AP Macroeconomics Practice E#1

Which of the following typically occurs during an

expansionary phase of a business cycle?

(A) Nominal interest rates decrease.

(B) Income taxes decrease.

(C) The price level decreases.

(D) Government transfer payments increase.

(E) Employment increases.

(E) Employment increases.

Economic growth refers to an increase in which of

the following?

(A) Government spending

(B) Consumption spending

(C) Nominal gross domestic product

(D) Potential real gross domestic product

(E) Household wealth

(D) Potential real gross domestic product

If both the nominal interest rate and the expected

inflation rate increase, what will happen to the

real interest rate?

(A) It will increase because the expected inflation

rate has increased.

(B) It will increase because the nominal interest

rate has increased.

(C) It will increase if the expected inflation

rate increases by more than the nominal

interest rate.

(D) It will decrease because the nominal interest

rate has increased.

(E) It will decrease if the expected inflation

rate increases by more than the nominal

interest rate.

(E) It will decrease if the expected inflation

rate increases by more than the nominal

interest rate.

Which of the following statements is true about an

expansionary fiscal policy?

(A) It decreases demand for loanable funds.

(B) It decreases the equilibrium price level.

(C) It decreases the equilibrium real interest rate.

(D) It increases aggregate demand.

(E) It increases the money supply.

(D) It increases aggregate demand.

Which of the following will most likely result

from deflation?

(A) Increased nominal interest rates

(B) Increased business profits

(C) Increased real value of fixed incomes

(D) Decreased purchasing power of cash

(E) Decreased real wealth

(C) Increased real value of fixed incomes

Which of the following is a defining characteristic

of a fractional reserve banking system?

(A) The existence of a central bank with

a monopoly on money creation

(B) The use of paper money backed by

a commodity such as gold or silver

(C) The fact that banks retain an amount of bank

reserves that is less than the amount of

customer demand deposits

(D) The requirement that banks maintain a certain

percentage of their reserves as a deposit in

an account at the central bank

(E) The regulations that separate investment

banking from commercial banking

(C) The fact that banks retain an amount of bank

reserves that is less than the amount of

customer demand deposits

A negative aggregate supply shock will result in

which of the following in the short run?

(A) An increase in the price level and a decrease

in the unemployment rate

(B) A decrease in the price level and an increase

in the unemployment rate

(C) A decrease in both the price level and real

output

(D) An increase in both the price level and real

output

(E) An increase in both the price level and the

unemployment rate

(E) An increase in both the price level and the

unemployment rate

Which of the following combinations of fiscal

and monetary policies will correct a severe

recession?

(A) Increasing income tax rates and decreasing

the money supply

(B) Increasing both the income tax rates and the

money supply

(C) Decreasing both the income tax rates and the

money supply

(D) Decreasing income tax rates and increasing

the money supply

(E) Decreasing income tax rates and increasing

the federal funds rate

(D) Decreasing income tax rates and increasing

the money supply

Which of the following would decrease the

United States net exports to South Korea?

(A) South Korean computer companies sell more

computers to the United States.

(B) South Korean insurance companies provide

fewer services to the United States.

(C) South Koreans spend more vacations in the

United States.

(D) United States banks provide more banking

services to South Korea.

(E) United States smartphone companies sell

more smartphones to South Korea.

(A) South Korean computer companies sell more

computers to the United States.

An increase in the purchases of newly constructed

houses will result in which of the following?

(A) Aggregate demand will decrease as a result of

a decrease in the price level.

(B) Aggregate demand will increase as a result of

an increase in investment spending.

(C) Aggregate demand will increase as a result of

an increase in exports.

(D) Aggregate demand will not change, since

consumer spending has not changed.

(E) Aggregate demand will not change, since

investment spending has not changed.

(B) Aggregate demand will increase as a result of

an increase in investment spending.

Suppose that a country's nominal gross domestic

product (GDP) was $1,000 in year 1 and $2,000

in year 2. If year 1 is the base year and real GDP

in year 2 was $1,000, which of the following

is true?

(A) Prices fell by 50% between year 1 and year 2.

(B) Prices doubled between year 1 and year 2.

(C) Prices remained the same between year 1 and

year 2.

(D) More goods and services were produced in

year 2 than in year 1.

