Basic Concepts

1. (*78%) Which of the following is true according to the circular flow model?

a. Firms are suppliers in both the product and factor markets. b. Firms are demanders in the product markets and suppliers in the factor markets.

c. Households are demanders in both the product and factor markets.

d. Households are demanders in the product markets & suppliers in the factor markets.

e. The government is a demander in the product market only.

2. (*78%) On the basis of the diagram showing an economy’s PPC

for two goods, which of the following statements must be true?

I. The opportunity cost of moving from point P to point R is 10 units of Y.

II. The opportunity cost of moving from point R to point P is 8 units of X.

III. The opportunity cost of moving from point Q to point R is 0 units.

a. I only b. III only c. I and II only d. II and III only e. I, II, & III

Global Trade

3. (*74%) An increase in Japan’s demand for U.S. goods would cause the dollar to

a. depreciate because of inflation

b. depreciate because the U.S. would be selling more dollars to Japan

c. depreciate because the U.S. money supply would increase as exports rise

d. appreciate because Japan would be buying more U.S. dollars

e. appreciate because Japan would be selling more U.S. dollars

2000 AP Macro Exam [with some 1995 & 1990 questions] [*represents what percent of 23,000 students chose the correct answer]

[Includes 59 questions from 2000 Macro exam, 35 from 1995 exam, and 6 from 1990 exam]

4. (*65%) As nations specialize in production and trade in international markets,

they can expect which of the following domestic improvements?

I. Allocation of domestic resources II. Standard of living III. Self-sufficiency a. I only b. II only c. III only d. I and II only e. I, II, and III 5. (*51%) Which of the following would be most likely to occur if the U.S. placed

high tariffs on imported goods?

a. Workers in the U.S. would have more jobs in the long run.

b. Income in the U.S. would be redistributed from the rich to the poor.

c. The U.S. standard of living would increase.

d. The United States economy would become less efficient.

6. (*58%) Mary Jane is a lawyer who can earn $150 per hour in her law practice. She

is also an excellent carpenter who can build cabinets three times as fast as

the best carpenter, whose hourly wage is $20 per hour. Which of the following

is a correct economic statement? a. Mary Jane has a comparative advantage in law so she should specialize in law & hire a

carpenter to make her cabinets.

b. Mary Jane has an absolute & comparative advantage in both law and carpentry, so she

should make her own cabinets while continuing to practice law.

c. Mary Jane is three times faster than any carpenter so she could give up her law practice to

become a carpenter.

d. When carpenters work for lawyers, they should charge $150 per hour instead of $20 per hour.

e. Because Mary Jane is an excellent carpenter, when the best carpenter works for Mary Jane,

he can only charge one third as much, or $6.67 per hour.

Even if she worked 3 hours as a carpenter & earned $60

bucks, this is not one half of what she could earn as a

lawyer in one hour ($150 bucks). She has an absolute in

both but a comparative advantage just in lawyering.

GDP

7. (*79%) Which of the following would represent an addition to a nation’s GDP?

a. Ms. Smith purchases a share of stock in an automobile company.

b. A retailer increases her stock of imported shoes.

c. The government increases its domestic purchases of food for use by the military.

d. A corporation sells shoes from last year’s inventory.

e. A mother sells her car to her daughter.

8. (*70%) If real GDP is increasing at 3% per year & nominal GDP is increasing at 7%

per year, which of the following is necessarily true?

a. Unemployment is increasing d. The economy is in a recession.

b. The price level is increasing. e. The government is running a budget deficit.

c. Exports exceed imports.

9. (*44%) Which of the following would best explain a decline in potential GDP?

a. Negative net investment d. A decrease in the infant mortality rate

b. The discovery of vast new oil deposits e. A decrease in wages and profits

c. A lower price level

10. (*60%) As a measure of economic welfare, GDP underestimates a country’s

production of goods and services when there is an increase in

[What is not being counted here?]

a. the production of military goods d. household production

b. the production of anti-pollution devices e. legal services

c. crime prevention services

Negative net investment means we’re not replacing all the worn

out real capital. We will be less productive and not reach our

potential. The other 4 answers [more oil, lower PL-thus more “C”,

less infant deaths-so more workers, and a decrease in wages will

increase AS & potential GDP] will all increase potential GDP.

