MACROECONOMICS SECTION I Time-70 minutes

60 Questions answersor complebelow is followed by five suggested or Directions: Each of the questions incompletestatements tions. Selectthe one that is best in each caseand then fill in the conespondingoval on the answersheet.
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4. What would be the effect of a large increase in labor productivity on the real grossdomestic product and the price level? Real Gross Domestic Product (A) (B) (C) (D) (E) Increase Increase No effect Decrease Decrease Price Level Increase Decrease Increase Increase Decrease

STEEL l. Which of the following would causethe produc-

tion possibilitiescurve shown aboveto shift outward? (A) Reopeningsteelplants that had been closed (B) Rehiring laid-off steelworkers (C) Using machineryfor missile production insteadof steelproduction (D) Using machineryfor steel productioninstead of missile production (E) Developing a more efficient steelmaking process

5. An increasein which of the following will

increase the value of the spendingmultiplier? (A) (B) (C) (D) (E) The supply of money Equilibrium output Personalincome tax rates The marginal propensityto consume The required reserve ratio

6. According to the Keynesianmodel, which of the demand? following would increaseaggregate (A) An increasein autonomous investment (B) An increasein the discountrate (C) A decrease unemployment compensation in payments (D) A decrease govemmentexpenditures in by accompanied an equal reductionin taxes (E) A decreasein government expendifureson public works

2. If in a specifiedyear nominal gross domestic

product grew by I 1 percent and real gross domesticproduct grew by 4 percent,inflation for this year would be (A) -1Vo (B) jvo (C) 8Vo (D ) l r% o (E) r57o
J.

Which of the following is an exampleof structural unemployment? (A) A computerprogrammerwho leavesher job to move to Florida (B) A worker who loseshis job during a recession (C) An autoworkerwho is replacedby a robot (D) A constructionworker who is always unemployedduring the winter months (E) A worker who is engaged unproductive in work

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+ + Consumption Investment Government Expenditures + Consumotion Investment

300 200
1.500 PRODUCT DOMESTIC GROSS

7. The graph above indicatesequilibrium at E for a closed

economywithout govemmentspending.If the addition of govemmentspendingresultsin equilibrium at F, which of the following is true? (A) Govemment is spending $300 and the multiplieris 5. (B) Government is spending $100 and the multiplieris 5. (C) Governmentspendingis $100 and consumption increases $500. by (D) Governmentspendingand grossdomesticproduct increase $500 each. by (E) Consumptionand grossdomesticproduct increase by $500 each.

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8. Commercial banks can create money by

(A) transfening depositors' accountsat the Federal Reserve for conversion to cash (B) buying Treasury bills from the Federal Reserve (C) sending vault cash to the Federal Reserve (D) maintaining a 100 percent reserve requirement (E) lending excessreservesto customers 9. If the reserverequirement is 20 percent, the exisin tence of $100 worth of excessreserves the banking system can lead to a maximum expansion of the money supply equal to (A) $20 (B) $100

10. If the Federal Reserve lowers the reserverequirement, which of the following would most likely occur? (A) Imports will rise, decreasingthe trade deficit. (B) The rate of saving will increase. (C) Unemploymentand inflation will botli increase. (D) Businesseswill purchasemore factories and equipment. (E) The budget deficit will increase. l l . If the public's desire to hold money as culrency 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 decreaseaggregate supply. (C) Banks would be less able to decreaseaggregate supply. (D) Banks would be more able to expand credit. (E) Banks would be less able to expand credit.

