AP Macro Practice MCQ Exam 1

An economy is operating at a point inside its production possibilities curve (PPCPPC). Which of the following will most likely cause the economy to move toward the current PPCPPC in the short run?

A

A decrease in government spending

B

A decrease in inflation

C

An increase in human capital

D

An increase in employment

E

An increase in imports

D. An increase in employment

A point inside the production possibilities curve means that the economy is operating below full employment. An increase in employment will therefore cause the economy to move toward the current PPC in the short run.

An increase in which of the following will most likely promote economic growth?

A

Taxes on investment

B

The price level

C

Human capital

D

Consumption of nondurable goods

E

Interest rates

C. Human capital

An increase in human capital increases labor productivity, which increases output per capita and aggregate production in the long run.

Which of the following will cause aggregate supply to increase in Country X?

A

An increase in personal income taxes

B

The discovery of low-cost alternative sources of energy

C

A decrease in labor productivity with no change in nominal wages

D

Depreciation of country X's currency on the foreign exchange market

E

An increase in the price level

B. The discovery of low-cost alternative sources of energy

Production costs are a determinant of aggregate supply. The discovery of low-cost alternative sources of energy will decrease production costs and increase aggregate supply.

The graph above shows the production possibilities curve for Factory X (40B 60S) and Factory Y (80B 60S). If Factory X uses the same amount of resources to produce skateboards and bikes as Factory Y uses, which of the following is true?

A

Factory X has an absolute advantage in producing bikes.

B

Factory X has an absolute advantage in producing skateboards.

C

Factory X has a comparative advantage in producing skateboards.

D

Factory Y has a comparative advantage in producing skateboards.

E

Factory Y has an absolute advantage in producing skateboards.

Factory X has a comparative advantage in producing skateboards.

Comparative advantage describes a situation in which a factory can produce a good at a lower opportunity cost than another factory. Factory X's opportunity cost of producing 1 skateboard is 0.67 of a bike, while Factory Y's opportunity cost of producing 1 skateboard is 1.33 bikes. Therefore, Factory X has a comparative advantage in producing skateboards.

An increase in the price of oil, an important input to production, will result in which of the following in the short run?

A

A decrease in the price level

B

A decrease in short-run aggregate supply

C

A decrease in unemployment

D

An increase in real wages

E

An increase in aggregate demand

B. A decrease in short-run aggregate supply

Correct. Production costs are a determinant of short-run aggregate supply. An increase in the price of oil will increase production costs and decrease short-run aggregate supply.

An economy is currently operating at the full-employment level of output. Which of the following would result in a recessionary gap in the short run?

A

An increase in the costs of production

B

An improvement in the productivity of labor

C

An increase in money supply

D

A positive supply shock

E

A decrease in income tax rates

A. An increase in the costs of production

An increase in the cost of production causes the short-run aggregate supply curve to shift to the left, reducing real output below full employment. This will result in a recessionary gap.

Thailand and Malaysia are trading partners. If the price level in Thailand decreases relative to the price level in Malaysia, what will happen to Thailand's exports to Malaysia and Thailand's aggregate demand?

B. Thailand´s exports will increase and the AD will increase as well.

When the price level in Thailand decreases relative to the price level in Malaysia, this will make domestic goods less expensive relative to foreign goods, which increases the Malaysian demand for Thai goods, increasing Thailand's exports and decreasing Thailand's imports. Therefore, Thailand's net exports increase and Thailand's aggregate demand increases.

Assuming year 1 is the base year, what is the nominal and real gross domestic product (GDP) for year 2 ?

NGDP: $280

RGDP: $200

Nominal GDP is calculated using Year 2 prices and quantities ($2×80)+($2×60)=$280, and the real GDP is calculated using Year 1 prices and Year 2 quantities ($1×80)+($2×60)=$200.

Which of the following is a fiscal policy action aimed at reducing unemployment?