11. (75%) If purchases of education and medical care were counted as investment

rather than consumption, GDP would a. not change, because there is no change in total(aggregate) expenditures

b. increase, because investment is included in GDP but consumption is not

c. increase, because consumption is included in GDP but investment is not

d. decrease, because investment is weighted more heavily than consumption in calculating GDP

e. decrease because consumption is weighted more heavily than investment in calculating GDP.

Unemployment, inflation, & business cycles

12. (72%) The official unemployment rate is not an accurate indicator of actual

unemployment in the economy because

a. structural unemployment is greater than cyclical unemployment at the going wage rate

b. full employment is greater than natural unemployment

c. the unemployment rate is less than natural unemployment

d. the official rate does not include persons who have given up looking for work

13. (64%) An increase in energy costs will most likely cause the price level and

real GDP to change in which of the following ways?

Price Level Real GDP

a. increase increase

b. increase decrease

c. increase not change

d. decrease increase

e. decrease decrease

An increase in energy costs (resource

cost for businesses) will shift the AS

curve leftward, which would increase

price level and decrease real GDP.

14. (58%) A contractionary supply shock would most likely result in

a. an increase in AD d. a decrease in the general price level

b. an increase in national income e. a decrease in employment

c. an increase in GDP

15. (82%) If the economy is operating in the intermediate range of the AS curve and

if AD increases due to an increase in net exports, then the price level, output, &

the unemployment rate are most likely to change in which of the following ways?

Price Level Output Unemployment Rate

a. increase increase increase

b. increase increase decrease

c. increase decrease increase

d. increase decrease decrease

e. decrease decrease increase

16. (78%) The short-run AS curve is likely to shift to the left when there is an increase in

a. the cost of productive resources d. the federal budget deficit

b. productivity e. imports

c. the money supply

17. (54%) Which of the following best explains how an economy could simultaneously

experience high inflation and high unemployment?

a. The government increases spending without increasing taxes.

b. The government increases taxes without increasing spending.

c. Inflationary expectations decline.

d. Women and teen-agers stay out of the labor force.

e. Negative supply shocks cause factor prices to increase

SRAS would shift left, incr PL, decr GDP, & decr employment.

18. (89%) The intersection of the AS & the AD curve occurs at the economy’s

equilibrium level of

a. real investment and the interest rate d. government expenditures & taxes

b. real disposable income and unemployment e. imports and exports

c. real domestic output(GDP) and the price level

19. (47%) Which of the following would most likely cause the U.S. economy to fall

into recession?

a. increase in welfare payments d. a decrease in the required reserve ratio

b. increase in exports e. an open market sale of bonds by the Fed

c. a decrease in savings by consumers

20. (58%) Which of the following would cause a rightward shift of the AS curve?

a. an increase in interest rates

b. a tax increase of 50 cents per gallon for gasoline

c. an across-the-board reduction of wages in the manufacturing sector

d. the passage of legislation mandating a reduction in automobile pollution

e. the shutdown of plants and movement of production of goods abroad

21. (38%) Which changes in the AD & AS curves is likely to result in stagflation? a. the AD curve shifts to the left when the economy is in the classical range of the AS curve.

b. the AD curve shifts to the right when the economy is in the classical range of the AS curve.

c. the AD curve shifts to the right when the economy is in the Keynesian range of the AS curve.

d. The AS curve shifts to the left.

e. The AS curve shifts to the right.

Classical/Keynesian Economics

22. (80%) Which argument is typically associated with classical economists?

a. A market economy is self-correcting and thus will not remain in a recession indefinitely. b. A market economy has stable prices and thus is usually free from inflation.

c. A market economy requires a strong government to ensure that the market meets the needs

of the people.

d. A market economy needs only moderate assistance from the government to avoid an extended

recession.

e. A market economy eventually results in monopolies in both the input & output markets.

23. (62%) According to the Keynesian saving schedule, when aggregate

income increases by a given amount, savings will a. remain the same

b. decrease by the amount of the change in income

c. increase by the amount of the change in income

d. increase by less than the amount of the change in income

e. increase by more than the amount of the change in income

24. (49%) An important assumption in Keynesian theory is that a. prices are rigid downward & decreases in AD will lead to an increase in unemployment.

b. price rigidity will cause downturns in the economy to self-correct.

c. When AD is inadequate, prices will fall.

d. When interest rates are high, many businesses borrow money.

e. changes in the money supply are the major cause of changes in real output & price level.