(c) $300 (D) $s00 (E) $7s0

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taxes and increasing 12, According to Keynesiantheory,decreasing governmentspendingwill most likely changeconsumption in expenditures and unemployment which of the following ways? ConsumptionExpenditures Unemployment (A) (B) (C) (D) (E) Decrease Decrease Increase Increase No change Increase No change Decrease Increase Decrease

13. Which of the following policy combinationsis most likely to cure a severerecession? Open-MarketOperations (A) (B) (C) (D) (E) Buy securities Buy securities Buy securities Sell securities Sell securities Taxes Increase Decrease Decrease Decrease Increase GovemmentSpending Decrease Increase Decrease Decrease Increase

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t4. In an economy at full employment, a presidential

candidateproposescutting the government debt in half in four years by increasing income tax rates and reducing government expenditures. According to Keynesiantheory, implementation of these policies is most likely to increase (A) (B) (C) (D) (E) unemployment consumer prices aggregatedcmand aggregatesupply the rale of economic growth

11. Which of the following means of reducing military spending would have the greatestpositive impact on gross domestic product for the United States? (A) Combining two domestic military basesinto one overseasbase

15. To protect high-cost domestic producers,a

country imposes a tariff on an imported commodity, Y. Which of the following is most likely to occur in the short run?
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(B) Cutting rctirementbenefitsto military personnel (c) Closingoverseas military bases relocating and to thoseoperations the UnitedStates (D) Closingoverseas military bases laying off and military personnel producers (E) Canceling with domestic contracts for new airplanes

I. A decrcasein domestic production of Y tr. An increasein domestic production of Y Itr. An increasein forcign ouput of Y (A) (B) (C) (D) (E) I only II only Itr only I and Itr only II and Itr only

Supply Aggregate

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16. Supposetwo counries are each capable of individually producing two given commodities. Instead, each specializesby producing the commodity for which it has a comparative advantage and then trades with the other country. Which of the following is most likely to result? (A) The two countries will become more independent of each other. (B) Uncmployment will increasein one country and decreasein the other. (C) There will be more efficient production in one country but less efficient production in the other. (D) Both countries will become better off. (E) Both countries will be producing their commodity inefficiently.

Demand Aggregate PRODUCT DOMESTIC CROSS

18. According to the graph above, which of the

following will necessarilyresult in a decreasein output? I. A rightward shift of the aggregatedemand curve II. A leftward shift of the aggregatedemand curve m. A rightward shift of the aggregatesupply curve IV. A leftward shift of the aggregatesupply curve (A) (B) (C) (D) (E) I only Itr only I and Itr only II and III only tr and IV only

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19. Which of the following will result in the greatest

increase in aggegate demand? (A) (B) (C) (D) in A $100 increase taxes in A $100 decrease taxes A $100 increasein government expenditures A $100 increasein government expenditures, coupled with a $100 increasein taxes (E) A $100 increasein governmentexpenditures, coupled with a $100 decreasein taxes

Ouestions 2l-22 refer to the diagram below, which depicts an economy's consumption function.

20. If the economy is in a severerecession,which of

the following is the fiscal policy most effective in stimulating production? (A) (B) (C) (D) Govemmentspendingincreases. Government spending decreases. Personalincome taxes are increased. The Federal Reserve sells bonds on the open market. (E) The Federal Reservebuys bonds on the open market. " $t,500 $3,000 REALINCoME

21. If the marginal propensity to consume increases, the equilibrium levels of income and consumption will change in which of the following ways? F4uilibrium lrvel of Income (A) (B) (C) (D) (E) No change No change Increase Increase Decrease Equilibrium Level of Consumption No change Increase No change Increase Decrease

22. If private investment of $100 is added to the economy, the equilibrium levels of income and consumptionwill changein which of the following ways? Equilibrium l-evel of Income (A) (B) (C) (D) (E) Increase Increase Incrcase No change No change Equilibrium I-evel of Consumption Decrease Increase No change Increase No change

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The real value of the United Statesdollar is determined by (A) federal regulations regarding purchasing power (B) the value of the gold backing the dollar (C) the goodsand servicesit will buy (D) the money multiplier (E) the marginal propensity to consume

27. Which of the following relationshipsis illustrated

by a short-run Phillips curve? (A) A decreasein the rate of inflation is accompaniedby an increasein the rate of economicgrowth. (B) A decreasein the rate of inflation is accompanied an increasein the rate of by unemployment. (C) An increasein the rate of inflation is accompaniedby a decreasein the rate of economicgrowth. (D) An increasein the rate of inflation is accompaniedby an increase in the rate of unemployment. (E) A decreasein the rate of economic growth is accompaniedby a decreasein the rate of unemployment.

