AP Econ MCQ - Midterm

Unit One: MCQ 

1. In a market economy, most choices about production and consumption are made by which of the following

→ Answer: Many individuals and firms 

→ In a market economy, the decisions of individual producers and consumers largely determine what, how, and for whom to produce, with little government involvement in the decisions. 

2. Which of the following pairs indicates a category of resources and an example of that resource 

→ Answer: Category: Land | Example: timber 

→ Land refers to all resources that come from nature (minerals, timber, and petroleum) 

3. You can either go to a movie or study for an exam. Which of the following is an opportunity cost of studying for the exam? 

→ Answer: The enjoyment from seeing the movie 

→ Opportunity cost refers to what you have to give up in order to get something else. It is the value of the next best alternative that you give up when you make a choice. By choosing to study for the exam, you are giving up the pleasure of watching the movie. 

4. Which of the following situations is explained increasing opportunity costs? 

→ Answer: Convenience stores cater to busy people 

5. Which of the following is a normative statement?

→ Answer: The government should increase the minimum wage 

→ Normative economics refers to how economists think the economy should work. It involves more opinion and valve judgement to answer normative questions. The idea that the government should increase the minimum wage doesn’t hint towards how the economy works, but rather a statement on the policies that should be enacted. 

6. Falling output in an economy is consistent with which of the following? 

→ Answer: A recession 

→ A recession refers to periods in the business cycle of economic downturns when output and employment are falling. In the business cycle during a recession, GDP (output) is low, unemployment is high, and inflation is low. 

7. Which of the following is a goal for the macroeconomy?

→ Answer: Rising aggregate output 

→ Macroeconomics is concerned with the overall ups and downs of the economy, and focuses on economic aggregates such as unemployment rate, GDP, that summarize data across different markets. While the employment rate is a focus for macroeconomics, the goal isn't the rising unemployment rate. The goal is to have rising GDP and rising employment. 

8. Atlantis can produce which of the following combinations of output? (Referring to a table)

→ Answer: 400 pounds of potatoes and 600 pounds of fish

9. If Atlantis is efficient in production, what is the opportunity cost of increasing the annual output of potatoes from 600 to 800 pounds? 

→ Answer: 200 pounds of fish

→ At 600 pounds of potatoes, Atlantis can produce 500 pounds of fish. Increasing to 800 pounds of potatoes would mean 300 pounds of fish. Therefore, the opportunity cost of producing 800 pounds of potatoes would be 200 pounds of fish. 

10.  As Atlantis produces more potatoes, what is true about the opportunity cost of producing potatoes? 

→ Answer: It continually increases

→ If Atlantis were to produce more and more potatoes, they would produce less and less fish. For example, at 800 pounds of potatoes, Atlantis produces three pounds of fish. At 1000 pounds of potatoes, Atlantis produces zero fish. The more potatoes Atlantis produces, the more fish they lose which increases the opportunity cost of producing more potatoes. 

11. Which of the following combinations of output is efficient? 

→ 1,000 pounds of potatoes and 0 pounds of fish

12. Tivolis have the comparative advantage in meatball production and the frivolous have a comparative advantage in spaghetti production 

13. Frivolis have the absolute advantage in meatball production and tivolis have the comparative advantage in meatball production 

14. Which of the following is a basis for economic growth? 

→ Improved technology

15. Comparative advantage explains which of the following?

→ Why the PPC is bowed outward 

Unit Two: MCQ

1. Which of the following changes will most likely result in an increase in the demand for hamburgers in your hometown?

→ The number of vegetarians in your town decreases and the population size remains the same 

2. Which of the following will most likely result in a decrease in the supply of guitars?

→ Answer: The wages of guitar makers increase 

→ An increase in wages would mean that there is an increased cost of producing that guitar. The increase in wages makes production of guitars more expensive which leads to a decrease in supply. 

3. Which of the following will most likely result in a decrease in the quantity of lemons demanded? 

→ Answer: In increase in the price of lemons 

→ A decrease in the quantity of lemons demanded would either be upward movement on the demand curve or downward movement of the supply curve. Either of these would result in an increase in price level. 

4. Which of the following will occur if consumer incomes increase?

→ Answer: The demand for normal goods will increase 

→ When income rises, the demand for normal goods increases and the demand for inferior goods decreases. 

5. If two goods are complements, an increase in the price of one good will cause which of the following? 

→ Answer: A decrease in demand for the other

6. An increase in the wages of workers producing a good will most likely lead to which of the following? → A decrease in the supply of that good 

7. Which of the following is true at the equilibrium price in a market? → The quantity demanded of that good equals the quantity supplied 

8. A survey indicated that chocolate is America’s favorite ice cream flavor. Which of the following will lead to a decrease in the price of chocolate ice cream? 