A

Decreasing government expenditures

B

Decreasing income taxes

C

Decreasing tax credits

D

Increasing nominal interest rates

E

Increasing required reserves

B. Decreasing income taxes

This action is an expansionary fiscal policy that will increase aggregate demand and therefore will decrease unemployment.

Increases in human capital can be achieved by which of the following?

A

Building more factories

B

Reducing immigration of skilled workers

C

Improving the quality of job-training programs

D

Increasing the physical capital per worker

E

Increasing government spending on infrastructure

C. improving the quality of job training programs

Improving the quality of job-training programs increases human capital since it allows workers to do their jobs better (increases productivity).

If the marginal propensity to save is 0.25, a $15 billion increase in government spending will lead to an increase in national income by a maximum of

A

$60 billion

B

$45 billion

C

$15 billion

D

$11.25 billion

E

$3.75 billion

A. $60 billion

National income will increase by a maximum of $60 billion. The maximum change in national income is determined by multiplying the spending multiplier by the amount of the change in government spending. The spending multiplier is equal to (1/MPS=1/0.25=4). Therefore, national income will increase by a maximum of $15 billion×4=$60 billion.

Assume the banking system has limited reserves and the economy is currently in long-run equilibrium. An increase in the money supply will affect unemployment in the short run and in the long run in which of the following ways?

A

Unemployment will decrease in the short run and decrease in the long run.

B

Unemployment will increase in the short run and increase in the long run.

C

Unemployment will not change in the short run and remain at the natural rate of unemployment in the long run.

D

Unemployment will increase above the natural rate of unemployment in the short run and decrease back to the natural rate of unemployment in the long run.

E

Unemployment will decrease below the natural rate of unemployment in the short run and increase back to the natural rate of unemployment in the long run.

E

Unemployment will decrease below the natural rate of unemployment in the short run and increase back to the natural rate of unemployment in the long run.

An increase in the money supply will increase aggregate demand and real output and decrease unemployment below the natural rate in the short run. This will create an inflationary gap because real output will exceed the full employment level of output, which will create a shortage of labor and overutilization of resources. In the long run, this will cause input prices and nominal wages to increase and shift the short-run aggregate supply curve to the left to restore full employment and increase unemployment back to the natural rate.

The term "value added" for a firm is best defined as which of the following?

A

The firm's sales

B

The firm's sales minus depreciation

C

The firm's sales minus its losses

D

The firm's sales minus the cost of inputs purchased from other firms

E

The firm's profits from its sales

D. The firm's sales minus the cost of inputs purchased from other firms

The term "value added" is sales minus intermediate purchases, which are the costs of inputs purchased from other firms. The term "value added" also refers to the sum of the contributions of each firm.

An increase in a country's current account surplus will result in which of the following in the short run?

A

A decrease in the country's government budget surplus

B

A decrease in the country's national savings

C

A decrease in the country's financial account deficit

D

An increase in the country's net financial capital outflows

E

An increase in the country's national debt

D. An increase in the country's net financial capital outflows

A current account surplus indicates that a nation is a net lender to the rest of the world. An increase in a country's current account surplus causes a country's financial capital outflows to increase.

Using 2010 as the base year, the gross domestic product (GDP) deflator in 2011 was 97. Which of the following must be true?

The inflation rate in 2011 was positive.

B

The inflation rate in 2011 was negative.

C

The inflation rate in 2011 was zero.

D

The purchasing power of a dollar decreased by 3 percent.

E

The real output increased by 3 percent.

B. The inflation rate in 2011 was negative.

The GDP deflator is the ratio between nominal GDP and real GDP×100. Since the GDP deflator in 2011 was less than 100, 2011 prices were falling and therefore the inflation rate in 2011 was negative.

According to the business cycle represented in the diagram above, the actual rate of unemployment equals the natural rate of unemployment when the economy is

A

in expansion

B

in contraction

C

at the peak

D

at the trough

E

on the potential line

E. on the potential line

When the economy is on the potential line, the actual real GDP equals the potential real GDP and the actual rate of unemployment equals the natural rate of unemployment.

