Practice AP Macroeconomics Test

1. Which of the following correctly describes the components of

Aggregate Demand? 6. If a 100 deposit in a bank leads to a 1000 increase in the money
A. Consumption expenditures + Investment expenditures + supply, the reserve requirement must have been:
Government expenditures + Exports + Imports A. .10%
B. Consumption expenditures + Investment expenditures + B. 10%
Government expenditures + Exports - Imports C. 100%
C. Consumption expenditures + Investment expenditures + D. 1000%
Government expenditures - Exports - Imports E. cannot be determined from the information given.
D. Consumption expenditures + Investment expenditures +
Government expenditures + Savings + Exports - Imports 7. Long run economic growth in a country would be encouraged
E. Consumption expenditures + Investment expenditures + through which of the following combinations of events?
Government expenditures + Business expenditures +
Savings + Exports + Imports Investment interest rates savings rate
A. high high high
2. Which of the following formulas is correctly stated? B. high high low
A. Real interest rate = nominal interest rate + anticipated
inflation.
C. high low low
B. Nominal interest rate = real interest rate + anticipated D. low low low
inflation. E. high low high
C. Real interest rate = nominal interest rate + actual inflation.
D. Nominal interest rate = real interest rate + actual inflation. A. A
E. Nominal interest rate = real interest rate - actual inflation. B. B
C. C
3. Which of the following would not affect the size of real GDP? D. D
A. Consumer purchase of a new car for personal use. E. E
B. Government purchase of a new car for the military.
C. Business purchase of a new car for a delivery vehicle. 8. Which of the following people would be considered structurally
D. Consumer purchase of a rare renaissance painting. unemployed?
E. Consumer purchase of a haircut. A. Unemployed auto assembly line factory worker during a
recession.
4. If an autonomous increase in spending in an economy of 100 B. Unemployed auto assembly line factory worker who was
leads to an increase in real GDP of 500 then for that economy the replaced with a robot.
marginal propensity to consume must have been: C. An auto assembly line worker who quit her job to go back to
A. 4/5 school full-time to improve her job skills.
B. 5 D. A high school student who mows lawns during the summer,
C. 100 but is out of work because it is winter.
D. 400 E. A high school economics teacher who is not working during
E. 500 the summer, but plans to go back and teach in the fall.

5. If the government increased spending by 10 and increased taxes 9. Which combination of events described below would be the most
by 10 to pay for the increased spending then which of the expansionary for an economy, assuming that they all happened at the
following combinations would correctly explain the effect on same time?
the budget and GDP?
Budget GDP Taxes Government Net exports reserve
A. unchanged decrease spending requirement
A. decrease increase increase decrease
B. surplus decrease
B. increase increase increase decrease
C. unchanged no change C. decrease increase decrease decrease
D. surplus increase D. decrease decrease decrease decrease
E. unchanged increase E. increase decrease decrease increase
A. A
B. B 10. If an economy is suffering from inflation, what fiscal policy
C. C measure could be taken to help alleviate the problem?
D. D A. Increase money supply
E. E. B. Increase government spending
C. Increase taxes
D. Increase the reserve requirement
E. Increase deficit spending
AP Macro MC Practice test with AKey.docx
11. Which of the following would be an appropriate monetary
policy measure to combat inflation? 14. Based on Figure 2 the size of the simple multiplier is:
A. increase taxes A. one
B. decrease taxes B. two
C. sell bonds C. three
D. buy bonds D. four
E. lower the reserve requirement E. five

15. Based on Figure 2 the economy shown is experiencing a/an:

A. inflationary gap
B. recessionary gap
C. unemployment gap
D. stagflation
E. disinflation

16. Based on Figure 2 the MPC is:

A. 0%
B. 25%
C. 50%
D. 75%
E. 100%

17. A production possibility curve is most closely related to which

of the following?
A. short run aggregate supply curve
Figure 1
B. long run aggregate supply curve
12. Based on Figure 1 a movement from C0 to C2, in both diagrams, C. aggregate demand curve
would be consistent with which of the following? D. aggregate expenditure diagram
A. fixed tax cut and cut in tax rate E. Keynesian cross diagram
B. fixed tax increase and increase in tax rate
C. fixed tax cut and increase in tax rate 18. Which of the following combinations of policy moves would be
D. fixed tax increase and decrease in tax rate recommended for an economy experiencing an annual increase in
E. none of the above correctly describe the movement from Co the inflation rate of 6% and an unemployment rate of 5%?
to C2 A. increase government spending and increase the discount
rate
13. Over the long run, the rate of growth of real wages is B. decrease government spending and decrease the reserve
approximately equal to the rate of: requirement
A. inflation. C. increase income tax rates and sell bonds
B. unemployment. D. decrease income tax rates and buy bonds
C. growth of labor productivity plus the rate of inflation. E. increase government transfer payments and increase the
D. growth of labor productivity minus the rate of inflation. reserve requirement
E. growth of labor productivity.
19. The Keynesian monetary policy transmission mechanism would
correctly be described in which of the following?

Money supply Interest rate Investment GDP

A. increase increase increase increase
B. increase increase increase decrease
C. increase decrease increase increase
D. increase decrease decrease decrease
E. decrease decrease decrease decrease

Figure 2
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20. Crowding out describes a relationship among deficits, interest 23. In a typical circular flow model describing the interaction of
rates, and private spending. Which of the following describe that businesses and households, which of the following is/are true?
relationship?
Deficit interest rate private spending I. Households buy factors of production and goods
II. Firms buy factors of production and goods
A. increase increase increase III. Households buy factors of production
B. decrease decrease decrease IV. Firms buy factors of production
C. increase increase decrease V. Firms buy goods
D. increase decrease increase VI. Households buy goods
E. increase decrease decrease
A. I only
21. Which of the following correctly describe the concept of the B. II only
multiplier? C. III and IV only
D. IV and VI only
I. It takes time for the multiplier to work. The impact of an E. V and VI only
independent change in investment during the first six
months will be considerably smaller than the multiplier 24. If Americans suddenly decide to hold more cash for carrying
analysis implies. on transactions and for precautionary reasons, which of the
II. When the marginal propensity to consume is 0.8, an following is most likely to result?
independent increase in investment of $10 billion will A. Increase in interest rates
cause the aggregate income of a fully employed economy B. Decrease in interest rates
to rise to $50 billion. C. Dollar depreciates in value
III. The multiplier effect may be even larger over time as its D. Exports will rise
effect is supported by the interest rate and foreign E. Gross private domestic investment will rise
purchases effect. 25. If the federal government and the Federal Reserve both attempt
to contract the economy, which of the following sets correctly
A. I, II, and III are all true describes the probable results of these actions? (FP = fiscal policy,
B. I is true, II and III are false MP = monetary policy)
C. I and II are true, III is false
D. I and III are true, II is false Interest rates Price level Output
E. I, II, and III are all false FP MP FP MP FP MP
A. increase increase increase increase increase increase
22. “In the first half of 1973, prices rose at an annual rate of 8 B. decrease decrease decrease decrease decrease decrease
percent and real output at 4.5 percent, while unemployment fell from C. increase decrease decrease decrease decrease decrease
5.0 percent to 4.8 percent. From June 1972 to June 1973, the money D. decrease increase decrease decrease decrease decrease
supply increased 11 percent, while the U.S. government ran a deficit E. decrease increase decrease increase decrease increase
equal to 2 percent of GDP.” Since unemployment was already at or
near its natural rate during 1972-73, 26. The Keynesian model would find monetary policy to be less
effective if:
A. greater monetary expansion was necessary to stabilize A. Interest rates fell
prices. B. Interest rates rose
B. monetary and fiscal policy of the period added to the C. Investment demand is elastic
inflationary pressure already plaguing the economy. D. Investment demand is inelastic
C. $14 billion budget deficit probably caused unemployment to E. Fiscal policy remains neutral
fall and real income to expand without adding to the
inflation problem. 27. Banks create money when they:
D. monetary and fiscal policy of the period probably helped A. collect interest on loans to the public
stabilize the growth rate of aggregate demand and promote B. buy government securities from the Federal Reserve
price stability in the long run. C. allow customers to transfer money from time accounts to
E. Expansionary fiscal policy was necessary to stabilize prices demand accounts
D. keep required reserves as vault cash
E. loan excess reserves to the public