25. (73%) What would be the effect of a large increase in labor

productivity on the real GDP and the price level?

Real GDP Price Level

a. Increase Increase b. Increase Decrease

c. No effect Increase

d. decrease Increase

e. Decrease Decrease

26. (46%) Which of the following is true of supply shocks?

a. They tend to change both relative prices and the general price level in the economy. b. They affect only the general PL.

c. They can be anticipated and offset with appropriate fiscal policy.

d. They can be anticipated and offset with appropriate monetary policy.

e. They make the AS curve vertical.

27. (45%) Suppose that from 2003 to 2004, unemployment fell from 7.2 to 7.0% and

inflation fell from 3.8 to 1.1%. An explanation of these changes might be that the

a. AD curve shifted to the left c. AS curve shifted to the left b. AD curve shifted to the right d. AS curve shifted to the right

e. short-run Phillips curve shifted to the right

28. (46%) Which of the following is a key feature of Keynesian economics? a. The level of saving depends mostly on interest rates.

b. The level of government expenditure depends mostly on interest rates.

c. Supply creates its own demand.

d. Macroeconomic equilibrium can occur at less than full employment.

1995 AP Exam

The change in relative prices (like oil) cause increase in general PL.

AD

PL1

AS1

AS2

PL2

AS shifts right, like the graph above.

29. (35%) According to Keynesian theory, the most important determinant of saving

and consumption is the a. interest rate

b. price level

c. level of income

d. level of employment

e. flexibility of wages and prices

30. (70%) An inflationary gap could be reduced by

a. an increase in government spending b. an increase in the supply of money

c. an increase in the income tax rate

d. a decrease in the discount rate

e. a decrease in the reserve requirement

31. (75%) Which of the following would most likely lead to a decrease in AD?

a. a decrease in taxes b. a decrease in interest rates

c. an increase in household savings

d. an increase in household consumption

e. an increase in business firms’ purchases of capital equipment from retained earnings

32. (52%) Which of the following would result in the largest increase in AD?

a. $30 billion increase in military spending and a $30 billion open-market purchase of G bonds b. $30 billion increase in military spending and a $30 billion open-market sale of G bonds

c. $30 billion tax cut and a $30 billion open-market sale of G bonds

d. $30 billion tax increase and a $30 billion open-market purchase of G bonds

e. $30 billion increase in social security payments and a $30 billion open-market sale of G bonds

means less “C”, which decreases AD

Both policies expand real GDP, but one answer in each of the others contracts real GDP.

means less DI & less “C”, which decreases AD

SRAS/LRAS Question on 95 Exam

33. If AD remains constant, the equilibrium price levels in the short run and in the long run will be _____ & _____? 34. If the government uses fiscal policy to get out of the recession, price level will end up at _____?

OB OA

OC

35. (81%) The value of the spending multiplier (ME) decreases when

a. tax rates are reduced d. government spending increases b. exports decline e. the marginal propensity to save increases

c. imports decline

36. (75%) Which of the following policies would a Keynesian recommend

during a period of high unemployment and low inflation? a. decreasing the MS to reduce AD

b. decreasing taxes to stimulate AD

c. decreasing government spending to stimulate AS

d. balancing the budget to stimulate AS

37. (47%) Which of the following best explains why equilibrium income will

increase by more than $100 in response to a $100 increase in G?

a. Incomes will rise, resulting in a tax decrease. b. Incomes will rise, resulting in higher consumption.

c. The increased spending raises the aggregate price level.

d. The increased spending increases the money supply, lowering interest rates.

e. The higher budget deficit reduces investment.

38. (56%) Unexpected increases in inventories usually precede

a. increases in inflation b. increases in imports c. stagflation

d. decreases in production e. decreases in unemployment

If MPS incr from .10 to .20, the ME would decrease from 10 to 5.

The multiplier ensures more C with each round.

Ig is more than desired, so lay-offs, decreasing production.