A fiscal policy action to reduce inflationary pressure would be to increase which of the following?

A

The required reserve ratio

B

The discount rate

C

Transfer payments

D

Government spending

E

Income tax rates

E. Income tax rates

Increasing income tax rates is a contractionary fiscal policy action that will decrease aggregate demand, real output, and the price level, which will decrease inflation.

The nominal gross domestic product of China in 2010 is a measure of the total value of which of the following in 2010 ?

A

Financial assets, including stocks, in China

B

Firms located within the borders of China

C

Final goods and services consumed in China

D

Final goods and services produced within the borders of China

E

Final goods and services exported by China to the rest of the world

D. Final goods and services produced within the borders of China

Nominal GDP is a measure of the total value of final goods and services produced domestically.

Assume the government reduces its spending and raises income taxes in an effort to reduce the budget deficit. The most likely short-run result will be an increase in

A

interest rates

B

unemployment

C

the money supply

D

the price level

E

personal savings

B. unemployment

A decrease in government spending and an increase in income taxes are contractionary fiscal policy actions aimed at decreasing aggregate demand, real output, and the price level. A decrease in real output is accompanied by an increase in unemployment.

Which of the following is true about inflation and interest rates?

A

The higher the inflation rate, the higher the real interest rate.

B

If there is no actual or expected inflation, the nominal and real interest rates are equal.

C

If the economy is experiencing deflation, the nominal interest rate exceeds the real interest rate.

D

The higher the inflation rate, the lower the nominal interest rate.

E

The nominal interest rate is the difference between the real interest rate and the expected inflation rate.

B. If there is no actual or expected inflation, the nominal and real interest rates are equal.

The real interest rate is the nominal interest rate adjusted for inflation and is equal to the nominal interest rate minus the expected inflation rate. Therefore, if there is no actual or expected inflation, the nominal and real interest rates will be equal.

Economic growth is shown by a rightward shift in

A

the aggregate demand curve

B

the long-run Phillips curve

C

the production possibilities curve

D

the short-run aggregate supply curve

E

the money supply curve

C. the production possibilities curve

The production possibilities curve shows the amount of goods and services the economy can produce given its resources and given the current state of technology. An increase in productivity or technology will increase economic growth and shift the production possibilities curve to the right. Therefore, a rightward shift in the production possibilities curve illustrates economic growth.

During a period of stagflation, a nation is most likely experiencing

A

high unemployment and low inflation

B

low unemployment and high inflation

C

low inflationary expectations

D

a decrease in short-run aggregate supply

E

an increase in taxes and government spending

D. a decrease in short-run aggregate supply

Stagflation is a condition of economic stagnation with relatively high unemployment accompanied by high inflation. Stagflation is usually caused by a decrease in short-run aggregate supply.

If businesses become optimistic about the profitability of investments in an economy, which of the following will happen in the loanable funds market in the short run?

A

The supply and demand for loanable funds will increase.

B

The supply and demand for loanable funds will decrease.

C

The demand for loanable funds by the private sector will decrease.

D

The real interest rate will increase.

E

The real interest rate will decrease.

D. The real interest rate will increase.

If businesses become optimistic about the profitability of investments in an economy, investment demand will increase, which will increase the demand for loanable funds. An increase in the demand for loanable funds will increase the real interest rate.

If investment demand becomes less responsive to changes in interest rates, which of the following is true?

A

An expansionary fiscal policy results in less crowding out.

B

An expansionary fiscal policy results in more crowding out.

C

An expansionary monetary policy is more effective.

D

A contractionary monetary policy is more effective.

E

An expansionary monetary policy results in more crowding out.

A. An expansionary fiscal policy results in less crowding out.

Crowding out refers to the adverse effect of increased government borrowing, which leads to decreased levels of interest-sensitive private sector spending in the short run. If investment demand becomes less responsive to changes in interest rates, there will be less crowding out.