24. The demand for money increaseswhen national

income increasesbecause (A) (B) (C) (D) (E) spendingon goods and services increases interest rates increase the budget deficit increases the money supply increases the public becomesmore optimistic about the future

2s.An aggregatesupply curve may be horizontal

over some range becausewithin that range (A) a higher price level leads to higher interest rates, which reduce the money supply and consumer spending (B) changesin the aggregateprice level do not induce substitution (C) output cannotbe increased unlessprices and interest rates increase (D) rigid pricespreventemploymentfrom fluctuating (E) resourcesare underemployedand an increase in demandwill be satisfiedwithout any pressurcon the price level

28. Which of the following could causesimultaneous

increasesin inflation and unemployment? (A) (B) (C) (D) (E) in A decrease governmentspending in A decrease the money supplY in A decrease the velocity of money An increasein inflationary expectations An increasein the overall level of productivity

29. If other things are held constant, an increasein

United Statesimports will because (A) tend to causethe dollar to appreciate the world supply of dollars will rise

(B) tend to cause the dollar to appreciatebecause

the world demand for dollars will rise (c) have no effect on the exchangerate for the dollar becauseexports will also increase (D) tend to cause the dollar to depreciatebecause the world supply of dollars will rise (E) tend to cause the dollar to depreciatebecause the world demand for dollars will rise

26. If the Federal Reserve wishes to use monetary

policy to reinforce Congress' fiscal policy it changes, should (A) increasethe money supply when government spendingis increased (B) increasethe money supply when government spending is decreased (C) decrease money supply when government the spendingis increased (D) increase interestrateswhen government spendingis increased (E) decreaseinterest rates when government spending is decreased

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30. An increasein which of the following is most

likely to causean improvement in the standard of living over time? (A) (B) (C) (D) (E) Size of the population Size of the labor force Number of banks Level of taxation Produaivity of labor

J+. Which of the following is a basic tenet of

classical economic analysis?

(A) Saving is usually greater than investment. (B) The economy is self-correcting to full

(c) The economy may be in equilibrium at less

than full employment. (D) Inflation is not a serious economic problem. (E) The prices of products tend to be inflexible.

employment.

31. The long-run aggregatesupply curve is likely to

shift to the right when there is (A) an increasein the cost of productive resources (B) an increasein productivity (C) an increasein the federal budget deficit (D) a decreasein the money supply (E) a decreasein the labor force

35. Which of the following will most likely result

from a decreasein government spending? (A) (B) (C) (D) (E) An increase in output An increasein the price level An increasein employment A decreasein aggregatesuPPly A decreasein aggregatedemand

32. The consumer price index measureswhich of the

following? (A) The changeover time of the weighted prices of a particular group of goods and services (B) The change over time of the weighted whoiesale price index (C) The change over time of the difference between the gross domestic product deflator and the wholesale price index (D) Inflation corrected for changesin the real gross domestic product (E) Inflation correctedfor changesin the wholesale price index Which of the following is true if the economy is producing at the full-employment level of output?

36. Current equilibrium output equals$2,500,000,

potential output equals $2,600,000,and the marginal propensity to consume equals 0.75. Under these conditions, a Keynesian economist is most likely to recommend (A) (B) (C) (D) (E) taxes by $25,000 decreasing taxes by $100,000 decreasing increasing government spending by $25,000 increasinggovernmentspendingby $33,333 increasing government spending by $100,000

An inflationary gap could be reduced by (A) (B) (C) (D) (E) an increasein government spending an increasein the supply of money an increasein the income tax rate a decreasein the discount rate a decreasein the reserye requirement

(A) The unemployment rate is zero. (B) No person is receiving unemployment

(c) There is frictional unemployment.

compensationfrom the government.

(D) The government's budgetis balanced. (E) The balance of trade is in equilibrium.