39. (63%) The economy on the right is

currently experiencing

a. inflation b. recession c. expansion

d. stagflation e. rapid growth

40. (77%) Correct monetary policy to

reach FE GDP is to increase

a. the MS b. the RR c. discount rate

d. taxes e. exports

41. (36%) The minimum increase in government

spending to reach full employment is

a. $2,000 b. $1,000 c. $500

d. $200 e. $100

42. (58%) In the simple Keynesian AE model [not AD/AS] of an economy,

changes in Ig or G will lead to a change in which of the following? a. the price level b. the level of output and employment c. interest rates

d. the AS curve

43. (83%) In a closed-private in which the APC is .75, which of following is true?

a. If income is $100, then saving is $75. d. If income is $200, then “C” is $75 b. If income is $100, then “C” is $50 e. If income is $500, then saving is $100

c. If income is $200, then saving is $50

45°45° Fu

ll.E

mp

loy.

C

C+Ig

AE

$500

$400

0 $800 $1,000 $2,000

S

E

A

Determine what the “M” is going

from A to E; then M X ? = $1,000

44. (63%) Suppose that DI is $1,000, consumption is $700, and the MPC is .6. If DI then increases by $100, consumption and savings will equal which of the following?

Consumption Savings

a. $420 $280

b. $600 $400

c. $660 $320

d. $660 $440

e. $760 $340

Fiscal Policy

45. (73%) An inflationary gap can be eliminated by all of the following EXCEPT

a. an increase in personal income taxes d. a decrease in G b. an increase in the MS e. a decrease in Xn

c. an increase in the interest rate

46. (56%) A major advantage of automatic stabilizers in fiscal policy is that they

a. reduce the public debt b. increase the possibility of a balanced budget

c. stabilize the unemployment rate

d. go into effect without passage of new legislation

e. automatically reduce the inflation rate

If $700 of $1,000 DI is consumed, then

saving is $300. MPC of .6 means if DI increases by $100, then $60 more will be

consumed & $40(.4) more will be saved(40%).

The $60 added to the $700 already consumed

= $760 consumed and the additional $40

saved = $340 saved.

Which answer does not slow the economy?

47. (70%) In the short run, a contractionary fiscal policy will cause AD,

output, and the price level to change in which of the following ways?

AD Output Price level

a. decrease decrease decrease

b. decrease increase increase

c. increase decrease decrease

d. increase increase increase

48. (52%) Crowding out due to government borrowing occurs when

a. lower interest rates increase private sector investment

b. lower interest rates decrease private sector investment

c. higher interest rates decrease private sector investment

d. a smaller money supply increases private sector investment

49. (41%) If, at FE, the G wants to increase its spending by $100 billion

without increasing inflation in the short run, it must do which of the following?

a. raise taxes by more than $100 billion c. raise taxes by less than $100

b. raise taxes by $100 billion d. lower taxes by $100 billion

50. (42%) Compared to expansionary monetary policies adopted to

counteract a recession, expansionary fiscal policies tend to result in

a. less public spending c. a high rate of economic growth

b. higher interest rates d. lower prices Starting from a balanced budget, G > T; LFM; Interest rates

1995 AP Exam 51. (71%) An increase in which will increase the value of the ME?

a. The supply of money d. The marginal propensity to consume b. Equilibrium output e. The required reserve ratio

c. Personal income tax rates

52. (61%) An AS curve may be horizontal over some range because within that range

a. a higher PL leads to higher interest rates, which reduces the MS & “C” b. changes in the aggregate PL do not induce substitution

c. output cannot be increased unless prices and interest rates increase

d. rigid prices prevent employment from fluctuating

e. resources are underemployed & an increase in AD will be satisfied without any pressure on the PL

53. (45%) What could cause simultaneous increases in inflation & unemployment a. a decrease in government spending d. An increase in inflationary expectations b. A decrease in the money supply e. An increase in productivity

c. A decrease in the velocity of money

54. (85%) Which of the following will result in the greatest increase in AD? a. A $100 increase in taxes

b. A $100 decrease in taxes

c. A $100 increase in government expenditures

d. A $100 increase in government expenditures, coupled with a $100 increase in taxes

e. A $100 increase in government expenditures, couples with a $100 decrease in taxes

55. (65%) Which of the following will result from a decrease in government spending? a. An increase in output d. A decrease in AS

b. An increase in the price level e. A decrease in AD

c. An increase in employment

Incr in inflationary expectations would result in higher wage

demands, shifting AS left, pushing up PL, and decr unempl.