Which of the following measures the opportunity cost of holding currency?

A

The nominal wage rate

B

The increase in the demand for money

C

The forgone interest on alternative assets

D

The ability to access currency to meet unexpected expenses

E

The average income tax rates

C. The forgone interest on laternative assets

The most likely alternative to holding currency would be to hold an interest-bearing financial asset. Therefore, the opportunity cost of holding currency is the interest foregone from not holding an interest-bearing asset.

A contractionary monetary policy combined with an expansionary fiscal policy will

A

decrease both income and consumption

B

increase both income and consumption

C

have uncertain effects on the interest rate and investment

D

increase the interest rate and decrease investment

E

increase both the interest rate and investment

D. increase the interest rate and decrease investment

A contractionary monetary policy will increase nominal interest rates. An expansionary fiscal policy will increase the demand for loanable funds (or decrease the supply of loanable funds), which will increase real interest rates. Therefore, both contractionary monetary policy and expansionary fiscal policy will increase interest rates. An increase in interest rates will decrease interest-sensitive spending, including investment.

Ms. Smith withdraws $1,000 from her safe and deposits the money in a bank. If the bank holds no excess reserves and the reserve requirement is 10 percent, how will this deposit increase the bank's required reserves and the bank's loans?

D. RR: $100 and Loans: $900

Required reserves are equal to the reserve requirement times the amount of checkable deposits. Excess reserves are equal to total reserves minus required reserves. The bank is allowed to loan out excess reserves. Therefore, of the $1,000 deposit, the bank must keep 10% as required reserves, or $100. The bank can lend out the rest of the deposit, or $1,000−$100=$900.

A country can have an increased surplus in its balance of trade as a result of

A

an increase in domestic inflation

B

declining imports and rising exports

C

higher tariffs imposed by its trading partners

D

an increase in financial capital inflow

E

an appreciating currency

B. declining imports and rising exports

A country will have a surplus in the balance of trade if exports exceed imports. Declining imports and rising exports will increase the surplus in the balance of trade.

Country X has a budget deficit. Which of the following changes in government budget outlays and tax revenues will result in a decrease in Country X's government budget deficit?

D. Govt. Outlays rise by $400 mil and Tax Revenues rise by $600 mil.

If government outlays rise by $400 million and tax revenues rise by $600 million, the government budget deficit will decrease by $200.

The table above shows the quantity of motorcycles and automobiles produced by two countries that use the same amount of resources. Which of the following is true? (X: 50M or 80A, Y: 75M or 40A)

Country X has an absolute and comparative advantage in the production of motorcycles.

B

Country X has an absolute and comparative advantage in the production of both goods.

C

Neither country has a comparative advantage in the production of motorcycles.

D

Country Y has an absolute and comparative advantage in the production of automobiles.

E

Country Y has an absolute and comparative advantage in the production of motorcycles.

E. Country Y has an absolute and comparative advantage in the production of motorcycles.

Country Y can produce more motorcycles than Country X when all resources are devoted to the production of motorcycles; therefore, it has an absolute advantage in the production of motorcycles. Country Y's opportunity cost of producing one motorcycle is 8/15 automobile (0.53 automobile), while Country X's opportunity cost of producing one motorcycle is 8/5 automobiles (1.6 automobiles). Therefore, Country Y has a comparative advantage in the production of motorcycles because it has a lower opportunity cost in the production of motorcycles than Country X.

Which of the following is an example of how the consumer price index (CPI) exhibits bias in its estimates of changes in the cost of living?

A

Energy prices have a higher impact on inflation than other input costs do.

B

New products are always overrepresented in the CPI.

C

The CPI assigns greater weight to measures of welfare than it does to economic activity.

D

Product improvements are not always fully reflected in the calculation of the CPI.

E

The CPI adjusts for the substitution of less expensive goods by consumers.