→ Answer: New freezer technology lowers the cost of protruding ice cream

→ This change in technology will result in an increase in supply, shifting the supply curve to the right. The rightward shift of supply will result in a decrease in the price of chocolate ice cream. 

9. Which of the following events will increase both the price and the quantity of pizza?--> consumer income falls and pizza is an inferior good 

10.  What are the equilibrium price and quantity in the market for corn? 

→ Answer: Price: $3 and Quantity: 1,000 bushels of corn 

     11. If the government sets a price floor of $5 per bushel, how many bushels of corn are produced? 

→ Answer: 1,200 bushels of corn

     12. If the government sets a price floor of $5 per bushel, how many bushels of corn are purchased by consumers ?

→ Answer: 800 bushels of corn

    13. How many bushels of corn are purchased by the government if it maintains a price floor of $5 by buying all surplus corn? 

→ Answer: 400 bushels of corn 

    14. How much does a price floor of $5 cost the government if it maintains the price floor by buying any surplus of corn?

→ Answer: 2,000

    15. How much revenue do corn farmers receive if there is a price floor at $5?

→ Answer: 6,000

16. Where must an effective price ceiling in this market be set? → Below $500

17. If the government sets a price ceiling at $400, how many apartments will be demanded by consumers → 220,000 

18. How many apartments will be offered for rent if the government sets a price ceiling at $400? → 180,000 apartments 

19. A price ceiling set at $400 will result in which of the following in the market for apartments? → A shortage of 40,000 apartments 

20. A price ceiling set at $600 will result in which of the following in the market for apartments? → No surplus or shortage 

21. If the government establishes a quota of 7 million pounds in the market, what will the demand price of the swordfish be (per pound) → $18 per pound 

22.  If the government establishes a quota of 7 million pounds in the market, what will happen to the supply price of swordfish per pound → $12

23. What is the quota of 7 million pounds and swordfish fishing licenses are traded in a market, how much will the price of a fishing license be per pound? → $12

 24. If there is a quota of 7 million pounds and swordfish fishing licenses are traded in the market, how much will the price of a fishing license be per pound? 

→ Answer: $6

25. When transactions do not occur due to price or quantity controls, what is the term for the lost gains → Deadweight loss 

MCQ SECTION 3 

1. What is the value of GDP?

→ $750

2. What is the value of disposable income → $650

3. The 750 dollars of wages, profit, interest, and rent shown by the red arrow pointing into the factor markets box illustrates the calculation of GDP using which approach? → Income approach

4. What is the value of GDP - 14,100 

5. What is the value of net exports? –$500

6. Which of the following refers to a loan in the form of an IOU that pays interest → Bond 

7. Investment spending includes spending on which of the following? Physical capital 

8. Which of the following is included in the calculation of GDP → Domestically produced capital good 

9. Which of the following is true for this year if real GDP is greater than nominal GDP → The price level has decreased in the base year

10. A country’s labor force is equal to which of the following? → The number of people employed plus the number of unemployed 

11. The number of people who are considered unemployed is equal to the number of people who are not working and → Are actively seeking work 

12. The unemployment rate is the number of people unemployed divided by the number → In the labor force 

13. The number of people counted as unemployed includes which of the following types of workers? → Aspiring workers seeking their first job

14. A worker who is not working while engaged in a job search after moving to a new city is considered which of the following? → Frictionally unemployed 

15. A worker who is not working because of his or her skills are no longer demanded in the labor market is considered which of the following → Structurally unemployed 

16. The normal unemployment rate around which the actual unemployment rate fluctuates is known as which of the following?  Natural rate of unemployment 

17. Which of the following is true if the real wage rate is equal to the nominal wage rate? The price level for the current year is the same as the price level in the base year

18. A worker who is unemployed due to fluctuations in the business cycle is considered which of the following? Cyclically unemployed 

19. When inflation makes money a less reliable unit of measurement, the economy is experiencing which of the following costs of inflation? → shoe-leather inflation 

20. Bringing down the inflation rate is known as → Disinflation 

21. The real interest rate is equal to the nominal interest rate → Minus the inflation rate 

22. Who loses from unanticipated inflation? → People on fixed incomes 

23. Assume a country has a population of 1,000. If 400 people are employed and 100 people are unemployed, what is the country’s unemployment rate? → 20% (number of unemployed people/sum of employed people + unemployed people) x 100

24. Which of the following changes will result in an increase in the natural rate of unemployment →  The government increases the time during which an unemployed worker can receive benefits 

25. If the consumer price index rises from 120 to 132, what is the inflation rate? → 10% Inflation Rate = ((B-A)/A) x 100

→ In the formula, A would be the starting cost in the Consumer Price Index for a specific good or service in a specific year or month and B would be the ending cost for the same good or service 

MCQ FOR UNIT 4:

1. Which of the following will occur if the federal government reduces defense spending? → Aggregate demand will decrease 

