AP Macroeconomics Final Exam Questions and answers A Level

AP Macroeconomics Final Exam Questions and answers A Level What is the most fundamental issue that economics addresses? - Use of scarce resources Inflation occurs when there is a sustained increase in - average price level An increase in spending in an economy will cause a multiplied increase in GDP because - consumption increases as income increases A contraction in the money supply will most likely change the nominal interest rate and aggregate demand in what way in the short run? - Nominal Interest Rate- Increase, Aggregate Demand- Decrease If the economy is in a severe recession, what policy action is most appropriate? - Increasing both the money supply and government spending The most liquid asset is - currency If nominal interest rate is 8% and the expected inflation is 3%, the real interest rate is - 5% An increase in the international value of the US dollar will most likely benefit - retired US citizens living overseas on their social security checks What group would most likely gain from unanticipated inflation? - Individuals who have borrowed money at fixed interest rates The purchase of securities on the open market by the Federal Reserve will - Increase the supply of money Total spending in the economy is most likely to increase by the largest amount if what occurs to government spending and taxes? - Government Spending- Increase, Taxes- Decrease For an economy consisting of households and businesses only, what is consistent with the circular flow of income and production? - Households are suppliers of resources and consumers of goods and services If a banking system's reserves are $100 billion, demand deposits are $500 billion, and the system is fully loaned-up, the the reserve ratio must be - 20% (100/500=0.2) An increase in what would cause the long-run aggregate supply curve to shift to the right? - Potential Output If an economy is operating with significant unemployment, an increase in what will most likely cause employment to increase and the interest rate to decrease? - Purchases of government bonds by the central bank To counteract a recession, the Federal Reserve should - Buy securities on the open market and lower the reserve requirement An appreciation of the US dollar on the foreign exchange market could be caused by a decrease in what? - US consumer price index If the marginal propensity to consume (MPC) is 0.75, then a $100 increase in investment will result in a maximum increase in equilibrium real GDP of - $400 (Multiplier=4→4x100) What would indicate that economic growth has occurred? - LRAS curve shifts to the right Crowding out refers to the decrease in - private investment due to increased borrowing by the government Suppose that Country A is experiencing high inflation relative to Country B, which is enjoying steady growth with a stable price level. What would occur in the foreign exchange market? - Depreciation of Country A's currency The demand for money increase when national income increases because - Spending on goods and services increases What relationship is illustrated by a short-run Phillips curve (SRPC)? - Decrease in inflation rate and Increase in unemployment rate What will be counted as unemployed by the US Bureau of Labor Statistics? - Persons who were fired from their previous jobs and are actively applying for work If the Federal Reserve lowers the reserve requirement, what is most likely to happen to interest rates and gross national product? - Interest Rates- Decrease, Gross National Product- Increase If the inflation rate is lower than expected - lenders gain and borrowers lose What is the most likely short-run effect of an increase in government expenditures? - Unemployment Rate- Decrease, Inflation Rate- Increase, GDP- Increase What combination of monetary and fiscal policies are coordinated to increase output? - Purchase securities; decrease taxes Frictional unemployment occurs when what happens? - Worker voluntarily quits a job to search for a better one If the economy is in severe recession, what fiscal policy is the most effective in stimulating production? - Government spending increase What would cause the production possibilities curve (PPF) to shift outward? - Developing a more efficient product making process What would cause the US dollar to increase in value (appreciate) compared to another country's currency? - An increase in interest rates in the US If a country has a current account deficit, what must be true? - It must show a surplus in its capital account In an economy in which all prices, including wages, are completely flexible, an increase in labor productivity will result in what change in output and real wages? - Output- Increase, Real Wages- Increase