D. Product improvements are not alwaus fully reflected in the calculation of the CPI.

Product improvements are not always fully reflected in the calculation of the CPI. This will result in an overstatement of the cost of living.

Fred Jones withdraws $1,000 in cash from his savings account. What immediate effect does this transaction have on the monetary aggregate measures of M1 and M2 ?

A

M1 will increase; M2 will decrease

B

M1 will increase; M2 will not change

C

M1 will decrease; M2 will not change

D

M1 will not change; M2 will decrease

E

M1 will not change; M2 will not change

E. M1 will not change: M2 will not change

M1 is composed of currency in circulation, demand deposits, and other liquid deposits such as savings accounts. M2 is composed of M1, small-denomination time deposits, and balances in retail money market funds. Withdrawing money from savings accounts will increase the currency in circulation and decrease savings accounts, both of which are counted in M1, so there will be no change in M1 or M2.

Which of the following is true about inflationary expectations?

A

The actual unemployment rate equals the natural rate of unemployment if the actual inflation rate exceeds the expected inflation rate.

B

The actual unemployment rate equals the natural rate of unemployment when wages fully adjust to expected inflation.

C

Expectations are always correct in the short run.

D

The actual inflation rate is always equal to the expected inflation rate because of labor contracts.

E

The natural rate of unemployment equals the inflation rate when the actual inflation rate equals the expected inflation rate.

B. The actual unemployment rate equals the natural rate of unemployment when wages fully adjust to expected inflation.

When wages fully adjust to expected inflation, the short-run aggregate supply curve will shift to the left until real output equals full employment and, therefore, the actual unemployment rate equals the natural rate of unemployment.

Which of the following transactions is included in the financial account of Country X's balance of payments accounts?

A

A firm in Country X sells robots to a firm in Country A.

B

Country X sends financial aid to Country B.

C

An individual in Country X receives dividend payments from a firm in Country C.

D

An individual in Country X sends money monthly to family members in Country D.

E

An individual in Country X buys new government bonds issued by Country E.

E. An individual in Country X buys new government bonds issued by Country E.

The financial account includes the net acquisition and disposal of financial assets and liabilities. Buying foreign government bonds is a financial transaction that is included in the financial account.

Assume a country's government increases taxes and its central bank increases its administered interest rates. The actions will result in an increase in which of the following in the short run?

A

Aggregate demand

B

Aggregate supply

C

Investment spending

D

Unemployment

E

Inflation

D. unemployment

An increase in taxes is a contractionary fiscal policy that will decrease aggregate demand and real output. Increasing administered interest rates is a contractionary monetary policy that will decrease aggregate demand and real output. Both policies are contractionary and will increase unemployment in the short run.

When there is excess demand in the loanable funds market, which of the following will occur?

A

National savings will exceed investment spending.

B

The economy will remain at full employment.

C

Real interest rates will increase.

D

An inflationary gap will exist.

E

The money supply will increase.

C. Real interest rates will increase

Excess demand (a shortage) in the loanable funds market will put upward pressure on the real interest rate, which will drive the real interest rate toward equilibrium. Therefore, real interest rates will increase.

Which of the following is an assumption underlying an upward-sloping short-run aggregate supply curve?

A

The economy is experiencing high inflation.

B

The economy is at full employment.

C

National income is fixed.

D

Wages are sticky.

E

The velocity of money is constant.

D. Wages are sticky.

When wages are sticky, an increase in the price level will increase profits, to which firms respond by hiring more workers and increasing production.

The short-run Phillips curve implies there is a trade-off between

A

rule making and discretionary policies

B

monetary and fiscal policies

C

inflation and unemployment

D

budget deficits and interest rates

E

interest rates and investment

C. inflation and unemployment

The short-run Phillips curve (SRPC) implies there is a trade-off between inflation and unemployment. Moving along the SRPC, an increase in inflation is associated with a decrease in unemployment.