More MPC means less MPS and larger ME.

57. (48%) If private investment of $100 is added to the economy, the equilibrium levels of income and consumption will change in which of the following ways?

Equil. Level Equil. Level

of Income of Income

a. Increase Decrease

b. Increase Increase

c. Increase No change

d. No change Increase

e. No change No change

45°45°

C

Exp

en

dit

ure

s

$700

0 $1,500 $2,000 Real Income

S Questions 22-23 refer to the diagram(rt),

which depicts an economy’s “C” function.

56. (56%) If the MPC increases, the equilibrium levels of income and consumption will

change in which of the following ways?

Equil. Level Equil. Level

of Income of Consumption

a. No change No change

b. No change Increase

c. Increase No change

d. Increase Increase

e. Decrease Decrease

A larger MPC means a smaller MPS, and a larger “M”.

This will increase income and result in more “C” at

the new level of equilibrium income (GDP).

C+Ig

C1

C2

45°45°

C+Ig C+Ig+G AE

$300 $200

0 $1,000 $1,500 GDP

E

F 58. (61%) The graph indicates equilibrium at E

for a closed economy without G. If the

addition of G results in equilibrium at F,

which of the following is true? a. G is $300 and the multiplier is 5.

b. G is $100 and the multiplier is 5.

c. G is $100 and consumption increased by $500.

d. G and Ig increase by $500.

e. Consumption and GDP increase by $500 each.

59. (84%) According to Keynesian theory, decreasing taxes and increasing G will

most likely change consumption and unemployment in which of the following ways?

Consumption Unemployment

a. Decrease No change b. Decrease No change

c. Increase Decrease

d. Increase Increase

e. No change Decrease

60. (79%) In an economy at full employment, a presidential candidate proposes cutting

the government debt in half in 4 years by increase T and reducing G. According to

Keynesian theory, implementation of these policies is most likely to increase

a. unemployment d. aggregate supply b. consumer prices e. the rate of economic growth

c. aggregate demand

61. (79%) If the economy is in a severe recession, which of the following is the

fiscal policy most effective in stimulating production and employment?

a. Government spending increases.

b. Government spending decreases.

c. Personal income taxes are increased.

d. The Fed sells bonds on the open market.

e. The Fed buys bonds on the open market.

62. (27%) Faced with a large federal budget deficit, the government decides to decrease

expenditures and tax revenues by the same amount. This action will affect

output and interest rates in which of the following ways?

Output Interest Rates

a. Increase Increase b. Increase Decrease

c. No change Decrease

d. Decrease Increase

e. Decrease Decrease

63. (28%) If crowding out only partially offsets the effects of a tax cut, which of the

following changes in interest rates and GDP are most likely to occur.

Interest Rates GDP a. Increase Increase

b. Increase Remain unchanged

c. Increase Decrease

d. Remain unchanged Increase

e. Decrease Decrease

An equal decrease in G & T [Let’s say by $10 billion] would

decrease GDP by $10 billion. The decrease in GDP would

decrease PL which would cause a decrease in interest rates.

Partially means GDP increases. Starting from a

balanced budget, the tax cut would put the G in deficit

and the G borrowing would increase demand for money

in the LFM and push up interest rates.

Money and the Fed

64. (61%) In the Keynesian model, an expansionary monetary policy will lead to

a. lower real interest rates and more investment b. lower real interest rates and lower prices

c. higher real interest rates and lower prices

d. higher real interest rates and higher real income

e. higher nominal interest rates and more investment

65. (58%) Which of the following will most likely occur in an economy if more money is

demanded than is supplied?

a. the amount of investment spending will increase. d. interest rates will decrease b. the demand curve for money will shift to the left e. interest rates will increase.

c. the demand curve for money will shift to the right.

66. (64%) When consumers hold money rather than bonds because they expect the

interest rate to increase in the future, they are holding money for what purposes?

a. transactions c. speculation (asset) b. unforeseen expenditures d. illiquidity

Money Creation

67. (80%) If on receiving a checking deposit of $300 a bank’s ER increased by $255,

the RR must be:

a. 5% b. 15% c. 25% d. 35% e. 45%

When interest rates are too low, people will hold more asset (speculation) money. They don’t

want to tie up their money into interest rate bearing assets (like CDs & bonds) getting low

returns. They will hold the speculative money speculating interest rates will go back up.