28. Which of the following would be hurt the most by

unanticipated inflation?
A. borrowers with fixed rate loans
B. borrowers with variable rate loans
C. creditors
D. both borrowers and creditors are hurt the same
E. neither borrowers nor creditors are hurt by unanticipated
inflation, they both benefit

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29. A graphical representation with unemployment on the
horizontal axis and inflation on the vertical axis is known as:
A. Okun’s law
B. Stagflation
C. Long run equilibrium
D. Natural rate of unemployment and inflation
E. Phillips curve

30. Stagflation could be caused by which of the following?

A. Increase in aggregate supply
B. Decrease in aggregate supply
C. Increase in aggregate demand
D. Decrease in aggregate demand
E. Any of these has an equal chance of creating stagflation

31. If interest rates rise, growth will be slowed because;

A. Firms will invest in more projects with future payoffs thus
limiting growth. Figure 4
B. Firms will invest in fewer projects with future payoffs thus
limiting growth. 34. Beginning at the equilibrium position shown by AS1 and AD1,
C. Firms will invest the same amount in projects with future in Figure 4, which single movement could account for
payoffs at all interest levels thus leaving growth unaffected. stagflation?
D. Firms will pay more in dividends and as a result retained A. AS1 to AS2
earnings will fall. B. AS1 to AS3
E. Firms will pay less in dividends and as a result retained C. AD1 to AD2
earnings will fall. D. AD1 to AD3
E. None of the above would explain stagflation
32. If inflation is 5% and nominal GDP grew by 4% then during the
same period real GDP grew by: 35. Which of the following is a basic part of the Classical School
A. 9% of economic thought?
B. 5% A. Market systems may reach equilibrium at any level of
C. 4% output.
D. 1% B. Short-run inflation is unlikely to occur.
E. –1% C. Short-run unemployment is unlikely to occur.
D. Prices and wages are flexible.
E. Long-run equilibrium at full employment is unlikely to
say's occur.
zone
36. In the crude equation of exchange where MV=PY:
A. Monetarists believe V is stable.
B. Classical economists believe V is unstable.
C. Keynesians believe V is stable.
keynes D. Monetarists believe that P is stable.
zone E. Keynesians believe that P is stable

37. Which of the following is most likely to cause an increase in the

long run aggregate supply curve?
A. An increase in government spending.
B. An increase in interest rates.
C. An increase in taxes.
D. An increase in literacy levels of the population.
E. An increase in aggregate demand.
Figure 3
38. If an economy was operating at an equilibrium level of output
33. Based on Figure 3, a movement from _____ to _____ will result
at $3,000 billion and full employment equilibrium was $4,000
in a non-inflationary expansion of real output.
billion, with a marginal propensity to save of .2, a Keynesian
A. AD1 to AD2
economist would recommend:
B. AD2 to AD3
A. Increase government spending by $1,000 billion
C. AD3 to AD4
B. Increase government spending by $500 billion
D. AD4 to AD5
C. Increase government spending by $250 billion
E. AD5 to AD6
D. Decrease taxes by $1,000 billion
E. Decrease taxes by $250 billion
AP Macro MC Practice test with AKey.docx
 45. Suppose that the Fed decides to decrease the growth rate of the
39. An adverse supply shock: money supply in the U.S. What is most likely to happen to the U.S.
A. Can be anticipated and decreases aggregate supply trade deficit, and to GDP?
B. Can be anticipated and increases aggregate supply A. The trade deficit will rise, GDP will rise.
C. Cannot be anticipated but decreases aggregate supply B. The trade deficit will fall, GDP will rise.
D. Cannot be anticipated but increases aggregate supply C. The trade deficit will rise, GDP will fall.
E. Cannot be anticipated but decreases aggregate demand D. The trade deficit will fall, GDP will fall.
E. The trade deficit will rise, GDP will be unaffected.
40. All of the following are currently part of the United States
money supply, 46. Gross domestic product (GDP)
EXCEPT: A. is the sum of all exchanges of goods and services during a
A. Coins period.
B. Currency B. includes financial transactions such as the purchase of
C. Checkable accounts stocks or bonds traded during a period.
D. Credit cards C. includes the purchases of goods at intermediate stages of
E. Demand deposits production.
D. is the sum of the total spending on all final-user goods and
41. If the Federal Reserve sells bonds in the open market, which of services produced domestically during a period.
the following will result? E. includes all goods and services exchanged during a
A. Decreased demand for money and lower interest rates period.
B. Increased demand for money and higher interest rates
C. Increased money supply and lower interest rates 47. Which of the following is/are correct?
D. Decreased money supply and higher interest rates
E. Increased demand for and supply of money and an increase (X) Your spouse cleans your house every Thursday.
in interest rates (Y) You sell your old economics book for $25.
(Z) Your economic textbook is revised and you buy a new edition.
42. Based on the data from table below we can conclude that:
A. All three events increase GDP.
Output Per Unit of Labor Input B. Only (X) increases GDP
England Portugal C. Only (Y) increases GDP
Cloth 20 24 D. Only (Z) increases GDP
Wine 2 12 E. (X) and (Y) increase GDP, (Z) reduces GDP
1w = 10c 1w = 2c
A. Portugal has a comparative advantage in the production of 48. Which of the following best illustrates the difference between
cloth and wine GDP and GNP?
B. England has a comparative advantage in the production of A. GDP measures the goods and services consumed by the
cloth and wine citizens of a country, while GNP measures output exported
C. Portugal has a comparative advantage in cloth and England to other countries.
has a comparative advantage in wine B. GDP measures output produced by the citizens within a
D. England has a comparative advantage in cloth and Portugal country, while GNP measures output produced by non-
has a comparative advantage in wine citizens within a country.
E. England has an absolute advantage in the production of C. GDP measures the output produced by the citizens of a
cloth and wine country, while GNP measures output produced within the
borders of a cpuntry.
43. On day 1, it cost $.7354 U.S. to buy one Canadian dollar. How D. GDP measures the output produced within the borders of a
many Canadian dollars would $1 U.S. buy? country, while GNP measures output produced by the
A. 1.36 citizens of a country.
B. 1.27 E. GDP measures goods produced by the citizens of a
C. 1.11 country, while GNP measures the output of goods and
D. 0.84 services produced by the citizens of a country.
E. 0.73
49. If decision makers underestimate inflation, the real wage will
44. On the next day (see Question 43) it cost $.845 U.S. to buy one A. rise, increasing unemployment
Canadian dollar. From this information we can conclude that: B. rise, reducing unemployment
A. The U.S. dollar got stronger and U.S. exports will rise C. fall, increasing unemployment
B. The U.S. dollar got weaker and U.S. exports will rise D. fall, reducing unemployment
C. The U.S. dollar got stronger and U.S. exports will fall E. Is as likely to rise or fall making the effect on
D. The U.S. dollar got weaker and U.S. exports will fall unemployment indeterminate
E. The U.S. dollar got stronger and U.S. exports will be
unaffected