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38. The circular flow of economic activity between

consumers and producersincludeswhich of the following? I. IL IIL fV. (A) (B) ( C) (D) (E) Households from firms. buy factor services Households sell factor services to firms. Householdsbuy outputs from firms. Householdssell outDutsto firms.

40. Which of the following is most likely to increase

if the public decidesto increaseits holdings of currency? (A) (B) (C) (D) (E)
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III only IV only Ia n d tro n l y II and III only III and IV only

The interestrate The price level Disposablepersonalincome Employment The reserve requirement

if During a mild recession, policymakersw.ult to reduceunemploymentby increasinginvestment, which of the following policies would be most appropriate? (A) Equal increases governmentexpenditure in and taxes only (B) An increasein governmentexpenditure (C) An increasein transferpayments (D) An increasein the reserverequirement by (E) Purchase governmentsecurities the of Federal Reserve

39. Supposethe requiredreserveratio is 20 percent

and a single bank with no excessreserves receivesa $100 depositfrom a new customer. The bank now has excessreserves equal to (A) $20 (B) $80 (c) $100 (D) $400

(E) $s00

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42. Which of the following monetaryand fiscal policy combinationswould most demand? in likely result in a decrease aggregate Discount Rate (A) (B) (C) (D) (E) Lower Lower Raise Raise Raise Open-MarketOperations Buy bonds Buy bonds Sell bonds Buy bonds Sell bonds GovernmentSpending Increase Decrease Increase Increase Decrease

43. Which of the following is true of supply shocks? (A) They tend to changeboth relative prices and the generalprice level in the economy. (B) They affect only the generalprice level. fiscal policy. (C) They can be anticipatedand offset with appropriate monetarypolicy. (D) They can be anticipated and offset with appropriate (E) They make the aggregate supply curve vertical. fell that,from 1985to 1986,unemployment from'7'2to7.0 percent 44. Suppose of An and inflationfell from 3.8 to 1.1 percent. explanation thesechanges might be that the (A) (B) (C) (D) (E) demandcurve shifted to the left aggregate aggregate demandcurve shifted to the right supply curve shifted to the left aggregate aggregate supply curve shifted to the right short-runPhillips curve shifted to the right

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45. If higher United Statesinterestratescauseforeign

which of the demandfor the dollar to increase, following will occur to the intemationalvalue of the dollar and to United Statesexports? InternationalValue of the Dollar (A) (B) (C) (D) (E) Increase Increase Increase Decrease Decrease Expons Increase Decrease No change Increase Decrease

48, An increasein the labor force participation rate will

(A) (B) (C) (D) (E) savings increaseinvestmentand decrease investment increasesavingsand decrease have no effect.on unemployment make it easierto reduceunemployment make it more difficult to reduce unemployment

49. Which of the following is a key featureof

Keynesianeconomics? (A) The level of saving depends mostly on interestrates. (B) The level of governmentexpenditure depends on interestrates. mostly (C) Supply createsits own demand. (D) Macroeconomicequilibrium can occur at less than full employment. (E) Wagesare more flexible than prices.

46. The table below indicatesthe number of labor hours requiredin CountriesX and Y to produce one unit of food or one unit of clothing. Country X Y Food 20 hours 10 hours Clothine 50 hours 20 hours

)u. If a large increasein total spending has no effect

on reai grossdomesticproduct,it must be true that (A) the price level is rising high unemploy(B) the economyis experiencing ment (C) the spendingmultiplier is equal to I (D) the economy is in short-runequilibrium (E) aggregate supply has increased

Given this information,which of the following is statements conect? (A) X has a comparativeadvantage the in productionof both food and clothing. (B) Y has a comparativeadvantage the in productionof both food and clothing, (C) X has a comparativeadvantage food in production,whereasY has a comparative in advantage clothing production. (D) Y has a comparativeadvantage food in production,whereasX has a comparative advantage clothing production. in (E) Neither country has a comparative advantage the productionof either good. in 47. Which of the following groupsof people would infl benefit from unanticipated ation? I. Savers IL Bonowers III. Lenders (A) (B) (C) ( D) (E) I oniy iI only III only Ia n d tro n i y I and III only

