AP MACROECONOMICS SECTION 1: Multiple Choice Practice 60 Questions

In a mixed economy, what to produce and how much to produce are determined by

markets and the government

The major difference between real and nominal gross domestic product (GDP) is that real GDP

is adjusted for price-level changes using a price index

Which of the following statements exemplifies the concept of structural employment?

Workers are fired because their skills are no longer in demand.

An increase in which of the following will increase aggregate demand?

Government spending

When the United States government engages in deficit spending, that spending is primarily financed by

issuing new bonds

When the Federal Reserve buys government securities on the open market, which of the following will decrease in the short run?

Interest rates

Changes in which of the following factors would affect the growth of an economy?

Quantity and quality of human and natural resources, Amount of capital goods available, and Technology

According to the short-run Phillips Curve, there is a trade-off between

inflation and unemployment

A favorable supply shock, such as a decrease in energy prices, is most likely to have which of the following short-run effects on the price level and output?

Price Level: Decrease, Output: Increase

Which of the following best explains why many United States economists support free international trade?

The long-run gains to consumers and some producers exceed the losses to other producers.

If two coats are currently being produced, the opportunity cost of producing the third coat is

15 belts

The best combination of belts and coats for this economy to produce is

indeterminate with the available information

The unemployment rate measures the percentage of

people in the labor force who do not have jobs

The classical economists argued that involuntary unemployment would be eliminated by

self-correcting market forces stemming from flexible prices and wages

Which of the following can be considered a leakage from the circular flow of economic activity?

Saving

An increase in the marginal propensity to consume causes an increase in which of the following?

Spending multiplier

If Mexicans increase their investment in the United States, the supply of Mexican pesos to the foreign exchange market and the dollar price the peso will likely change in which of the following ways?

Supply of Pesos: Increase, Dollar Price of Peso: Decrease

If a commercial bank has no excess reserves and the reserve requirement is 10 percent, what is the value of new loans this single bank can issue if a new customer deposits $10,000?

$9,000

An increase in government spending with no change in taxes leads to a

higher interest rate

If AD and AS represent aggregate demand and aggregate supply curves, respectively, and the arrows indicate the movement of the curves, which of the following graphs best illustrates long-run economic growth?

AS1 increase to AS2 (D)

Assume that the economy is at full-employment equilibrium in the diagram shown above. Which if the following would lead to stagflation?

A leftward shift of the short-run aggregate supply curve only

If the real interest rate in Country X increase relative to the real interest rate in Country Y and there are no trade barriers between the two countries, then for Country X which of the following will be true of its capital flow, the value of its currency, and its exports?

Capital Flow: Inflow, Currency: Appreciation, Exports: Decrease

When a central bank sells securities in the open market, which of the following set of events is most likely to follow?

A decrease in the money supply, an increase in interest rates, and a decrease in aggregate demand

The federal funds rate is the interest rate that

banks charge one another for short-term loans

According to the long-run Philips curve, which of the following is true?

The natural rate of unemployment is independent of monetary and fiscal policy changes that affect aggregate demand.

A change in which of the following will cause the short-run aggregate supply curve to shift?

The cost of all inputs

In an economy with lump-sum taxes and no international sector, assume that the aggregate supply curve is horizontal. If the marginal propensity to consume is equal to 0.8, which of the following will necessarily be true?

The government expenditure multiplier will be equal to 5.

Country A can produce either 2 tons of cocoa or 4 cars with 10 units of labor. Country B can produce either 5 tons of cocoa or 25 cars with 10 units of labor. Based on this information, which of the following is true?

Country A has a comparative advantage in the production of cocoa, while Country B has a comparative advantage in the production of cars.

Which if the following is included in the computation of gross domestic product?

Additions to business inventories

In the country of Agronomia, banks charge 10 percent interest on all loans. If the general price level has been increasing at the rate of 4 percent per year, the real rate of interest in Agronomia is

6%

According to the theory of rational expectations, a fully anticipated expansionary monetary policy will

have no impact on real output

In an economy with a horizontal aggregate supply curve, an increase in government spending will cause output and the price level to change in which of the following ways?

Output: Increase, Price Level: No change

The aggregate demand curve is downward sloping because as the price level increases the

purchasing power of wealth decreases

A commercial bank is facing the conditions given above. If the reserve requirement is 12 percent and the bank does not sell any of its securities, the maximum amount of additional lending this bank can undertake is

$3,000

According to Keynesian analysis, if government expenditures and taxes are in creased by the same amount, which of the following will occur?

Aggregate demand will increase

if investors feel that business conditions will deteriorate in the future, the demand for loans and real interest rate in the loanable funds market will change in which of the following ways in the short run?

Demand for Loans: Decrease, Real Interest Rate: Decrease

If a country has a current account deficit, which of the following must be true?

It must show a surplus in its capital account

The long-run growth rate of an economy will be increased by an increase in all of the following EXCEPT

real interest rate

Assume that the government implements a deficit-reduction policy that results in changes in aggregate income and output. Then the Federal Reserve engages in monetary policy actions that reverse the changes in income and output caused by fiscal policy action. Which of the following sets of changes in taxes, government spending, the required reserve ratio, and the discount rate is most consistent with these policies?

Taxes: Increase, Spending: decrease, Reserve Ratio: Decrease, Discount Rate: No change

With an increase in investment demand in the United States, the real interest rate rises. In this situation, the most likely change in the capital stock in the United States and in the international value of the dollar would be which of the following?

Capital Stock in United States: Increase, International Value of the Dollar: Increase

Which of the following events will most likely cause an increase in both the price level and real gross domestic product?

Exports increase

Which of the following best explains why transfer payments are not included in the calculation of gross domestic product?

Recipients of transfer payments have not produced or supplied goods and service in exchange for these payments.

Suppose that a typical consumer buys the following quantities of three commodities in 1993 and 1994. Which of the following can be concluded about the consumer price index (CPI) for this individual from 1993 to 1994?

It increased by 25%

If an economy's aggregate supply curve is upward sloping, an increase in government spending will most likely result in a decrease in the

unemployment rate

An increase in which of the following is consistent with an outward shift of the production possibilities curve?

Long-run aggregate supply

An increase in which of the following will lead to lower inflation and lower unemployment?

Labor productivity

An unanticipated decrease in aggregate demand when the economy is in equilibrium will result in

an increase in unplanned inventories

Which of the following would be true if the actual rate of inflation were less than the expected rate of inflation?

People who borrowed funds at the nominal interest rate during this time period would lose.

If the Federal Reserve institutes a policy to reduce inflation, which of the following is most likely to increase?

Interest rates

To stimulate investment in new plant and equipment without increasing the level of real output, the best policy mix is to

increase the money supply and decrease government spending

Assume that the reserve requirement is 20 percent, but banks voluntarily keep some excess reserves. A $1 million increase in new reserves will result in

an increase in the money supply of less than $5 million

Assume that a perfectly competitive financial market for loanable funds is in equilibrium. Which of the following is most likely to occur to the quantity demanded and quantity supplied of loanable funds if the government imposes an effective interest rate ceiling?

Quantity Demanded: Increase, Quantity Supplied: Decrease

If the economy is operating at full employment and there is a substantial increase in the money supply, the quantity theory of money predicts an increase in

the price level

Which of the following would cause the United States dollar to increase in value compared to the Japanese yen?

An increase in interest rates in the United States

Assume that the supply of loanable funds increases in Country X. The international value of Country X's currency and Country X's exports will most likely change in which of the following ways?

International Value of Country X's Currency: Decrease, Country X's Exports: Increase