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50. Which of the following will most likely occur during the
expansionary phase of the business cycle?
A. Real GDP rises and unemployment falls.
B. Real GDP rises and unemployment rises.
C. Real GDP declines and inflation rises.
D. Interest rates rise and the number of business failures rise.
E. Inflation rises and employment falls

51. Frictional unemployment

A. would be eliminated if the economy were operating at full
employment levels of GDP.
B. would be eliminated if the minimum wage were raise.
C. is the result of worker skills not matching the jobs
available.
D. is zero when we have achieved the Natural rate of Figure 6
unemployment.
E. is present even when labor markets are working well. 54. Given the aggregate demand and aggregate supply conditions
depicted in Figure 6, which of the following is most likely?
A. an increase in resource prices, which will stimulate
FIGURE 5 aggregate demand and direct the economy to potential
capacity
Population 50 million B. a decrease in resource prices, which will increase costs and
Number in the labor force 30 million shift SRAS to the left, directing the economy to its
Number employed full time 20 million potential capacity
Number unemployed 2 million C. lower resource prices, which will reduce costs and shift
SRAS to the right until full-employment is achieved
52. Based on the data in Figure 5, what is the labor force D. a shift in LRAS to the left as the result of an increase in
participation rate of the economy? the expected inflation rate
A. 40 percent E. a shift in LRAS to the right as a result of higher
B. 56 percent inflationary expectations for the future
C. 60 percent
D. 66.7 percent 55. If the consumer price index (CPI) were 131 at year-end 1999
E. 93.3 percent and 125 at year-end 1998, then inflation during 1999 was
A. zero; prices were stable during 1999
53. Based on the data in Figure 5, what is the unemployment rate B. 4.8 percent
of the economy? C. 6.0 percent
A. 4 percent D. 31 percent
B. 6.7 percent E. 125 percent
C. 7.1 percent
D. 10.0 percent 56. Which of the following best expresses the central idea of
E. 60 percent countercyclical fiscal policy?
A. Planned deficits are experienced during economic booms
and planned surpluses during economic recessions.
B. The balanced-budget approach is the proper criterion for
determining annual budget policy.
C. Deficits are planned during economic recessions, and
surpluses are utilized to restrain inflationary booms.
D. Deficits are planned during inflationary booms, and
surpluses are utilized to restrain economic recessions.
E. Actual deficits should equal actual surpluses during a
period of deflation.

AP Macro MC Practice test with AKey.docx

57. Although the economy was in the Great Depression, the
Hoover administration followed a fiscal policy of balancing the
budget. A Keynesian would have found this policy
A. inappropriate, because it probably would have inflationary
consequences that might serve to further the people’s
reluctance to hold money.
B. appropriate, because it probably would have led to a
significant increase in the money supply and thereby
increased employment.
C. appropriate, because it probably would have stimulated
economic activity and helped end the depression.
D. appropriate, because a balanced budget is always
appropriate.
E. inappropriate, because it probably would further depress
aggregate demand, economic activity, and employment.

58. If debit cards become more widely used by consumers and

businesses, which of the following is most likely to happen?
A. Currency holdings will remain the same, but M1 money
supply will fall.
B. The amount of currency held by the public will increase.
C. Less money will be held as currency and more money will
be held in bank accounts, which will increase the reserves
of banks unless the Fed takes offsetting actions.
D. Less money will be held as currency and more money will
be held in bank accounts, which will decrease the reserves
of banks unless the Fed takes offsetting actions.
E. The money supply will be unaffected because debit card
expenditures are considered the equivalent of cash.

59. International trade can be mutually advantageous because it

A. allows each trading partner to specialize more fully in the
production of those things that it does best.
B. reduces the competitiveness of domestic industries and
thereby makes it easier for the domestic producers to raise
prices.
C. permits the trading partners to expand their joint output.
D. All of the above are true.
E. Both A and C are true; B is false.

60. Compared to the no-trade situation, when a country imports a

good
A. domestic consumers gain, domestic producers lose, and
the gains outweigh the losses.
B. domestic consumers lose, domestic producers gain, and
the gains outweigh the losses.
C. domestic consumers gain, domestic producers lose, and
the losses outweigh the gains.
D. domestic consumer gain, but domestic producers lose an
equal amount.
E. Both domestic consumers and domestic producers lose.

AP Macro MC Practice test with AKey.docx

 MACROECONOMICS
Section I
Time—70 minutes
60 Questions

Directions: Each of the questions or incomplete statements below is followed by five suggested answers or
completions. Select the one that is best in each case and then fill in the corresponding circle on the answer sheet.

1. Which of the following is the most fundamental 5. A contraction in the money supply will most
issue that economics addresses? likely change the nominal interest rate and
aggregate demand in which of the following
(A) Choice of appropriate technology
ways in the short run?
(B) Reduction of unemployment
(C) Reduction of budget deficit Nominal
(D) Promotion of privatization Interest Rate Aggregate Demand
(E) Use of scarce resources
(A) Increase Decrease
(B) Increase Increase
2. Inflation occurs when there is a sustained increase
(C) Increase Not change
in which of the following?
(D) Decrease Decrease
(A) Real gross domestic product (E) Decrease Increase
(B) The average price level
(C) The price of any commodity 6. If the economy is in a severe recession, which of
(D) Labor productivity the following policy actions is most appropriate?
(E) The unemployment rate
(A) Keeping the money supply constant and
reducing budget deficits
3. Which of the following is LEAST likely to
(B) Decreasing government spending and taxes
promote economic growth?
by the same amount
(A) Investment in tools and machines (C) Increasing both the money supply and
(B) Investment in training of labor government spending
(C) Increase in consumption of nondurable goods (D) Increasing both the federal funds rate and
(D) Tax credit for technology improvement taxes
(E) Increase in the labor force participation rate (E) Decreasing the money supply and increasing
taxes
4. An increase in spending in an economy will cause
a multiplied increase in gross domestic product 7. Of the following, the most liquid asset is
because
(A) mutual funds
(A) government spending is greater than zero (B) currency
(B) investment is greater than zero (C) time deposits
(C) investment increases as income decreases (D) demand deposits
(D) consumption increases as income increases (E) savings deposits
(E) taxes increase as income increases