When Stephanie took out a one-year fixed-rate loan, she expected to pay a real interest rate of 3 percent. At the end of the year, the real interest rate had fallen to 2 percent. Which of the following could have caused the decrease in the real interest rate?

There was an increase in the nominal interest rate.

B

There was a decrease in the nominal interest rate.

C

There was a decrease in the money supply.

D

The actual inflation rate was greater than the expected inflation rate.

E

The actual inflation rate was less than the expected inflation rate.

D. The actual inflation rate was greater than the expected inflation rate

The real interest rate is equal to the nominal interest rate minus the expected inflation rate. If the actual inflation rate turned out to be greater than the expected rate, the real rate would decrease.

A continuous increase in the consumer price index (CPI) is

A

deflation

B

stagflation

C

inflation

D

recession

E

disinflation

C. inflation

Inflation occurs when the aggregate price level as measured by the CPI increases. The percentage change in the CPI measures the inflation rate from one period to another.

Which of the following would most likely lead to cost-push inflation in the short run?

A

A decrease in labor productivity

B

A decrease in income tax rates

C

A decrease in consumers' and businesses' optimism about future economic activity

D

An increase in government deficit spending to stimulate a weak economic recovery

E

Discovery of new sources of energy

A. A decrease in labor productivity

A decrease in labor productivity decreases the output per worker and raises unit costs of production. The increase in costs of production will decrease short-run aggregate supply, raising the price level and lowering real output. This is a negative supply shock and will lead to cost-push inflation.

If there is an increase in the price level caused by an increase in aggregated demand, the resulting inflation is demand-pull (not cost-push) inflation.

The measured unemployment rate is often criticized for understating the level of joblessness because

A

individuals working in the underground economy are counted as employed

B

individuals working more than one job are counted more than once

C

discouraged workers are counted as unemployed

D

discouraged workers are not counted in the labor force

E

part-time workers are counted as unemployed

D. discouraged workers are not counted in teh labor force

Because they have given up actively looking for jobs, discouraged workers are not part of the labor force. To be included in the unemployment statistics, individuals must be counted as part of the labor force. By not including discouraged workers, the measured unemployment rate understates the level of unemployment.

An economy is in short-run equilibrium at a level of output that is greater than potential output. If there were no active fiscal or monetary policy intervention, which of the following changes in output and the price level would occur in the long run?

D. Output will decrease and price level will also decrease

The economy is experiencing an inflationary output gap in the short run. In the long run, nominal wages will rise, causing the short-run aggregate supply curve to shift to the left until the economy returns back to potential output but at a higher price level. Therefore, output would decrease and the price level would increase.

The table shows the production possibilities for Country X in producing shirts and chairs when it uses all its available resources. The opportunity cost of producing one additional chair is

B. constant

Moving from point A to point B requires giving up 4 shirts (production of shirts decreases from 20 to 16 to allocate the resources to produce the first chair), and moving from point B to point C requires giving up 4 shirts (production of shirts decreases from 16 to 12 to allocate the resources to produce the second chair), and so on. Therefore, the opportunity cost of producing one chair is constant and equal to 4 shirts.

An increase in which of the following will most likely cause an increase in aggregate demand and inflation in the short run?

A

Income tax rates

B

Input prices

C

Government spending

D

Real interest rates

E

Savings

C. Government spending

An increase in government spending raises aggregate demand, increasing both real output and the price level. The increase in the price level is likely to result in inflation.

Assume the banking system in a country has limited reserves. If the central bank of that country wishes to maintain a stable nominal interest rate after a decrease in consumers' spending, taking which of the following actions will achieve the goal?

Increasing government spending

B

Increasing income tax rates

C

Decreasing the required reserve ratio

D

Decreasing the discount rate

E

Selling government bonds

E. selling government bonds

A decrease in consumer spending decreases aggregate demand and the price level, lowering the demand for money and the interest rate. Therefore, in order to stabilize the interest rate, the central bank needs to take an action that will increase interest rates. Selling government bonds decreases the money supply and increases the interest rate. The policy will offset the effect of the decrease in consumer spending on interest rates and stabilize the nominal interest rate.