68. (62%) The money-creating ability of the banking system will be less than the

maximum amount indicated by the money multiplier when

a. interest rates are high b. the velocity of money is rising

c. people hold a portion of their money in the form of currency

d. the unemployment rate is low

69. (71%) RR is 20%. If a bank initially has no ER and $10,000 cash is deposited in the

bank, the maximum amount by which this bank may increase its loans is

a. $2,000 b. $8,000 c. $10,000 d. $20,000 e. $50,000

70. (86%) RR is 15% and that bank receives a new DD of $200. Which of the

following will most likely occur in the bank’s balance sheet?

Liabilities(DD) Required Reserves

a. increase by $200 increase by $170 b. increase by $200 increase by $30

c. increase by $200 no change

d. decrease by $200 decrease by $30

e. decrease by $200 decrease by $170

The Fed and Monetary Policy

71. (89%) The Federal Reserve can increase the money supply by

a. selling gold reserves to the banks

b. selling foreign currency holdings

c. buying government bonds on the open market

d. borrowing reserves from foreign governments

72. (73%) An increase in the money supply is most likely to have which of the

following short-run effects on real interest rates and real output?

Real Interest Rates Real Output

a. decrease decrease b. decrease increase

c. increase decrease

d. increase no change

e. no change increase

73. (81%) Under which of the following conditions would a restrictive (contractionary)

monetary policy be most appropriate?

a. high inflation d. low interest rates

b. high unemployment e. a budget deficit

c. full employment with stable prices

74. (82%) The Fed can change the U.S. money supply by changing the

a. number of banks in operation d. prime rate b. velocity of money e. discount rate

c. price level

75. (*30%) If the money stock decreases but nominal GDP remains constant,

which of the following has occurred?

a. income velocity of money has increased. d. price level has decreased. b. income velocity of money has decreased. e. real output has decreased.

c. price level has increased.

A decreasing MS, because of high inflation, could be offset by an increase in the velocity of money.

76. (54%) Policy-makers concerned about fostering long-run growth in an economy that

is currently in a recession would most likely recommend which of the following

combinations of monetary and fiscal policy actions?

Monetary Policy Fiscal Policy

a. sell bonds reduce taxes b. sell bonds raise taxes

c. no change raise taxes

d. buy bonds reduce spending

e. buy bonds no change

77. (76%) Open market operations refer to which of the following activities? a. the buying and selling of stocks in the New York stock Market

b. the loans made by the Fed to member commercial banks

c. the buying and selling of government securities by the Federal Reserve

d. the government’s purchases and sales of municipal bonds

e. the government’s contribution to net exports

78. (58%) An open market sale of bonds by the Fed will most likely change the money supply, the interest rate, and the value of the U.S. dollar

in which of the following ways?

Money Supply Interest Rate Value of the Dollar

a. increase decrease decrease

b. increase decrease increase

c. decrease decrease decrease

d. decrease increase increase

e. decrease increase decrease

Buying bonds will increase MS & decrease the

interest rate, increasing Ig. Reducing T would

cause a deficit, resulting in G borrowing and

higher interest rates. Raising T or reducing G

would result in job losses, resulting in negative

profit expectations, reducing Ig [LR growth].

79. (82%) Commercial banks can create money by a. transferring depositors’ accounts at the Fed for conversion to cash

b. buying Treasury bills from the Federal Reserve

c. sending vault cash to the Fed

d. maintaining a 100% reserve requirement

e. lending excess reserves to customers

80. (65%) If the RR is 20%, the existence of $100 worth of ER in the banking system

can lead to a maximum expansion of the money supply equal to

a. $20 b. $100 c. $300 d. $500 e. $750

81. (71%) If the Fed lowers the RR, which of the following would most likely occur?

a. Imports will rise, decreasing the trade deficit. b. The rate of saving will increase.

c. Unemployment and inflation will both increase.

d. Businesses will purchase more factories and equipment.

e. The budget deficit will increase.