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Questions 8-9 refer to the income and consumption 10. An increase in government spending will affect
data presented in the table below. the demand for money and nominal interest rates
in which of the following ways?
Assume a closed economy with no government and
a marginal propensity to consume of 0.80. Nominal
Demand for Money Interest Rates
Disposable Income Consumption (A) Increase Increase
$620 $624 (B) Increase Decrease
$640 $640 (C) Increase Indeterminate
$660 $656 (D) Decrease Increase
$680 $672 (E) Decrease Decrease
$700 $688
$720 $704 11. Which of the following policies, if appropriately
$740 $720 sized, would provide expansion during a recession
$760 $736 with the smallest change in interest rates?
(A) An open-market purchase of government
securities by the central bank and a decrease
8. Dissaving occurs when disposable income is in the federal funds rate
(A) $620 (B) An open-market sale of government
(B) $640 securities by the central bank and an
(C) $660 increase in the federal funds rate
(D) $700 (C) A decrease in taxes and an open-market
(E) $1,000 purchase of government securities by the
central bank
9. The marginal propensity to save for this (D) An increase in government spending and an
economy is open-market sale of government securities
by the central bank
(A) 4.0 (E) An increase in taxes and an increase in the
(B) 1.0 federal funds rate
(C) 0.8
(D) 0.2 12. In the circular flow diagram of a market economy,
(E) 0 which of the following supplies the factors
of production?
(A) The business sector
(B) The government
(C) The household sector
(D) Financial sector
(E) The foreign sector

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13. If the velocity of money is constant and the
aggregate supply curve is vertical, a doubling of
the money supply would most likely result in a
doubling of
(A) the unemployment rate
(B) real output
(C) the price level
(D) nominal interest rates
(E) real interest rates

14. An increase in which of the following would most

likely result in an increase in aggregate supply?
(A) The price level
(B) Aggregate demand
(C) Unemployment compensation
(D) Labor-force participation rate 17. The graph above shows two aggregate demand
(E) The minimum wage curves, AD1 and AD2, and an aggregate supply
curve, AS. The shift in the aggregate demand
15. The main benefit of free trade between curve from AD1 to AD2 could be caused by
two countries is that
(A) a decrease in taxes
(A) income distribution in each country will (B) a decrease in the money supply
become more equitable (C) an increase in government spending
(B) employment in each country will increase (D) an increase in consumption spending
(C) migration from one country to the other will (E) an increase in the price level
increase
(D) each country can consume beyond its 18. An increase in the international value of the
constraints of resources and productivity United States dollar will most likely benefit
(E) each country will become more self-sufficient
(A) domestic producers of premium wines sold
16. Assume that the public holds part of its money in to people in other countries
cash and the rest in checking accounts. If the (B) currency traders holding large quantities
central bank lowers the reserve requirement from of yen
16 percent to 8 percent, the money supply will (C) German citizens vacationing in the
United States
(A) decrease by more than half (D) Canadian citizens expecting to purchase real
(B) decrease by half estate in the United States
(C) decrease by less than half (E) retired United States citizens living overseas
(D) exactly double on their social security checks
(E) increase by less than double
19. Which of the following will cause an increase in
aggregate demand?
(A) An increase in the price level
(B) A decrease in income taxes
(C) An increase in the demand for money
(D) A decrease in the supply of money
(E) A decrease in government transfer payments

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20. If wages are sticky, which of the following 24. Which of the following actions by the Federal
policies will be the most effective in raising real Reserve of the United States increases the money
gross domestic product to the full-employment supply?
level?
(A) Buying government bonds on the open
(A) Doing nothing, since there are automatic market
stabilizers (B) Selling government bonds on the open
(B) The sale of bonds by the Federal Reserve market
(C) An increase in the income tax (C) Increasing the reserve requirement
(D) An increase in government spending (D) Increasing the discount rate
(E) An increase in the discount rate (E) Increasing the federal funds rate

21. Suppose that Country A is experiencing high 25. If the production technology of a good improves
inflation relative to Country B, which is enjoying and at the same time the number of consumers
steady growth with a stable price level. Which of willing and able to buy the good in the market
the following would occur in the foreign increases, which of the following will definitely
exchange market? occur?
(A) An increase in the demand for Country A’s (A) Equilibrium price will increase.
currency (B) Equilibrium price will decrease.
(B) An increase in the supply of Country B’s (C) Equilibrium quantity will increase.
currency (D) Equilibrium quantity will decrease.
(C) A decrease in the supply of Country A’s (E) Equilibrium quantity will remain the same.
currency
(D) A decrease in the demand for Country B’s 26. An increase in which of the following will most
currency likely increase productivity?
(E) A depreciation of Country A’s currency
(A) Population growth rate
(B) Aggregate demand
22. Which of the following will most likely cause an
(C) Capital stock
increase in real output in the long run?
(D) Consumption
(A) A decrease in the labor force (E) Employment
participation rate
(B) An increase in the velocity of money 27. The short-run aggregate supply curve would be
(C) An open-market sale of government bonds vertical if
by the central bank
(A) nominal wages adjust immediately to
(D) An increase in immigration from abroad
changes in the price level
(E) An increase in the price level
(B) nominal wages adjust slowly when there is
unemployment
23. Potential gross domestic product will decrease
(C) both nominal wages and prices adjust
under which of the following conditions?
slowly to changes in aggregate demand
(A) The growth rate of the population increases (D) the spending multiplier is very low
more rapidly than the growth rate of gross (E) investment demand is very responsive to
domestic product. changes in interest rates
(B) Nominal gross domestic product increases
more than real gross domestic product. 28. Increases in the real per capita income of
(C) The natural rate of unemployment decreases. a country are most closely associated with
(D) The country’s annual depreciation is greater increases in which of the following?
than its annual gross investment.
(A) The labor force
(E) The monetary authorities adopt an easy
(B) The price level
monetary policy.
(C) The money supply
(D) Productivity
(E) Tax rates

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29. The consumer price index (CPI) is criticized for 31. If the marginal propensity to consume is 0.75,
then a $100 increase in investment will result in
(A) overstating the true burden of inflation
a maximum increase in equilibrium real gross
because it does not recognize consumers’
domestic product of
ability to substitute goods and services as
prices change (A) $40.00
(B) overstating the true burden of inflation (B) $100.00
because it recognizes consumers’ ability to (C) $133.33
substitute goods and services as prices (D) $400.00
change (E) $500.00
(C) understating the true burden of inflation
because it does not recognize consumers’ 32. Frictional unemployment occurs when which of
ability to substitute goods and services as the following happens?
prices change
(A) A worker is replaced by robots on factory
(D) understating the true burden of inflation
assembly lines.
because it recognizes consumers’ ability to
(B) A worker voluntarily quits a job to search
substitute goods and services as prices
for a better one.
change
(C) A worker is laid off because of a downturn in
(E) overstating the true burden of inflation
economic activity.
because it reflects the prices of both
(D) A worker undergoes on-the-job training.
intermediate goods and final goods
(E) A worker switches from working full-time
to part-time.
30. A rightward shift of the short-run Phillips curve
is most likely due to
(A) an increase in aggregate demand
(B) a decrease in aggregate demand
(C) a decrease in the expected rate of inflation
(D) an increase in the expected rate of inflation
(E) an increase in aggregate supply