2. Which of the following will occur if an increase in the interest rates leads to a decrease in investment spending? → Aggregate demand will increase 

3. Which of the following will occur as a result of an increase in the aggregate price level → Aggregate demand will decrease 

4. Which of the following will occur if the price of steel decreases as a result of the discovery of new deposits of iron ore used to make steel? → Aggregate supply will increase 

5. Sticky nominal wages in the short run cause the SRAS to → Slope upward 

6. As a result of the wealth effect, a higher aggregate price level will reduce which of the following? → Households’ purchasing power 

7. The interest rate effect of a decrease in the aggregate price level will increase which of the following? → Investment spending 

8. Which of the following types of shocks poses a policy dilemma due to the inability to use stabilization policy to address inflation and unemployment at the same time? → Negative supply shock 

9. A higher aggregate price level leads to higher profit per unit of output and increased output in the short run because of which of the following? → Sticky nominal wages 

10. If potential output is equal to actual aggregate output, which of the following is true? → The economy is in long run equilibrium 

11. Which of the following is true about the long run aggregate supply curve? → It is the result of nominal wages being fully flexible 

12. Short run equilibrium aggregate output is the quantity of aggregate output produced when → the quantity of aggregate output supplied is equal to the quantity demanded. 

13. The collapse of wealth and business and consumer confidence that caused the Great Depression is an example of → Negative demand shock

14. Which of the following is an example of a positive demand shock? → A large increase in defense spending 

15. A positive supply shock will lead to which of the following? → A rightward shift of the SRAS 

16. Which of the following is an example of a negative supply shock? → World oil supplies are disrupted

17. Which of the following is true when the economy is experiencing a recessionary gap? → There is high unemployment 

18. When the economy is experiencing an inflationary gap, the output is → Positive 

19. Which of the following leads to self-correction when the economy is experiencing a recessionary gap? → The SRAS shifts to the right

20. Which type of policy can be used to address a decrease in aggregate output to below potential output? → Expansionary 

21. If the marginal propensity to consume is 0.80, the spending multiplier is → 5

22.  If the MPC is 0.75, an initial increase in aggregate spending of $1000, will lead to a total change in real GDP equal to → $4000

23. If the MPC is 0.9, every $10 billion increase in taxes will cause a change in spending equal to → -$90 Billion.  

24. Compared to an increase in taxes, an equal-size increase in government spending will have what effect on real GDP? → A larger, positive effect

25. Which of the following is an example of an automatic stabilizer? → Sales Tax

UNIT 5 Questions 

1. The interest rate is → The price borrowers pay for the use of lenders savings. 

2. Which of the following identities is true in a simplified economy with no government and no interaction with other countries → Savings = investment spending 

3. A budget surplus exists when the government does which of the following? → Uses expansionary fiscal policy 

4. Which of the following is a task of an economy's financial system? Enhancing the efficiency of financial markets 

5. A financial intermediary that resells shares of a stock portfolio is a → Mutual fund 

6. Which of the following assets is most liquid? → Cash 

7. When money acts as a means of holding purchasing power over time, it is serving which function? → Store of value 

8. Which of the following is an example of using money as a unit of account? → Purchasing ten dollars worth of candy

9. Which of the following is a desirable characteristic of money → Widely accepted 

10. Flat money derives its value from which of the following → Its official status 

11. The M1 money supply includes which of the following? → Checkable deposits 

12. The present value of $1 you receive one year from now is equal to → $1/(1+r)

13. If the interest rate is 2%, the amount received 1 year from now as a result of lending $1000 today is → 1,020

14. The required reserve ratio is → Set by the federal reserve 

15. If rr is the reserve requirement, the money multiplier is equal to → 1/rr

16. Which of the following is part of the money supply but not part of the monetary base? → Bank reserves 

17. The federal reserve is a(n) → Institution that oversees the banking system 

18. The federal reserve is charged with doing all of the following except? → Insuring bank deposits 

19. Which of the following will increase the demand for money → An increase in real GDP

20. The money supply curve is → vertical 

21. When banking regulations were changed so that banks could pay interest on checking accounts, what was the effect on interest rates and the equilibrium quantity? → The interest rate increases and the quantity of money decreases 

22. Which of the following will shift the supply curve for loanable funds to the right? → An increase in the rate of return on investment spending 

23. Crowding out is illustrated by which of the following changes in the loanable funds market? → An increase in the demand for loanable funds 

24. The supply curve for loanable funds is → Upward sloping 

UNIT 6 MCQ 

1. The Budget balance is equal to → Taxes - government spending and transfer payments 

2. The cyclically adjusted budget deficit adjusts the actual budget deficit for the effect of → The business cycle 

3. The public debt increases when → The government runs a budget deficit 

4. Which of the following is a potential problem with persistent increases in government debt? → Government borrowing may crowd out 