82. (61%) If the public’s desire to hold money as currency increases, what will the

impact be on the banking system?

a. Banks would be more able to reduce unemployment. b. Banks would be more able to decrease AS.

c. Banks would be less able to decrease AS.

d. Banks would be more able to expand credit.

e. Banks would be less able to expand credit

More MS means lower I.R. & more Ig

Holding currency means less ER & higher I.R.

5 x $100=$500

83. (86%) Which of the combinations is most likely to cure a severe recession? Open-Market Operations Taxes Gov. Spending

a. Buy securities Increase Decrease

b. Buy securities Decrease Increase

c. Buy securities Decrease Decrease

d. Sell securities Decrease Decrease

e. Sell securities Increase Increase

84. (61%) The demand for money increases when national income increases because a. spending on goods and services increases d. the MS increases

b. interest rates increase e. the budget deficit increases

c. the public becomes more optimistic about the future

85. (76%) Suppose the RR is 20% and a single bank with no ER receives a $100 DD

from a new customer. The bank now has excess reserves equal to

a. $20 b. $80 c. $100 d. $400 e. $500

86. (45%) Which of the following is most likely to increase if the public decides to

increase its holding of currency?

a. Interest rate d. Employment b. The price level e. The reserve requirement

c. Disposable personal income

87. (47%) During a mild recession, if policymakers want to reduce unemployment by

increasing investment, which of the following policies would be most appropriate? a. Equal increases in government expenditure and taxes

b. An increase in government expenditure only

c. An increase in transfer payments

d. An increase in the reserve requirement

e. Purchase of government securities by the Fed

Holding more MS means banks

have less money, so higher I.R.

88. (73%) Which of the following monetary and fiscal policy combinations would

most likely result in a decrease in AD? Discount Rate Open-Market Operations Gov. Spending

a. Lower Buy bonds Increase b. Lower Buy bonds Decrease

c. Raise Sell bonds Increase

d. Raise Buy bonds Increase

e. Raise Sell bonds Decrease

89. (35%) Under which of the following circumstances would increasing the MS be

most effective in increasing real GDP? Interest Rates Employment Business Optimism

a. High Full High

b. High Less than full High

c. Low Full High

d. Low Full Low

e. Low Less than full Low

90. (57%) According to both Monetarists and Keynesians, which of the following

happens when the Fed reduces the discount rate? a. The demand for money decreases and market interest rates decrease.

b. The demand for money increases and market interest rates increase.

c. The supply of money increases and market interest rates decrease.

d. The supply of money increases and market interest rates increase.

91. (79%) All of the following are components of the MS in the U.S. EXCEPT

a. paper money b. gold bullion c. checkable deposits d. coins e. demand deposits

Reducing the D.R. sends signal to banks to lower their prime rate which incr MS & decr I.R.

92. (77%) If a banking system’s reserves (TR) are $100 billion, DD are $500 billion,

and the banking system is fully loaned-up, then the RR must be

a. 10% b. 12.5% c. 16.6% d. 20% e. 25%

93. (58%) Which of the following would increase the value of the ME? a. an increase in government expenditure

b. An increase in exports

c. a decrease in government unemployment benefits

d. a decrease in the MPC

e. a decrease in the MPS

94. (76%) According to the monetarists, inflation is most often the result of

a. high federal tax rates

b. increased production of capital goods

c. decreased production of capital goods

d. an excessive growth of the money supply

e. upward shifts in the consumption function

95. (67%) What would occur if the international value of the U.S. dollar decreased?

a. U.S. exports would rise.

b. More gold would flow into the U.S.

c. U.S. demand for foreign currencies would increase.

d. The U.S. trade deficit would increase.

e. Americans would pay less for foreign goods.

96. (48%) According to the classical model, an increase in the MS causes an increase in which I. The price level II. Nominal Gross Domestic Product III. Nominal wages

a. I only b. II only c. III only d. II and III only e. I, II, and III

A decrease in MPS (say, from .5 to .1) would

increase the value of the M (from 2 to 10).

A depreciated dollar makes our products cheaper.

Incr in MS results in incr in PL. This inflation results in incr in nominal(money)

GDP. Workers will demand higher nominal wages because of higher PL.