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 33. On the graph above, stagflation will be caused by a
(A) leftward shift in the short-run aggregate supply
curve only
(B) rightward shift in the short-run aggregate supply
curve only
(C) leftward shift in the aggregate demand curve only
(D) rightward shift in the aggregate demand curve only
(E) rightward shift in both the short-run aggregate supply
and aggregate demand curves

34. As a component of aggregate demand, investment 35. If a contractionary fiscal policy is followed by an
refers to the expansionary monetary policy, nominal interest
rate and employment would most likely be
(A) purchase of raw land for later resale
affected in which of the following ways in the
(B) purchase of stocks and bonds
short run?
(C) purchase of new equipment and additional
inventories Nominal Interest Rate Employment
(D) difference between people’s income and
(A) Increase Increase
spending
(B) Increase Decrease
(E) dividends paid out to shareholders
(C) Decrease Decrease
(D) Decrease Indeterminate
(E) Indeterminate Decrease

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36. Assume that the aggregate supply curve is upward
sloping. If both aggregate supply and aggregate
demand increase, what will happen to the
equilibrium output and price level?
Output Price Level
(A) Decrease Decrease
(B) Decrease Increase
(C) Indeterminate Increase
(D) Increase Indeterminate
(E) Increase Increase

37. Which of the following will lead to a depreciation

of a nation’s currency?
(A) Lower inflation in the nation than in the rest
of the world
39. According to the graph above and starting with
(B) Higher required reserve ratio in the nation
equilibrium point R, which of the following shifts
than in the rest of the world
identifies the short-run and the long-run impact of
(C) Decreased real interest rates in the nation
a demand-pull inflation?
compared with the rest of the world
(D) Increased demand for the nation’s currency Short Run Long Run
(E) Decreased supply of the nation’s currency
(A) R to N M to N
(B) R to M R to N
38. Country A’s growth rate in per capita real gross
(C) R to Q Q to N
domestic product (GDP) has been consistently
(D) R to M R to Q
higher than that of Country B. Which of the
(E) R to N N to Q
following factors can account for these
differences in the per capita GDP growth rates?
40. If the central bank raises the required reserve
(A) Country B’s government gives more ratio, the money multiplier and the money supply
investment tax credits. will change in which of the following ways?
(B) The labor force of Country A is becoming
Money Multiplier Money Supply
more skilled than the labor force of
Country B. (A) Increase Increase
(C) The natural rate of unemployment is higher in (B) Increase Decrease
Country A. (C) Increase No change
(D) Country A’s central bank is less effective at (D) Decrease No change
controlling the inflation rate. (E) Decrease Decrease
(E) Although the populations of Countries
A and B are the same, Country A has 41. In the short run, government deficit spending will
twice as many people who are retired. most likely
(A) raise the unemployment rate
(B) lower the inflation rate
(C) raise nominal interest rates
(D) lower private savings
(E) raise net exports

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42. An increase in the price level will most likely 47. Assume that Country A exports one bushel of
cause which of the following? wheat in exchange for 2.5 bushels of corn from
Country B. If the terms of trade are beneficial to
(A) A leftward shift of the aggregate demand
both countries, which of the following must be
curve
true?
(B) An increase in the demand for money
(C) An increase in the real interest rate (A) Country A has an absolute advantage in
(D) A decrease in the nominal interest rate the production of wheat.
(E) An increase in the supply of money (B) The cost of producing a bushel of wheat in
Country A is less than 2.5 bushels of corn.
43. The purchase of United States government bonds (C) The cost of producing a bushel of wheat
by Japanese investors will be included in Japan’s in Country A is greater than 2.5 bushels
of corn.
(A) current account
(D) Country A is producing inside its current
(B) financial account (formerly called capital
production possibilities curve.
account)
(E) Country A needs to use more resources to
(C) trade deficit
produce wheat than to produce corn.
(D) foreign direct investment
(E) imports
48. Which of the following is true of the opportunity
cost of holding cash?
44. Assume that the marginal propensity to consume
out of disposable income is 0.8 and that the (A) It is zero.
government taxes all income at a constant rate of (B) It is represented by the value of the dollar.
30 percent. If gross income increases by $100, (C) It is equal to the price level.
consumption will initially increase by (D) It decreases as the price level rises.
(E) It increases as the interest rate rises.
(A) $44
(B) $56
49. The natural rate of unemployment can be defined
(C) $70
as the
(D) $80
(E) $100 (A) unemployment rate consistent with
accelerating inflation
45. Public policy that generates an unexpected increase (B) unemployment rate of the least-skilled
in consumer prices will inflict short-run costs on workers
all of the following EXCEPT (C) economy’s long-run equilibrium rate of
unemployment
(A) borrowers
(D) labor force participation rate plus the
(B) workers with fixed incomes
unemployment rate
(C) savers holding non-interest-bearing money
(E) labor force participation rate minus the
(D) taxpayers shifted into higher tax brackets
unemployment rate
(E) people whose incomes are not adjusted for
inflation
50. In the long run, an increase in aggregate demand
due to an expansion in the money supply will
46. If aggregate demand is growing faster than long-
increase
run aggregate supply, the Federal Reserve is most
likely to (A) price level and real output
(B) nominal output and real output
(A) sell securities on the open market
(C) nominal output but not the price level
(B) increase bond prices
(D) nominal output and the price level
(C) increase income taxes
(E) real output but not the price level
(D) decrease the discount rate
(E) decrease the required reserve ratio

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51. Rational expectations theory suggests that people 54. For an economy that is operating inside its
production possibilities curve, which of the
(A) do not estimate future inflation rates because
following is true?
it is impossible to do so
(B) believe that current inflation should be the (A) It can increase the production of both goods.
same as last year’s (B) Its population is growing faster than the
(C) assume that current inflation will be the same economy’s ability to increase production.
for next year (C) It is using all available resources efficiently.
(D) use all available information in forming their (D) It cannot move to a point on the production
expectations about future inflation possibilities curve with available
(E) assume that current inflation will be equal to technology.
the average inflation of the past decade (E) It lacks the resources to increase production
beyond its current output.
52. Following a decrease in the real interest rate, there
is an increase in financial capital outflows from 55. If unemployed workers become discouraged and
Country A. The increase in capital outflows will give up trying to find work, the number of
most likely have which of the following effects on workers employed and the unemployment rate
Country A’s net exports and aggregate demand? would change in which of the following ways?
Net Exports Aggregate Demand Number of Unemployment
Workers Employed Rate
(A) Decrease Decrease
(B) Decrease No change (A) Decrease Decrease
(C) Increase Increase (B) Decrease Increase
(D) Increase Decrease (C) Decrease No change
(E) Increase No change (D) No change Decrease
(E) No change Increase
53. If the required reserve ratio is 10 percent, actual
reserves are $10 million, and currency in 56. Which of the following is true of the Phillips
circulation is equal to $20 million, M1 will curve?
at most be equal to (A) It is vertical in the short run, but is upward
(A) $20 million sloping in the long run.
(B) $30 million (B) It is upward sloping in the short run, but
(C) $90 million is downward sloping in the long run.
(D) $120 million (C) It is downward sloping in the short run, but
(E) $150 million is vertical in the long run.
(D) It shows trade-offs between unemployment
and inflation in the long run but not in the
short run.
(E) It is upward sloping both in the short run and
in the long run if inflation is anticipated
correctly.