5. The Federal Open Market Committee sets a target for which of the following? → The federal funds rate 

6. Which of the following will occur if the Federal reserve buys Treasury bills? The money supply will increase 

7. Which of the following actions would the Federal reserve use to address inflation? → Make an open market sale of treasury bills

8. The Taylor rule sets the target federal funds rate based on which of the following? → Both the output gap and the inflation rate 

9. An increase in the money supply will generate which of the following? → An increase in the aggregate price level in the short run and the long run

10. According to the concept of money neutrality, changes in the money supply will affect which of the following in the long run? → The aggregate price level 

11. An inflation tax is the result of → Contractionary fiscal policy 

12. An increase in the aggregate price level caused by a significant increase in the price of an input with economy-wide importance is called → Cost-push inflation 

13. Which of the following is true when the output gap is negative? → Potential output is above aggregate output 

14. The short run phillips curve shows the relationship between inflation rate and → the unemployment rate 

15. An increase in expected inflation has what effect on the short-run Phillips curve? → An upward shift of the curve 

16. The long run phillips curve is → vertical 

17.  The long run phillips curve illustrates which of the following → that unemployment will always return to the NAIRU 

18. The process of bringing down the inflation rate that has become embedded in expectations is known as → Deflation 

19. A liquidity trap occurs when conventional monetary policy is ineffective because → The real interest rate can’t be negative 

20. According to the Quantity theory of money → Velocity varies significantly with the business cycle 

UNIT 7 MCQ

1. If real GDP grows by 5% per year, approximately how many years will it take for it to double? → 15 years 

2. What is the most important ingredient in the long run economic growth? → Increased labor productivity 

3. The technical means for the production of goods and services is known as → Technology 

4. Which of the following is a major reason for productivity growth → Technological process 

5. Assuming diminishing returns to physical capital, if physical capital per worker is 50,000, real GDP per worker will most likely equal which of the following? → Less than 60,000 but greater than 40,000 

6. An upward shift of the curve shown could be caused by which of the following? → Rising total factor production 

7. Which of the following is true about the role of natural resources in productivity growth? → They result in higher productivity, other things equal 

8. According to the convergence hypothesis, over time, international differences in real GDP per capita will → Decrease 

9. When the government spends money to create and implement new technologies, it has invested in → Research and development 

10. Which of the following is part of an economy’s infrastructure? → Highways 

11. If long-run economic growth can continue into future despite limited natural resources, it is considered → Sustainable 

12. An outward shift of the PPC indicates which of the following? → Long-run economic growth

13. In the aggregate supply and demand model, a rightward shift of the LRAS curve indicates which of the following? → Long run economic growth 

14. Which of the following will likely lead to long run economic growth? → An increase in total factor productivity 

15. If an economy experiences long-run economic growth, which of the following is true of its potential output? → It has increased 

16. Depreciation leads to → A reduction in physical capital 

UNIT 8 MCQ 

1. Which of the following transactions is counted in the U.S current account? → An American working for a brazilian company deposits her paycheck 

2. The difference between a country’s exports and imports of goods is that country’s → Merchandise trade balance 

3. Which of the following relationships between the current account (CA) and the financial account (FA) must be true → CA + FA = 0

4. Which of the following is a reason for capital flow to the country → A rapidly growing economy 

5. Given the situation depicted in the graphs, which of the following will happen? → Capital will inflow into Northlandia 

6. Which of the following will happen to Southlandina → The quantity of loanable funds supplied will decrease 

7. If the international equilibrium interest rate is 8%, which of the following will be true → Southlandia will experience a capital outflow of 250. 

8. Which of the following is traded in a foreign exchange market? → Currency 

9. The price in a foreign exchange market is a(n) → Exchange rate 

10. Given the equilibrium exchange rate in the graph, which of the following is true regarding the bern? → It takes $1.50 to buy a bern 

11. How could depreciation of the bern be shown on the graph? → A movement of the equilibrium exchange rate to 1

12. Real exchange rates are adjusted for international differences in → Aggregate price levels 

13. Which of the following will occur in the foreign exchange market as a result of capital inflow to the United States → Appreciation of the US dollar 

14. Which of the following is true if two countries have purchasing power parity? → The nominal exchange rate assures that goods cost the same amount in each country. 

15. When a government lets exchange rates be determined by foreign markets, it is called →  A floating exchange rate 

16. Governments intervene to keep the value of their currency down in order to → Make domestic goods cheaper in the world market 

17.  A decrease in domestic interest rates will necessarily have which of the following effects in the foreign exchange market? → The demand for domestic currency will decrease 

18. An import quota on a good will do which of the following? → It will decrease domestic production of that good

19. Which of the following is true of tariffs? → They can result in trade wars between countries 

20. The goal of protectionism is to → Decrease competition for domestic industries