(E) Fewer goods and services were produced in

year 2 than in year 1.

(B) Prices doubled between year 1 and year 2.

To decrease the money supply, a country's central

bank can do which of the following?

(A) Sell government bonds.

(B) Decrease the discount rate.

(C) Decrease the required reserve ratio.

(D) Increase taxes.

(E) Increase government spending.

(A) Sell government bonds.

Which of the following types of unemployment is

caused by a recession?

(A) Hidden

(B) Frictional

(C) Seasonal

(D) Structural

(E) Cyclical

(E) Cyclical

If the United States government increases deficit

spending, which of the following will occur as a

result of the change in the interest rate?

(A) The United States dollar will appreciate in

foreign exchange markets.

(B) Household savings in the United States will

decrease.

(C) The United States exports will increase.

(D) The demand for United States dollars will

decrease.

(E) Private investment in plant and equipment in

the United States will increase.

(A) The United States dollar will appreciate in

foreign exchange markets.

In the short run, a reduction in the money supply

will cause

(A) a rightward shift in the aggregate demand

curve

(B) a leftward shift in the aggregate demand

curve

(C) a rightward shift in the aggregate supply

curve

(D) a leftward shift in the aggregate supply curve

(E) a movement along the aggregate demand

curve

(B) a leftward shift in the aggregate demand

curve

. How will an increase in demand and a

simultaneous decrease in supply affect the

equilibrium price and quantity of a good in

a market?

Price Quantity

(A) Increase Increase

(B) Increase Indeterminate

(C) Decrease Increase

(D) Decrease Indeterminate

(E) Indeterminate Indeterminate

(B) Increase Indeterminate

An increase in government spending financed

by increased borrowing will most likely change

the real interest rate and the gross private

domestic investment in which of the

following ways?

Real Gross Private

Interest Rate Domestic Investment

(A) No change No change

(B) Decrease Increase

(C) Decrease Decrease

(D) Increase Decrease

(E) Increase Increase

(D) Increase Decrease

If real interest rates in the United States fall

relative to real interest rates in Great Britain,

which of the following will occur?

(A) British investors will buy more United States

securities.

(B) British exports to the United States will

increase.

(C) The supply of dollars will decrease.

(D) United States investors' demand for British

pounds will decrease.

(E) The British pound will appreciate relative to

the dollar.

(E) The British pound will appreciate relative to

the dollar.

A country's economy is currently in equilibrium

at point R. Which of the following policy actions

could the country's government take to achieve

potential output (YP) ?

(A) Decreasing the money supply

(B) Decreasing investment tax credits

(C) Increasing interest rates

(D) Increasing government expenditures

(E) Increasing the minimum wage

Good X Good Y

P V Q P V Q

2 2 $1 4

3 2 $2 4

Assume that an economy produces just two

goods, X and Y, as shown in the table above. If

year 1 is the base year, the consumer price index

for year 2 in this economy is

(A) 57.1

(B) 66.7

(C) 100

(D) 175

(E) 250

(D) 175

Which of the following is LEAST likely to affect

the long-run growth of an economy?

(A) Investment in physical capital

(B) Research and development

(C) Education and training

(D) A specific tax on luxury goods

(E) Stable and efficient institutions

(D) A specific tax on luxury goods

Pat deposits a portion of her wages into a personal

savings account every week. The saved money

can be considered to be primarily a

(A) means of payment

(B) unit of account

(C) store of value

(D) measure of value

(E) medium of exchange

(C) store of value

An increase in the number of which of the

following will lead to an increase in the

unemployment rate?

(A) Discouraged workers

(B) Business start-ups

(C) Self-employed persons

(D) Persons working 30 instead of 40 hours

per week

(E) Persons quitting part-time jobs to look

for full-time ones

(E) Persons quitting part-time jobs to look

for full-time ones

An economy experiences a sharp increase

in energy prices, and policy makers adopt

a stabilization policy to increase aggregate

demand. Compared with the initial short-run

equilibrium, which of the following will

definitely occur?