51, According to Keynesiantheory,the most important determinantof saving and consumptionis the (A) (B) (C) (D) (E) interestrate price level level of income level of employment flexibility of wagesand prices

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5)

Under which of the following circumstances would increasingthe money supply be most effective in increasingreal grossdomestic product? InterestRates Emplovment (A) (B) (C) (D) (E) High High Low Low Low Full Less than full Full Full Less than full Business Optimism High High High Low Low

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Long-run Aggregate Supply

YX

Y,X,
C B A

Short-run Aggregate Supply Aggregate Demand ngnLcnossDOMESTICPRODUCT

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56. The graph above depictsan economy'saggregate

demand and aggregatesupply curves. If aggregate demandremainsconstant,the equilibrium price levels in the short run and in the long run will be which of the following? Short Run Long Run

53. Facedwith a large federalbudget deficit, the

government and expenditures decidesto decrease by tax revenues the sameamount.This action will affect output and interestratesin which of the following ways? Output (A) (B) (C) (D) (E) Increase Increase No change Decrease Decrease InterestRates Increase Decrease Decrease Increase Decrease

(A) 0A (B) 0B (c) 0B (D) 0c (E) 0c

0A 0A 0c 0A oc

54. If crowding out only partially offsetsthe effects

in of a tax cut, which of the following changes gross domesticproduct are interestratesand most likely to occur? InterestRates (A) (B) (C) (D) (E) Increase Increase Increase Remain unchanged Decrease GrossDomestic Product Increase Remainunchanged Decrease Increase Decrease

and Keynesians, 57. According to both monetarists which of the following happenswhen the Federal Reservereducesthe discountrate? (A) The demandfor money decreases and market interestrates decrease. and market (B) The demandfor money increases interestratesincrease. and market (C) The supply of money increases interestratesdecrease. and market (D) The supply of money increases interestratesincrease. (E) Both the demandfor money and the supply of money increaseand market interestrates increase,

of 55. All of the following are components the money supply in the United StatesEXCEPT (A) (B) (C) (D) (E) papermoney gold bullion checkabledeposits coins demanddeposits

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58. An increasein which of the following is most likely to increasethe long-run gfowth rate of an economy's real per capita income? (A) Population growth (B) The proportion of gross domestic product consumed (C) The educational attainment of the population (D) The supply of money in circulation (E) Personalincome taxes 59. An increasein the money supply will have the greatesteffect on real gross domestic product if (A) the marginal propensity to consume is low (B) unemployment is very low (C) investment spending is not sensitive to changesin interest rates (D) the quantity of money demandedis not very sensitive to interest rates (E) the required reseryeratio is high

60, If the Federal Reseryeundertakesa policy to reduce interest rates, intemational capital flows will be affected in which of the following ways? (A) Long-run capital outflows from the United Stateswill decrease. (B) l,ong-run capital inflows to the United States will increase. (C) Short-run capital outflows from the United Stateswill decrease. (D) Short-run capital inflows to the United States will decrease. (E) Short-run capital inflows to the United States will not change'

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Chapter III Answersto the Examination 1995AP Macroeconomics

I SECTION I: MULTIPLE-CHOICE
Listed below aretle correctanswers the multipleto choicequestions thepercentage AP candidates and of who attemptedeach questionand answeredit correctly. An answer sheet gridded with the correct responses appears the nextpage. on

Sectionf Answer Key and PercentAnswering Correctly Item No.

I

Corrcct Answer
E B B D A B E D D E B A B D

Perrcent Correct

Item No.
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Correct Answer
B A

Percent Correct

2
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4 5 6
1

34 35 36
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B E

8 9 10 ll t2 l3 l4 15 l6 17 18 t9 20 2l 22 23 24 25 26 27 23 29 30

38 39 40 4l 42
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E E A D B C A E A B D D E

44 45 46 47 48 49 50 5l 52 53 54 55 56 57 58 59 60

D B A E E A D B

c c

B E D A C B E A B B D D

c c

a27 a