Assume that the market for bottled water is in equilibrium. If both the supply of and the demand for bottled water decrease, what will be the effect on equilibrium price and quantity?

E. Price: Indeterminate

Quantity: Decrease

A decrease in supply will result in an increase in price and a decrease in quantity. A decrease in demand will result in a decrease in price and a decrease in quantity. Therefore, the equilibrium price will be indeterminate, while the equilibrium quantity will decrease.

Investment in physical capital is most likely to occur as a result of an increase in

A

interest rates

B

inflation rates

C

business confidence

D

money demand

E

personal consumption

C. business confidence

An increase in business confidence about future economic activity and profitability of investments induces investment spending. This expectation of future profitability will shift the demand curve for loanable funds to the right, as businesses will be willing to borrow more at each interest rate. As a result, the economy's physical capital stock will increase.

Country X's government increases its spending without raising taxes. Which of the following is true about the effect on Country X's real interest rates and its subsequent effect on Country X's net exports?

A

Real interest rates increase and net exports increase.

B

Real interest rates increase and net exports decrease.

C

Real interest rates increase with no change in net exports.

D

Real interest rates decrease and net exports increase.

E

Real interest rates decrease and net exports decrease.

B. Real interest rates increase and net exports decrease

An increase in government spending not financed by taxes implies that the government is borrowing to finance its spending, which will increase the demand for loanable funds and causes the real interest rate to increase. The increase in the real interest rate is likely to make the country's financial assets more attractive to foreign investors, and the value of the country's currency will appreciate, making its exports relatively expensive to other countries. Therefore, the country's net exports (exports minus imports) will decrease.

Which of the following shifts the money demand curve to the right?

A

An increase in the price level

B

A decrease in the price level

C

An increase in interest rates

D

A decrease in interest rates

E

A decrease in the nominal gross domestic product

A. An increase in the price level

An increase in the price level will increase the demand for money because people will need more money to pay for goods and services. An increase in the demand for money shifts the demand curve to the right.

An increase in government spending that is financed by an equal increase in taxes results in which of the following changes in aggregate demand (AD) and short-run aggregate supply (SRAS) curves?

C. AD curve shifts to theright, SRAS curve does not change

A balanced budget entails financing a given increase in government spending by an equal increase in lump-sum taxes. The balanced budget multiplier is equal to the government spending multiplier plus the tax multiplier, i.e. 1/1−mpc+−mpc/1−mpc=1−mpc1/−mpc=1. Thus, the net impact of an equal increase in government spending and lump-sum taxes shifts the aggregate demand curve to the right by an amount equal to the initial increase in government spending. Autonomous changes in government spending and lump-sum taxes do not affect the SRAS curve. Therefore, the SRAS curve will not change.

Assuming a banking system with limited reserves, an increase in the money supply will result in an increase in

A

output in the short run and in the long run

B

inflation in the short run and an increase in output in the long run

C

inflation in the short run and no change in output in the long run

D

output in the long run but not in the short run

E

output in the long run and no change in inflation in the short run

C. inflation in the short run and no change in output in the long run

Changes in the money supply affect only nominal values in the long run but not real values. Assuming the economy is in long-run equilibrium when the money supply increased, in the long run, nominal wages will increase and return the economy back to full employment. There will be an increase in the price level in the short run, but the economy will return back to full-employment output in the long run at a higher price level.

Which of the following is an example of frictional unemployment?

A

A former mayor doing volunteer work

B

A factory worker who loses her job because of recession

C

A college student working part-time at the campus bookstore

D

A college graduate interviewing for two available positions

E

An architect whose job is replaced by computer software that designs buildings

D. A college graduate interviewing for two available positions

A college graduate that is interviewing and actively looking for a job remains unemployed until making a decision to accept the job. This is considered frictionally unemployed.

