AP Macroeconomics Semester 1 Exam MCQ

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What is shown on a production possibilities curve?

A graph that shows that if all resources are being used efficiently that you can only produce more of one good by producing less of another good.

What do tariffs cause?

A decrease in demand for a product

What is a comparative advantage?

Being able to produce an item at a lower opportunity cost than another economy.

What is an absolute advantage?

Being able to produce more of an item than another economy

When do both countries have a comparative advantage in trade?

As long as the opportunity costs are different.

Why do individuals and nations engage in trade?

• Specialization of production

• Each country has a comparative advantage (lower opportunity cost) in producing one item

What is a change in demand?

When a variable other than price changes. The entire demand curve itself shifts left or right

What is a change in quantity demanded?

When price changes. Movement occurs along the demand curve.

• An increase in price causes a decrease in (blank)

• A decrease in price causes an increase in (blank)

When is a good a substitute or compliment based on whether demand curve shifts left or right after a change in price?

• Substitutes: if price & demand have a positive relationship

  • If Jiffy peanut butter price goes up, I buy more Great Value peanut butter (and vise versa)

• Compliments: If price & demand have an inverse relationship

  • If price of cereal goes down, I buy more milk (and vise versa)

Which curve changes and in what direction if there’s a change in input prices?

• If input prices increase, supply shifts left

• If input prices decrease, supply shifts right

Where is market equilibrium found?

Where quantity supplied = quantity demanded

What are effects on equilibrium price and quantity when supply or demand curve shifts?

1. When any curve shifts right: quantity increases

2. When any curve shifts left: quantity decreases

3. Demand shifts: price & quantity change the same way

4. Supply shifts: price & quantity change opposite ways

5. Supply & Demand shift the same way: quantity changes, price ambiguous

6. Supply & demand shifts opposite ways: quantity ambiguous, price changes

How do households receive most of their income?

Earned by selling labor (called wages)

What are examples of investment spending?

• Tools

• Machinery

• Equipment used by businesses

What is an example of an intermediate good?

A good that is used to make a final product (ex: wood for a toy box)

What is NOT included in GDP

• Black Market Transactions

• Volunteer Work

• Financial Assets

• Used Goods

• Intermediate Goods

• Transfer Payments

What is the difference between nominal wages & real wages?

Nominal wages: the actual dollar amount you're paid

Real Wages: wages adjusted for inflation

What are the classifications and types of unemployment?

• Unemployed: Not currently working, actively looking for a job (ages 16+)

• Frictional: Being in between jobs

• Structural: More people looking for work than jobs available

• Cyclical: Unemployment due to a recession

• Discouraged: People who would like to work, but have given up looking

What are effects on unemployment and real GDP during a recession?

Unemployment increases and real GDP decreases

What is inflation?

An increase in price level

What is deflation?

A decrease in price level

What is disinflation

A slower increase in price level

What are effects on planned investment spending from change in interest rates?

• High interest rates: Planned investment spending decreases

• Low interest rates: Planned investment spending decreases

Why is SRAS upward sloping?

Because wages are sticky in the short run

What is the slope of LRAS and its relationship with the x-axis?

LRAS is vertical and touches the x-axis at potential output

What is stagflation?

Increased unemployment & inflation at the same time

What are short-run changes on a graph of AD and SRAS given a change in one of the curves?

• SRAS shifts if economy self corrects

• AD shifts due to policy changes or changes in consumer spending, investment spending, or exports (C,I, or X)

What are long-run self corrections for a recessionary or inflationary gap?

• SRAS shifts right in a recessionary gap due to lower wages

• SRAS shifts left in an inflationary gap due to higher wages

When does a recessionary or inflationary gap occur by definition or from a graph?

• Recessionary Gap: output is less than potential output (LRAS right of equilibrium)

• Inflationary Gap: output is greater than potential output (LRAS left of equilibrium)

How can expansionary or contractionary fiscal policy be used?

• Expansionary: decrease taxes, increase government spending, increase transfer payments

• Contractionary: increase taxes, decrease government spending, decrease transfer payments

What was the book and author who transformed the way economists looked at Macroeconomics?

John Maynard Keynes wrote “The General Theory of Employment, Interest, and Money” in 1936

What is the concept of how the money multiplier occurs?

Real GDP always changes by more than the change in taxes or government spending

What is the equation for multiplier from a change in government spending?

1/(1-MPC)

How do you reduce financial risk?

Buy a variety of financial assets (stocks, bonds, loans, bank deposits)

What is the GDP equation?

C+I+G+(X-M)=GDP

• C: Consumer spending

• I: Investment spending

• G: Government spending

• X: Exports

• M: Imports

What is the relationship between reserve ratio (rr) and the money multiplier and how do you solve a calculation knowing one of them?

• 1/rr=money multiplier

• If given a new amount of demand deposits, multiply by the

  money multiplier to see how large the economy can grow

Which institution in the U.S. determines the size of the monetary base and regulates the banking system?

The Federal Reserve

What is the monetary policy tool that involves buying & selling government bonds?

Open market operations

What is the federal funds rate?

the rate banks charge each other for loans

What is the discount rate?

the rate that the Federal Reserve charges banks for loans

Why is the demand curve for loanable funds is downward sloping?

Businesses increase investment spending as interest rates decrease.

What is the crowding out effect?

When an increase in the federal budget deficit causes a decrease in investment spending due to higher real interest rates.

How can the Federal Reserve use expansionary or contractionary monetary policies?

• Expansionary: in recessionary gaps to increase the money supply and shift AD right

• Contractionary: inflationary gaps to decrease the money supply and shift AD left

How can monetary policy affect AD on a graph?

Expansionary monetary policy: AD shifts right

Contractionary monetary policy: AD shifts left

What is the belief of the classical model regarding a change in the money supply?

An increase in the money supply leads to just inflation with no change in output.

What is shown on a Short-Run Phillips Curve?

An inverse relationship between unemployment and inflation

Interpret a graph of a Short-run Phillips Curve

• AD shifts right: upward movement along SRPC

• AD shifts left: downward movement along SRPC

• SRAS shift left or expected inflation increases: SRPC curve shifts up

• SRAS shift right or expected inflation decreases: SRPC curve shifts down

When does a trade surplus occur?

when exports are greater than imports

When does a trade deficit occur?

when imports are greater than exports

What causes a currency to appreciate compared to another currency?

• When a currency costs more for another currency to buy 1 of it

• If people demand more of a product from that country

What causes a currency to depreciate compared to another currency?

• When a currency costs less for another currency to buy 1 of it

• If people demand less of a product from that country

• Tariffs cause a decrease in demand for a product