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 59. If the value of the United States dollar increases
on the foreign exchange market, which of the
following is most likely to occur in the short run?
(A) Aggregate demand will decrease.
(B) Aggregate demand will increase.
(C) Aggregate supply will decrease.
(D) Both aggregate demand and aggregate supply
will decrease.
(E) Both aggregate demand and aggregate supply
will increase.

60. Assume that the reserve requirement for demand

deposits is 20 percent, that banks hold no excess
reserves, and that the public holds no currency.
If the central bank sells $10,000 worth of
government securities to commercial banks, the
total money supply will

57. The diagram above shows three production (A) increase by $10,000
(B) increase by $50,000
possibilities curves (PPCs). If the current PPC is
(C) decrease by $10,000
PPC1, which of the following changes indicates a (D) decrease by $50,000
recession? (E) not change
(A) Movement from point X to point Y
(B) Movement from point Y to point X
(C) Movement from point Y to point Z
(D) Shift from PPC1 to PPC0
(E) Movement from point Z to point X

58. If wages and prices are perfectly flexible and

inflation is correctly anticipated, then an expan-
sionary monetary policy will affect the real output
and price level in which of the following ways?
Real Output Price Level
(A) Increase Increase
(B) Increase Decrease
(C) Increase Not change
(D) Not change Increase
(E) Not change Not change

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 MACROECONOMICS
Section I
Time—70 minutes
60 Questions

Directions: Each of the questions or incomplete statements below is followed by five suggested answers or
completions. Select the one that is best in each case and then fill in the corresponding circle on the answer sheet.

1. A country’s government runs a budget deficit 4. Unlike a market economy, a command economy
when which of the following occurs in uses
a given year?
(A) more centralized planning in economic
(A) The amount of new loans to developing decision making
nations exceeds the amount of loans paid (B) consumer sovereignty to make production
off by developing nations. decisions
(B) Government spending exceeds tax revenues. (C) its resources more efficiently
(C) The debt owed to foreigners exceeds the debt (D) price signals in economic decision making
owed to the country’s citizens. (E) the popular vote in making resource alloca-
(D) The amount borrowed exceeds the interest tion decisions
payment on the national debt.
(E) Interest payments on the national debt exceed 5. The value of a country’s currency will tend to
spending on goods and services. appreciate if
(A) demand for the country’s exports increases
2. A high marginal propensity to consume implies
(B) the country’s money supply increases
which of the following?
(C) the country’s citizens increase their travel
(A) A small change in consumption when income abroad
changes (D) domestic interest rates decrease
(B) A high savings rate (E) tariffs on the country’s imports decrease
(C) A high marginal tax rate
(D) An equilibrium level of income near full 6. Which of the following best illustrates an
employment improvement in a country’s standard of living?
(E) A low marginal propensity to save
(A) An increase in real per capita gross domestic
product
3. The transaction demand for money is very closely
(B) An increase in nominal per capita gross
associated with money’s use as a
domestic product
(A) store of value (C) Price stability
(B) standard unit of account (D) A balanced budget
(C) measure of value (E) An increase in the consumer price index
(D) medium of exchange
(E) standard of deferred payment

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7. Hyperinflation is typically caused by 11. Which of the following combinations of changes
in government spending and taxes is necessarily
(A) high tax rates that discourage work effort
expansionary?
(B) continuous expansion of the money supply
to finance government budget deficits Government
(C) trade surpluses that are caused by strong Spending Taxes
protectionist policies
(A) Increase Increase
(D) bad harvests that lead to widespread
(B) Increase Decrease
shortages
(C) Decrease Not change
(E) a large decline in corporate profits that
(D) Decrease Increase
leads to a decrease in production
(E) Decrease Decrease
8. All of the following changes will shift the
12. The amount of money that the public wants to
investment demand curve to the right EXCEPT
hold in the form of cash will
(A) a decrease in the corporate income tax rate
(A) be unaffected by any change in interest
(B) an increase in the productivity of new capital
rates or the price level
goods
(B) increase if interest rates increase
(C) an increase in the real interest rate
(C) decrease if interest rates increase
(D) an increase in corporate profits
(D) increase if the price level decreases
(E) an increase in real gross domestic product
(E) decrease if the price level remains constant
9. The official unemployment rate understates the
13. For an economy consisting of households and
unemployment level in the economy because
businesses only, which of the following is
the official unemployment rate
consistent with the circular flow of income and
(A) ignores the duration of unemployment production?
(B) ignores underemployed and discouraged
(A) Households are producers of goods and
workers
services and consumers of resources.
(C) includes jobs created by the underground
(B) Households are users of resources, and
economy
businesses are sources of saving.
(D) excludes all unemployed teenagers
(C) Households are suppliers of resources and
(E) excludes frictionally unemployed workers
consumers of goods and services.
(D) Businesses are users of taxes, and households
10. If a reduction in aggregate supply is followed by
are sources of taxes.
an increase in aggregate demand, which of the
(E) Businesses are suppliers of resources and
following will definitely occur?
consumers of goods and services.
(A) Output will increase.
(B) Output will decrease. 14. With an increase in the real interest rate,
(C) Output will not change. consumption and real gross domestic product
(D) The price level will increase. will most likely change in which of the following
(E) The price level will decrease. ways?
Real Gross
Consumption Domestic Product
(A) Increase Increase
(B) Increase Decrease
(C) Decrease Increase
(D) Decrease Decrease
(E) No change Increase

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15. According to the short-run Phillips curve, lower 17. An increase in which of the following would
inflation rates are associated with cause the aggregate demand curve to shift to
the left?
(A) higher unemployment rates
(B) higher government spending (A) Consumer optimism
(C) larger budget deficits (B) Population
(D) greater labor-force participation rates (C) Cost of resources
(E) smaller labor-force participation rates (D) Income taxes
(E) Net exports
16. Which of the following will lead to a decrease
in a nation’s money supply? 18. Which of the following changes in the supply of
and the demand for a good will definitely result in
(A) A decrease in income tax rates
a decrease in both the equilibrium price and
(B) A decrease in the discount rate
quantity of the good?
(C) An open market purchase of government
securities by the central bank Supply Demand
(D) An increase in reserve requirements
(A) Increase Increase
(E) An increase in government expenditures
(B) Increase No change
on goods and services
(C) No change Decrease
(D) Decrease Increase
(E) Decrease Decrease

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 BANK A
Assets Liabilities
Actual reserves $1,000 Demand deposits $5,000
Loans $4,000

BANK B
Assets Liabilities
Actual reserves $ 100 Demand deposits $ 600
Loans $ 500

BANK C
Assets Liabilities
Actual reserves $ 10 Demand deposits $ 100
Loans $ 90

19. Based on the balance sheets above for three different banks,
which of the following is true, if the reserve requirement is 10
percent?
(A) Bank A has no excess reserves.
(B) Bank B has no excess reserves.
(C) Bank B can increase its loans by $500.
(D) Bank B can increase its loans by $40.
(E) Bank C has excess reserves.