(A) Lower level of output

(B) Higher level of output

(C) Lower price level

(D) Higher price level

(E) Higher aggregate supply

(D) Higher price level

Assume that the marginal propensity to consume

is 0.8. If the government increases its purchases

of goods and services by $200 and exports

decline by $50, at most the equilibrium level

of income will

(A) decrease by $250

(B) decrease by $1,000

(C) increase by $150

(D) increase by $750

(E) increase by $1,250

(D) increase by $750

An ongoing increase in the price of oil will

result in

(A) demand-pull inflation

(B) cost-push inflation

(C) expansionary fiscal policy

(D) a decrease in the prices of substitute forms

of energy

(E) deflation

(B) cost-push inflation

Assume that Country X and Country Y are trading

partners. If the average income in Country X

increases, which of the following will occur in the

foreign exchange market?

(A) The demand for Country X's currency will

increase, and Country X's currency will

appreciate.

(B) The demand for Country Y's currency will

increase, and Country X's currency will

depreciate.

(C) The demand for Country Y's currency will

increase, and Country X's currency will

appreciate.

(D) The supply of Country X's currency will

decrease, and Country X's currency will

appreciate.

(E) The supply of Country Y's currency will

increase, and Country Y's currency will

depreciate.

(B) The demand for Country Y's currency will

increase, and Country X's currency will

depreciate.

Which of the following is a monetary policy

aimed at increasing the equilibrium interest rate in

the money market?

(A) Raising taxes

(B) Lowering the discount rate

(C) Lowering the federal funds rate

(D) Selling bonds on the open market

(E) Lowering the required reserve ratio

(D) Selling bonds on the open market

Which of the following monetary and fiscal

policy mixes will reduce unemployment?

(A) Buying government bonds in the open market

and increasing taxes

(B) Buying government bonds in the open market

and decreasing taxes

(C) Selling government bonds in the open market

and increasing government spending

(D) Selling government bonds in the open market

and decreasing government spending

(E) Selling government bonds in the open market

and increasing taxes

(B) Buying government bonds in the open market

and decreasing taxes

Which of the following is correct according to the

circular flow model of an economy?

(A) Taxes received from the public equal

government spending.

(B) Imports equal exports.

(C) Total spending equals total income.

(D) Consumption plus saving equals investment.

(E) Saving plus investment equals imports plus

exports.

(C) Total spending equals total income.

If the short-run aggregate supply curve is upward

sloping, which of the following will cause

inflation?

(A) An increase in long-run aggregate supply

(B) An increase in short-run aggregate supply

(C) An increase in aggregate demand

(D) A decrease in aggregate demand

(E) A decrease in aggregate demand and

an increase in aggregate supply

(C) An increase in aggregate demand

Sam and Bill run a leaf raking and lawn mowing

business. In one day, Sam can rake 3 lawns or

mow 5 lawns whereas Bill can rake 2 lawns or

mow 6 lawns. Which of the following correctly

describes Sam's and Bill's absolute and

comparative advantages?

(A) Sam has a comparative advantage in raking

and an absolute advantage in mowing.

(B) Sam has a comparative advantage in mowing

and an absolute advantage in raking.

(C) Sam has a comparative advantage in mowing

and an absolute advantage in mowing.

(D) Bill has a comparative advantage in mowing

and an absolute advantage in mowing.

(E) Bill has a comparative advantage in raking

and an absolute advantage in mowing.

(D) Bill has a comparative advantage in mowing

and an absolute advantage in mowing.

People who have given up looking for jobs are

classified as

(A) cyclically unemployed

(B) frictionally unemployed

(C) structurally unemployed

(D) discouraged workers

(E) underemployed workers

(D) discouraged workers

Banks expand the money supply when

(A) issuing credit cards

(B) printing money

(C) cashing checks

(D) making loans

(E) accepting deposits

(D) making loans

The economy is currently in long-run equilibrium.

If the central bank increases the money supply, in

the long run the price level will

(A) increase, and output will remain at the

full-employment level

(B) increase, and output will be above the

full-employment level

(C) increase, and output will be below the

full-employment level

(D) remain unchanged, and output will remain

at the full-employment level

(E) remain unchanged, and output will be above

the full-employment level

(A) increase, and output will remain at the

full-employment level

The crowding out effect of government spending

will be large if

(A) investment is highly sensitive to changes

in the interest rate

(B) consumption is highly sensitive to changes

in wealth

(C) money demand is highly insensitive to

changes in income

(D) it takes a long time for changes in

government spending to cause a change

in equilibrium income

(E) the long-run aggregate supply curve is

horizontal

(A) investment is highly sensitive to changes

in the interest rate

When the United States dollar appreciates against

the euro, which of the following will most likely

happen?

