AP Macroeconomics Exam Review (Latest
Update ) Questions & Answers
100% Correct - (Grade A)
Consumption. - correct answer A component of a nation's aggregate demand;
measures the total spending by domestic households of goods and services.
Contractionary Fiscal Policy - correct answer A policy whereby government increases
taxes or decreases its spending in order to reduce aggregate demand.
Could be used in a period of high inflation to bring down the inflation rate.
Contractionary Monetary Policy - correct answer A demand-side policy whereby the
central bank
1. Increase Reserve Requirements
2. Decrease Discount Rates
3. Sell Open-Market Operations (Government Bonds/Securities)reduces the supply of
money, increase interest rates and reducing aggregate demand. Could be used to bring
down high inflation rates.
Cost-Push Inflation - correct answer Inflation resulting from a decrease in AS (from
higher wage rates and raw material prices, such as the price of oil) and accompanied
,by a decrease in real output and employment. Also reffered to as "stagflation" or
"adverse aggregate supply shock".
Crowding-Out Effect - correct answer The rise in interest rates and the resulting
decrease in investment spending in the economy caused by increased government
borrowing in the loanable funds market. Seen as a disadvantageous side effect of
expansionary fiscal policy.
Current Account - correct answer Measures the balance of trade in goods and
services and the flow on income between one nation and all other nations.
Equal to a country's net exports (its exports minus its imports).
Cyclical Unemployment - correct answer Unemployment caused by a fall in aggregate
demand in a nation. Not included in the natural rate of unemployment. When a nation is
in a recession, there will be cyclical unemployment.
Demand Deposit - correct answer A deposit in a commercial bank against which
checks may be written. Also known as a "checkable deposit".
Depreciation - correct answer A decrease in the value of one currency relative to
another, resulting from a decrase in demand for or an increase in the supply of the
currency on the foreign exchange market.
,Devaluation - correct answer When a government intervenes in the market for its own
currency to weaken it relative to another currency.
Discount Rate - correct answer One of the three tools of monetary policy, it is the
interest rate that the federal government charges on the loans it makes to commercial
banks.
Economic Growth - correct answer An increase in the potential output of goods and
services in a nation over time.
Economic Resources - correct answer Land, labor, capital, and entrepreneurial ability
that are used in the production of goods and services. They are "economic" resources
because they are scarce (limited in supply and desired). Also known as "factors of
production".
Excess Reserves - correct answer The amount by which a bank's actual reserves
exceed its required reserves. Banks can lend excess reserves; when they do, they
expand the money supply. The amount of excess reserves in the banking system
determines equilibrium interest rate.
, Exchange Rate: - correct answer The price of one currency in terms of another
currency, determined in the forex market.
Exports - correct answer The spending by foreigners on domestically produced goods
and services. Counts as an injection into a nation's circular flow of income.
Federal Funds Rate - correct answer The interest rate banks charge one another on
overnight loans made out of their excess reserves. The FFR is the interest rate
targeted by the Fed Res Bank through it's open market operations.
Fiscal Policy - correct answer Changes in government spending and tax collections
implemented by government with the aim of either increasing or decreasing aggregate
demand to achieve the macroeconomic objectives of full employment and price-level
stability.
Floating Exchange Rate System: - correct answer When a currency's exchange rate is
determined by the free interaction of supply and demand in international forex
markets.
Forex Markets (Foreign Exchange Market) - correct answer The market in which
international buyers and sellers exchange foreign currencies for one another to buy
Update ) Questions & Answers
100% Correct - (Grade A)
Consumption. - correct answer A component of a nation's aggregate demand;
measures the total spending by domestic households of goods and services.
Contractionary Fiscal Policy - correct answer A policy whereby government increases
taxes or decreases its spending in order to reduce aggregate demand.
Could be used in a period of high inflation to bring down the inflation rate.
Contractionary Monetary Policy - correct answer A demand-side policy whereby the
central bank
1. Increase Reserve Requirements
2. Decrease Discount Rates
3. Sell Open-Market Operations (Government Bonds/Securities)reduces the supply of
money, increase interest rates and reducing aggregate demand. Could be used to bring
down high inflation rates.
Cost-Push Inflation - correct answer Inflation resulting from a decrease in AS (from
higher wage rates and raw material prices, such as the price of oil) and accompanied
,by a decrease in real output and employment. Also reffered to as "stagflation" or
"adverse aggregate supply shock".
Crowding-Out Effect - correct answer The rise in interest rates and the resulting
decrease in investment spending in the economy caused by increased government
borrowing in the loanable funds market. Seen as a disadvantageous side effect of
expansionary fiscal policy.
Current Account - correct answer Measures the balance of trade in goods and
services and the flow on income between one nation and all other nations.
Equal to a country's net exports (its exports minus its imports).
Cyclical Unemployment - correct answer Unemployment caused by a fall in aggregate
demand in a nation. Not included in the natural rate of unemployment. When a nation is
in a recession, there will be cyclical unemployment.
Demand Deposit - correct answer A deposit in a commercial bank against which
checks may be written. Also known as a "checkable deposit".
Depreciation - correct answer A decrease in the value of one currency relative to
another, resulting from a decrase in demand for or an increase in the supply of the
currency on the foreign exchange market.
,Devaluation - correct answer When a government intervenes in the market for its own
currency to weaken it relative to another currency.
Discount Rate - correct answer One of the three tools of monetary policy, it is the
interest rate that the federal government charges on the loans it makes to commercial
banks.
Economic Growth - correct answer An increase in the potential output of goods and
services in a nation over time.
Economic Resources - correct answer Land, labor, capital, and entrepreneurial ability
that are used in the production of goods and services. They are "economic" resources
because they are scarce (limited in supply and desired). Also known as "factors of
production".
Excess Reserves - correct answer The amount by which a bank's actual reserves
exceed its required reserves. Banks can lend excess reserves; when they do, they
expand the money supply. The amount of excess reserves in the banking system
determines equilibrium interest rate.
, Exchange Rate: - correct answer The price of one currency in terms of another
currency, determined in the forex market.
Exports - correct answer The spending by foreigners on domestically produced goods
and services. Counts as an injection into a nation's circular flow of income.
Federal Funds Rate - correct answer The interest rate banks charge one another on
overnight loans made out of their excess reserves. The FFR is the interest rate
targeted by the Fed Res Bank through it's open market operations.
Fiscal Policy - correct answer Changes in government spending and tax collections
implemented by government with the aim of either increasing or decreasing aggregate
demand to achieve the macroeconomic objectives of full employment and price-level
stability.
Floating Exchange Rate System: - correct answer When a currency's exchange rate is
determined by the free interaction of supply and demand in international forex
markets.
Forex Markets (Foreign Exchange Market) - correct answer The market in which
international buyers and sellers exchange foreign currencies for one another to buy