20. Which of the following will most likely lead to a 21. With an upward-sloping short-run aggregate
decrease in inflationary expectations? supply curve, an increase in government
expenditure will most likely
(A) A decrease in the marginal propensity to save
(B) A decrease in imports (A) reduce the price level
(C) A decrease in the money supply (B) reduce the level of nominal gross domestic
(D) An increase in the government budget deficit product
(E) An increase in the prices of raw materials (C) increase real gross domestic product
(D) shift the short-run aggregate supply curve to
the right
(E) shift both the aggregate demand curve and
the long-run aggregate supply curve to the
left

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22. Which of the following are the most likely short-run effects of an increase in government expenditures?
Unemployment Rate Inflation Rate Real Gross Domestic Product
(A) Increase Increase Increase
(B) Increase Increase Decrease
(C) Decrease Increase Increase
(D) Decrease Decrease Increase
(E) No change Decrease Increase

23. In the short run, an expansionary monetary policy 25. Which of the following is likely to occur
would most likely result in which of the following following the depreciation of the United States
changes in the price level and real gross domestic dollar?
product (GDP) ?
(A) United States imports will increase.
Price Level Real GDP (B) United States exports will increase.
(C) Demand for the United States dollar
(A) Decrease Increase
will decrease.
(B) No change Decrease
(D) United States demand for foreign
(C) Increase No change
currencies will increase.
(D) Increase Decrease
(E) United States goods will become more
(E) Increase Increase
expensive in foreign markets.
24. A reduction in inflation can best be achieved by
26. The table below shows the production alternatives
which of the following combinations of fiscal and
of Country A and Country B for producing com-
monetary policy?
puters and cars with equal amounts of resources
Fiscal Policy Monetary Policy that are fully and efficiently employed.
(A) Increase taxes Sell government Country Computers Cars
bonds
A 24 0
(B) Decrease taxes Buy government 0 12
bonds
B 45 0
(C) Decrease taxes Lower margin
0 15
requirements
Which of the following is true according to the
(D) Decrease government Lower discount rate
data in the table?
spending
(A) Country A has an absolute and comparative
(E) Increase government Raise discount rate
advantage in the production of computers.
spending
(B) Country B has an absolute and comparative
advantage in the production of computers.
(C) Country B should import computers and
export cars.
(D) Since Country B has an absolute advantage
in the production of both goods, it will not
trade with Country A.
(E) Neither country can benefit from trade.

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27. Which of the following individuals is considered 30. Assume that an economy is currently in long-run
officially unemployed? equilibrium and the short-run aggregate supply
curve is upward sloping. An adverse supply
(A) Chris, who has not worked for more than
shock, such as a drought, will most likely cause
three years and has given up looking for
which of the following to the economy in the
work
short run?
(B) Kim, who is going to school full-time and
is waiting until graduation before looking (A) A decrease in the price level and a decrease
for a job in the nominal wage
(C) Pat, who recently left a job to look for (B) A decrease in the price level and an increase
a different job in another town in the nominal wage
(D) Leslie, who retired after turning 65 only (C) An increase in the price level and an increase
five months ago in the nominal wage
(E) Lee, who is working 20 hours per week and (D) An increase in the price level and an increase
is seeking full-time employment in the real wage
(E) An increase in the price level and a decrease
28. An increase in net investment leads to faster in the real wage
economic growth because capital per worker
and output per worker will change in which 31. If Country Alpha has been experiencing a higher
of the following ways? inflation rate than Country Beta over the past
decade, which of the following is true?
Capital Output
per Worker per Worker (A) Alpha’s currency will have appreciated
relative to Beta’s currency.
(A) Increase Increase
(B) Alpha’s currency will have depreciated
(B) Increase Decrease
relative to Beta’s currency.
(C) No change Increase
(C) Alpha will have had lower nominal interest
(D) Decrease Increase
rates than Beta.
(E) Decrease Decrease
(D) Alpha will have had slower growth in the
money supply than Beta.
29. If a country’s economy is operating below the
(E) Alpha’s economy will have grown at a faster
full-employment level of output at a very low
rate than Beta’s.
inflation rate, the central bank of the country is
most likely to
(A) pursue an expansionary monetary policy
because it is required to do so by law
whenever output is below the full-
employment level
(B) pursue an expansionary fiscal policy because
it is required to do so by law whenever
output is below the full-employment level
(C) lower the discount rate and buy bonds on the
open market to generate an increase in
output
(D) lower the required reserve ratio and sell
bonds on the open market to generate an
increase in output
(E) raise the discount rate and lower the required
reserve ratio to generate an increase in
output

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 National Economic
Figures
(billions of dollars)
Consumption $ 3,000
Government purchases of goods and 1,000
services
Gross private domestic investment 700
Depreciation 300
Exports 300
Imports 500
Indirect business taxes 0

32. Based on the economic figures in the table above, what is the
value of gross domestic product, in billions of dollars?
(A) $4,500
(B) $4,700
(C) $4,900
(D) $5,150
(E) $5,950

33. Which of the following best explains the increase 34. Which of the following statements is true of
in national income that results from equal increases unanticipated inflation?
in government spending and taxes?
(A) It decreases the economic well-being of all
(A) Consumers do not reduce their spending by members of society proportionately.
the full amount of the tax increase. (B) It decreases the economic well-being of all
(B) The government purchases some goods that members of society equally.
consumers would have purchased on their (C) It increases the economic well-being of net
own anyway. creditors.
(C) Consumers believe all tax cuts are transitory. (D) It increases the economic well-being of net
(D) The increase in government spending causes debtors.
a decrease in investment. (E) It increases the economic well-being of
(E) Consumers are aware of tax increases but not workers with long-term labor contracts.
of increases in government spending.
35. A simultaneous increase in inflation and unem-
ployment could be explained by an increase in
which of the following?
(A) Consumer spending
(B) The money supply
(C) Labor productivity
(D) Investment spending
(E) Inflationary expectations