Assuming no government policies, which of the following will occur in the long run if the actual unemployment rate exceeds the natural rate of unemployment?

A

Prices will increase.

B

Unemployment will increase.

C

Wages will fall.

D

Aggregate demand will increase.

E

Long-run aggregate supply will decrease.

C. Wages will fall

Since the actual unemployment rate exceeds the natural rate of unemployment, the economy is experiencing a recessionary output gap. If there is no active policy action to correct the macroeconomic condition, in the long run nominal wages will fall, causing the short-run aggregate supply curve to shift to the right until the economy returns back to potential output.

Assume that the United States current account balance is zero. If the United States dollar appreciates against the Japanese yen, then demand for United States exports will

A

increase and result in a deficit in the United States financial account

B

increase and result in a surplus in the United States financial account

C

decrease and result in a surplus in the United States financial account

D

decrease and result in a deficit in the United States financial account

E

remain unchanged because the surplus in the current account will be offset by the deficit in the financial account

C. decrease and result in a surplus in the US financial account

The appreciating dollar will make United States goods and services relatively expensive to Japanese buyers, and Japanese demand for United States goods and services will decrease. United States exports to Japan will decrease, but United States imports from Japan will increase because of the appreciating dollar, resulting in an increase in the United States trade deficit with respect to Japan. This will lead to a deficit in the United States current account and a surplus in the United States capital and financial account.

If the government decreases spending while the country's central bank decreases its administered interest rates, which of the following will definitely occur?

A

The aggregate demand curve will shift to the right.

B

The aggregate demand curve will shift to the left.

C

The short-run aggregate supply curve will shift to the right.

D

Interest rates will fall.

E

Interest rates will rise.

D. interest rates will fall.

The decrease in government spending will decrease the demand for loanable funds (or increase the supply of loanable funds), which will decrease real interest rates. The decrease in administered interest rates by the central bank decreases interest rates throughout the economy. Therefore, both actions lead to a reduction in interest rates.

Which of the following best illustrates rising productivity?

A

An expansion of the labor force

B

An increase in the value of financial capital

C

A decrease in the amount of physical capital per worker

D

A decrease in the amount of labor needed to produce a unit of output

E

An increase in the amount of resources required to produce a certain level of output

D. A decrease in the amount of resources required to produce a certain level of output.

Productivity rises when output per worker rises or when there is a decrease in the amount of labor needed to produce a unit of output.

Which of the following will most likely cause a depreciation in a country's currency?

A

An increase in the country's price level

B

An increase in the country's real interest rate

C

A decrease in the country's expected inflation

D

A decrease in the country's real gross domestic product

E

A decrease in the country's money supply

A. An increase in the country´s price level

An increase in the price level in a country will make the country's goods and services relatively more expensive to other countries, which decreases foreign demand for the country's goods and services. This decrease in demand causes a decrease in the demand for the country's currency, resulting in a depreciation of the country's currency.

Banks create money when

A

they make loans

B

the loans they make are repaid

C

they keep all excess reserves

D

customers increase their cash withdrawals from their savings accounts

E

the money multiplier is less than one

A. they make loans

Banks use a portion of customers' deposits to expand credit. Specifically, banks use their excess reserves, reserves in excess of the required reserves they are legally required to keep to meet deposit liabilities, to make loans. Thus banks create or expand the money supply when they make loans.

Which of the following is true about a country's national debt?

A

It is the sum of the country's trade deficit and government budget deficit.

B

It increases when gross domestic product increases.

C

It increases when the country's government has a budget deficit.

D

It decreases when the country's exports exceed its imports.

E

It decreases when national savings decrease.

C. It increases when the country´s government has a budget deficit.

Each fiscal year, when a country's government spends more than it collects in tax revenues, it runs a budget deficit. The government often borrows funds to finance its deficit. The national debt grows as the government runs deficits year over year.