97. (47%) If the Fed undertakes a policy to reduce interest rates, international capital

flows (financial capital like CDs & bonds) will be affected in which of the following ways? a. Long-run capital outflows from the U.S. will decrease. b. Long-run capital inflows to the U.S. will increase.

c. Short-run capital outflows from the U.S. will decrease.

d. Short-run capital inflows to the U.S. will decrease.

e. Short-run capital inflows to the U.S. will not change.

98. (73%) If the Fed wishes to use monetary policy to reinforce Congress’

fiscal policy changes, it should a. increase the MS when government spending is increased

b. increase the MS when government spending is decreased

c. decrease the Ms when government spending is increased

d. increase interest rates when government spending is increased

e. decrease interest rates when government spending is decreased

Economic Schools of Thought

99. (53%) According to the monetarists, which is true of expansionary fiscal policy?

a. It will cause interest rates to rise and crowd out private investment spending.

b. It should not be used so long as there is a national debt.

c. It should be used only when resources are unemployed and the inflation rate is low.

d. It will decrease aggregate (total) income. The Debt and the Deficit

100. (71%) Which of the following will occur if the federal government runs a budget deficit.

a. The expenditure multiplier will increase.

b. The size of the national debt will increase.

c. The economy’s output will decrease.

d. State governments will run a budget surplus to offset the federal deficit.

e. Interest rates will tend to decline.

This would keep the interest

rate from going up.

Lower U.S. Interest rates will result in

fewer financial capital inflows to the U.S.

2nd Most Missed Question On 1995AP Exam [26% correct]

Country Food Clothing Ducky 20 hours 50 hours Wucky 10 hours 20 hours

a. Ducky has a comparative advantage in the production of both food and clothing. b. Wucky has a comparative advantage in the production of both food and clothing. c. Ducky has a comparative advantage in food production, & Wucky has a comparative advantage in clothing production. d. Ducky has a comparative advantage in clothing production, & Wucky has a comparative advantage in food production. e. Neither country has a comparative advantage in the production of either good.

Country Food Clothing

Ducky 20 hrs 50 hrs 1C = 2.5F; .4C = 1F Wucky 10 hrs 20 hrs 1C = 2F; .5C = 1F

1C 1F

Terms of Trade might be 1C = 2.2F

Ducky Wucky

Outputs v. Inputs Remember that with outputs or quantity, the larger number indicates absolute advantage; that country can produce more from the same inputs, so is more efficient.

And with inputs (hours), the smaller number indicates absolute advantage; that country is more efficient because it can produce a good quicker than the other with the same inputs.

Fuzzy A B C D E F DCC: Fuzzy Wuzzy A B C D E F DCC: Wuzzy Plums 1500 1200 900 600 300 0 1G = __ P Plums 3500 2500 1500 1000 500 0 1G = __ P Grapes 0 100 200 300 400 500 __ G = 1P Grapes 0 150 300 450 575 700__ G = 1P

Terms of Trade

1 Grape = __ Plums

Comparative Advantage

1/3

5 1/5 500 1P

C 900

200

B 2500

150

1. In Wuzzy, the opportunity cost of 1 grape is (1/2/3/4/5) plums.

2. Fuzzy has a comparative advantage in & should produce (plums/grapes).

3. The terms of trade will be 1 grape for somewhere between (3&5/2&6) plums. 4. Assume that if Fuzzy did not specialize it would produce combo “C” and if Wuzzy

did not specialize it would produce combo “B”. The gains from specialization and trade are: (0/100/150) plums and (0/100/150) grapes.

4

3 1G 3500

The countries of:

“Fuzzy” and “Wuzzy”

http://free-stock-photos.com/food/plum-1.html

Also, the Keynesians don’t think the lower interest rate is as important as “profit expectations.”

YR Y*

Dm(K)

Investment Demand

10%

8%

6%

0 Money Market QID1 QID2

Monetarist View of Transmission Mechanism v. Keynesian View

AS AD1

PL1

10

8%

6%

0

MS2

AD2

PL2

YI Dm is more inelastic [I.R. more sensitive]

QID2

DI is more elastic [or more responsive]

AD2(M) DI(K)

DI(M)

Dm(M) (K)

PL2

Mainly, we end up just getting inflation.

MS1

Keynesian view is that DI is rather steep so monetary policy is not that strong. Fiscal policy is “top banana.”

AS

AD1

AD2

The End You are now ready to make a “5” on the test.