(A) European firms will pay fewer euros

for equipment purchased from the

United States.

(B) European products will become more

expensive for United States consumers.

(C) United States tourists will pay fewer dollars

for trips to Europe.

(D) The European trade deficit will increase.

(E) The United States trade deficit will decrease.

(C) United States tourists will pay fewer dollars

for trips to Europe.

Which of the following will occur in the money

market when the aggregate price level increases?

(A) The money supply will increase and nominal

interest rates will decrease.

(B) The demand for money will increase and

nominal interest rates will decrease.

(C) The demand for money will increase and

nominal interest rates will increase.

(D) The demand for money will decrease and

nominal interest rates will decrease.

(E) The opportunity cost of holding money will

decrease.

(C) The demand for money will increase and

nominal interest rates will increase.

Increases in government subsidies to encourage

investment in research and development will

affect aggregate demand (AD) and long-run

aggregate supply (LRAS) in which of the

following ways?

AD LRAS

(A) Increase Increase

(B) Increase Decrease

(C) Increase No change

(D) Decrease Increase

(E) Decrease No change

(A) Increase Increase

If an automobile was manufactured in 2006 and

sold to a consumer in 2007, what was the effect

on gross domestic product in 2006 and 2007?

2006 2007

(A) No change Increase

(B) Decrease Increase

(C) Increase No change

(D) Increase Decrease

(E) No change No change

(C) Increase No change

If the government implements an expansionary

fiscal policy, how will real gross domestic product

(GDP) and the price level be affected in the

short run?

Real GDP Price Level

(A) Increase Decrease

(B) Decrease No change

(C) No change Increase

(D) Increase Increase

(E) Decrease Decrease

(D) Increase Increase

Which of the following will most likely contribute

to long-run economic growth?

(A) High levels of household spending

(B) High levels of government spending

(C) High levels of investment in plant and

equipment

(D) Low levels of immigration to the country

(E) Low levels of foreign investment in the

country

(C) High levels of investment in plant and

equipment

Which of the following is true when interest

rates rise?

(A) The opportunity cost of holding cash

decreases.

(B) The opportunity cost of holding cash

increases.

(C) The opportunity cost of holding cash stays

the same.

(D) The money demand curve shifts to the right.

(E) The money supply curve shifts to the right.

(B) The opportunity cost of holding cash

increases.

Which of the following is an example of fiscal

policy?

(A) Decreasing income tax rates

(B) Increasing the money supply

(C) Decreasing the discount rate

(D) Selling government bonds

(E) Decreasing the required reserve ratio

(A) Decreasing income tax rates

All of the following explain why prices and wages

are sticky EXCEPT

(A) menu costs experienced by firms

(B) efficiency wages paid to labor

(C) misperceptions about relative prices by

suppliers

(D) competition in the business sector

(E) labor contracts covering multiple years

(D) competition in the business sector

Total Population 300

Working-age Population 200

Unemployed 10

Employed 90

46. The table above gives population and

labor-market data for an economy. The

unemployment rate in this economy is

(A) 3.3%

(B) 5%

(C) 10%

(D) 33.3%

(E) 50%

(C) 10%

In the short run, how would a government's

budget deficit, national debt, and real output

change if government spending increases with no

change in taxes?

Deficit Debt Real Output

(A) Increase Increase Decrease

(B) Increase Decrease Increase

(C) Increase Increase Increase

(D) Decrease Decrease Increase

(E) Decrease Increase Decrease

(C) Increase Increase Increase

The graph above shows the production

possibilities curves (PPC) for an economy.

The concept of opportunity cost is best

represented by which of the following?

(A) A shift from PPC1 to PPC2

(B) A movement from point A to point D

(C) A movement from point B to point C

(D) A movement from point C to point E

(E) A movement from point D to point B

(C) A movement from point B to point C

If the central bank of Country Z wishes to

increase the value of its currency on foreign

exchange markets, it can do which of the

following?