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36. A country can have an increased surplus in its 41. The consumer price index (CPI) is designed to
balance of trade as a result of measure changes in the
(A) an increase in domestic inflation (A) spending patterns of urban consumers only
(B) declining imports and rising exports (B) spending patterns of all consumers
(C) higher tariffs imposed by its trading partners (C) wholesale price of manufactured goods
(D) an increase in capital inflow (D) prices of all goods and services produced in
(E) an appreciating currency an economy
(E) cost of a select market basket of goods and
37. Policies intended to reduce demand-pull inflation services
are most likely to increase which of the following
in the short run? 42. A barter economy is different from a money
economy in that a barter economy
(A) Gross domestic product
(B) The labor force participation rate (A) encourages specialization and division of
(C) The price level labor
(D) Unemployment (B) involves higher costs for each transaction
(E) Wage levels (C) eliminates the need for a double coincidence
of wants
38. An increase in the government budget deficit is (D) has only a few assets that serve as a medium
most likely to result in an increase in which of the of exchange
following? (E) promotes market exchanges
(A) The marginal propensity to consume
43. In the short run, which of the following would
(B) Exports
occur to bond prices and interest rates if a central
(C) The real interest rate
bank bought bonds through open-market
(D) The money supply
operations?
(E) The simple multiplier
Bond Prices Interest Rates
39. An increase in which of the following would be
(A) No change Increase
most likely to increase long-run growth?
(B) Increase Increase
(A) Pension payments (C) Increase Decrease
(B) Unemployment compensations (D) Decrease Increase
(C) Subsidies to businesses for purchases of (E) Decrease Decrease
capital goods
(D) Tariffs on imported capital goods 44. Suppose that in an economy with lump-sum taxes
(E) Tariffs on imported oil and no international trade, autonomous invest-
ment spending increases by $2 million. If the
40. A commercial bank’s ability to create money marginal propensity to consume is 0.75, equi-
depends on which of the following? librium gross domestic product will change by a
maximum of
(A) The existence of a central bank
(B) A fractional reserve banking system (A) $0.5 million
(C) Gold or silver reserves backing up the (B) $1.5 million
currency (C) $2.0 million
(D) A large national debt (D) $8.0 million
(E) The existence of both checking accounts (E) $15.0 million
and savings accounts

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 46. Assume that the required reserve ratio is
10 percent, banks keep no excess reserves,
and borrowers deposit all loans made by banks.
Suppose you have saved $100 in cash at home
and decide to deposit it in your checking account.
As a result of your deposit, the money supply can
increase by a maximum of
(A) $800
(B) $900
(C) $1,000
(D) $1,100
(E) $1,200

47. Which of the following would be the initial

45. The diagram above shows the production possi- impact on an economy if wages were to increase
bilities curve for an economy that produces more than worker productivity?
only consumption and capital goods. All of (A) There would be no initial impact, since
the following statements about this economy neither the aggregate supply curve nor the
are true EXCEPT: aggregate demand curve would shift.
(A) Producing at point Z results in the (B) Employment would increase, causing a
underutilization of resources. rightward shift in the aggregate demand
(B) The combination represented by point Y is curve.
unattainable, given the scarcity of resources. (C) The price level would increase, resulting in
(C) Resources are fully utilized at points W excess aggregate supply.
and X. (D) The short-run aggregate supply curve would
(D) Producing at point X will result in greater shift to the left, increasing the price level.
economic growth than will producing at (E) The aggregate demand curve would shift to
point W. the left, increasing the price level.
(E) Point X represents the most efficient
combination of the two goods that can 48. Under a flexible exchange-rate system, the Indian
be produced by this economy. rupee will appreciate against the Japanese yen
when
(A) India’s inflation rate exceeds Japan’s
(B) India has a trade deficit with Japan
(C) Japan’s economy enters a recession,
but India’s does not
(D) Japan’s money supply decreases while
India’s money supply increases
(E) real interest rates in India increase relative
to those in Japan

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49. Which of the following occurs as investment 52. One explanation for the downward slope of the
becomes more responsive to changes in the aggregate demand curve is that when the price
interest rate? level increases, which of the following will
decrease?
(A) Monetary policy becomes more effective at
changing real gross domestic product. (A) Real value of assets
(B) Fiscal policy becomes more effective at (B) Prices of foreign goods
changing real gross domestic product. (C) Prices of substitute goods
(C) Monetary policy becomes more effective at (D) Expectations of future prices
changing interest rates. (E) Government deficit
(D) Fiscal policy becomes more effective at
changing interest rates. 53. Which of the following is true about changes in
(E) There is no change in the effectiveness of tax rates, changes in the level of government
either monetary or fiscal policy. expenditures, and changes in the money supply?
(A) They are automatic stabilizers.
50. If two nations specialize according to the law of
(B) They are tools of discretionary fiscal policy.
comparative advantage and then trade with each
(C) They have different lag times between
other, which of the following would be true?
implementation of a policy and its effects
(A) A smaller number of goods would be avail- on aggregate demand.
able in each trading nation. (D) They are favored equally by both classical
(B) Total world production of goods would and Keynesian economists to fine-tune the
decrease. economy.
(C) Everyone within each nation would be (E) All are controlled by the Federal Reserve
better off. system.
(D) Each nation would increase its consumption
possibilities. 54. An increase in which of the following would
(E) One nation would gain at the expense of the LEAST likely increase labor productivity?
other nation.
(A) Physical capital
(B) Human capital
51. The shifting of a country’s production possibil-
(C) Technological improvements
ities curve to the right will most likely cause
(D) Educational achievement
(A) net exports to decline (E) The labor force
(B) inflation to increase
(C) the aggregate demand curve to shift to the left 55. Tariffs are different from assigned import quotas
(D) the long-run aggregate supply curve to shift in that tariffs will
to the left
(A) restrict imports
(E) the long-run aggregate supply curve to shift to
(B) increase the price of imported goods
the right
(C) benefit domestic consumers of imported
goods
(D) hurt domestic producers of goods facing
import competition
(E) generate additional revenue for the domestic
government

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56. In the narrowest definition of money, M1, savings 59. Advocates of a monetary rule recommend
accounts are excluded because they are increasing the money supply at a rate that is equal
to the rate of increase in which of the following?
(A) not a medium of exchange
(B) not insured by federal deposit insurance (A) Price level
(C) available from financial institutions other (B) Unemployment rate
than banks (C) Level of exports
(D) a store of purchasing power (D) Level of imports
(E) interest-paying accounts (E) Long-run real gross domestic product

57. For which of the following sets of unemployment 60. If economic agents perfectly anticipate policy
and inflation rates will a central bank be most changes and if all prices, including wages, are
reluctant to increase the rate of growth in the completely flexible, which of the following will
money supply? be true in the long run?
Unemployment Rate Inflation Rate (A) The price level will be constant.
(B) There will be no trade-off between inflation
(A) 10% 2%
and unemployment.
(B) 10% 5%
(C) The unemployment rate will be less than the
(C) 10% 10%
natural rate of unemployment.
(D) 5% 5%
(D) The unemployment rate will be greater than
(E) 5% 10%
the natural rate of unemployment.
(E) Changes in the money supply will not lead to
58. Assume that Jane’s marginal propensity to
changes in the price level.
consume equals 0.8, and that in 2004 Jane spent
$36,000 from her disposable income of $40,000.
If her disposable income in 2005 increased to
$50,000, her consumption spending increased by
(A) $4,000
(B) $8,000
(C) $9,000
(D) $10,000
(E) $14,000

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