpected increases in inventories usually precede

decreases in production

One way in which the Federal Reserve works to change the United States money supply is by changing the

discount rate

A major advantage of automatic stabilizers in fiscal policy is that they

go into effect without passage of new legislation

Compared to expansionary monetary policies adopted to counteract a recession, expansionary fiscal policies tend to result in

higher interest rates

Crowding out due to government borrowing occurs when

higher interest rates decrease private sector investment

As a measure of economic welfare, gross domestic product underestimates a country's production of goods and services when there is an increase in

household production

According to the Keynesian savings schedule, when aggregate income increases by a given amount, savings will...

increase by less than the amount of the change in income

In the Keynesian model, an expansionary monetary policy will lead to

lower real interest rates and more investment

If purchases of education and medical care were counted as investment rather than consumption, gross domestic product would

not change, because there is no change in total expenditures

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

An important assumption in Keynesian theory is that

prices are rigid downward and decreases in aggregate demand will lead to an increase in unemployment

The intersection of the aggregate supply curve and the aggregate demand curve occurs at the economy's equilibrium level of

real national output and the price level

The following question refers to the graph below, which shows an economy's aggregate expenditures, assuming no foreign sector and that government expenditures are initially zero. there is a graph The economy is currently experiencing?

recession

The short-run aggregate supply curve is likely to shift to the left when there is an increase in

the cost of productive resources

The value of the spending multiplier decreases when

the marginal propensity to save increases

Uses same graph as 19 The appropriate monetary policy measure necessary to reach full employment is to increase?

the money supply

The official unemployment rate is not an accurate indicator of actual unemployment in the economy because

the official rate does not include persons who have given up looking for work