(A) Buy the currencies of other countries

(B) Increase the domestic money supply in

Country Z

(C) Increase the income tax in Country Z

(D) Raise interest rates in Country Z

(E) Increase tariffs in Country Z

(D) Raise interest rates in Country Z

An increase in the expected inflation rate will

cause the

(A) short-run Phillips curve to shift to the left

(B) short-run Phillips curve to shift to the right

(C) long-run Phillips curve to shift to the left

(D) long-run Phillips curve to shift to the right

(E) actual inflation rate to fall below the expected

inflation rate

(B) short-run Phillips curve to shift to the right

Which of the following is most likely included in

gross domestic product?

(A) Matt gives his secondhand bicycle to his

brother.

(B) Sal paints his own bicycle.

(C) Ali buys a new bicycle.

(D) Mike buys a share of stock in a bicycle firm.

(E) Daniel bikes to school every day.

(C) Ali buys a new bicycle.

Which of the following is likely to result in an

inflow of financial capital to Country Z?

(A) A decrease in Country Z's government

budget deficit

(B) An increase in personal income tax rates in

Country Z

(C) Increased sales of government bonds by the

central bank of Country Z

(D) An increase in country Z's trade surplus

(E) Increased political instability in Country Z

(C) Increased sales of government bonds by the

central bank of Country Z

A bank has $200 million in demand deposits

and $150 million in reserves. The reserve ratio

is 20 percent. What is the maximum amount of

loans the bank can make from its reserves?

(A) $750 million

(B) $150 million

(C) $110 million

(D) $50 million

(E) $40 million

(C) $110 million

Which of the following is true about the

Phillips curve?

(A) A change in aggregate demand does not shift

the long-run Phillips curve (LRPC).

(B) A change in aggregate demand does not

cause a movement along the short-run

Phillips curve (SRPC).

(C) The LRPC shows the trade-off between

unemployment and inflation but the SRPC

does not.

(D) Changes in expected inflation affect the

LRPC only.

(E) Negative supply shocks affect the LRPC

only.

(A) A change in aggregate demand does not shift

the long-run Phillips curve (LRPC).

When the total amount the government spends

equals tax revenues in any given year, which of

the following must remain constant?

(A) The real interest rate

(B) The national debt

(C) Real gross domestic product

(D) The price level

(E) The money supply

(B) The national debt

How does the automatic adjustment mechanism

move the economy to potential real gross

domestic product (GDP) in the long run when

current real GDP is above potential GDP?

(A) Nominal wages fall, shifting the short-run

aggregate supply curve to the right.

(B) Nominal wages fall, shifting the short-run

aggregate supply curve to the left.

(C) Nominal wages do not change, shifting

the short-run aggregate supply curve to

the right.

(D) Nominal wages rise, shifting the short-run

aggregate supply curve to the right.

(E) Nominal wages rise, shifting the short-run

aggregate supply curve to the left.

(E) Nominal wages rise, shifting the short-run

aggregate supply curve to the left.

Which of the following statements about inflation

is true?

(A) The expected inflation rate is the difference

between nominal and real interest rates.

(B) Low expected inflation rates lead to high

inflation rates.

(C) Lenders lose from expected inflation.

(D) Lenders gain from unexpected inflation.

(E) Workers lose from expected inflation.

(A) The expected inflation rate is the difference

between nominal and real interest rates.

The opportunity cost of an activity is

(A) the amount of time spent on the activity

(B) the value of the benefit received from

performing the activity

(C) the value of the forgone benefit of the next

best alternative

(D) zero if the activity offered no benefits

(E) the sum of benefits from all the sacrificed

alternatives

(C) the value of the forgone benefit of the next

best alternative

Increased spending on which of the following

contributes most to long-term economic growth?

(A) Social security and other transfer payments

(B) New automobiles and homes

(C) Education and infrastructure

(D) Imported consumer goods

(E) Interest payments on national debt

(C) Education and infrastructure

If consumers in Canada increase their demand for

products that are manufactured in India, which of

the following will occur?

(A) The Indian rupee will depreciate.

(B) The Canadian dollar will appreciate.

(C) India's financial capital inflow will increase.

(D) Canada's financial capital inflow will

increase.

(E) The supply of Canadian dollars will decrease.

(D) Canada's financial capital inflow will

increase.