AP Macroeconomics Practice Exam 2

Below is a practice exam for AP Macroeconomics exam.  There are two sections in this practice exam.  Section I has 60 multiple choice questions.  Section II has 3 free response questions.  For a thorough review of the concepts in this practice exam, refer to the information center on AP Microeconomics/Macroeconomics Notes.

Multiple-Choice Questions

Time—1 hour and 10 minutes
60 questions
For the multiple-choice questions that follow, select the best answer.
Questions 1–2 refer to the figure below.

1. Suppose that the production possibility frontier (PPF) of this nation moves from PPF₁ to PPF₂. Which of the following could be the cause of this movement?
   1. Technological improvements in the production of tractors.
   2. A long-lasting and destructive drought.
   3. A more efficient use of steel, an important raw material in the production of tractors.
   4. An economy-wide improvement in the productivity of the labor force.
   5. More effective pesticides used to protect crops from insect damage.
2. Now that the economy is operating on PPF₂, what has happened to the opportunity cost of producing these goods?
   1. The opportunity cost of producing tractors has decreased, while the opportunity cost of producing corn has increased.
   2. The opportunity cost of producing tractors has increased, while the opportunity cost of producing corn has decreased.
   3. The opportunity costs of producing tractors and corn have both decreased.
   4. There has been no change in the opportunity cost of producing tractors and corn.
   5. The opportunity costs of producing tractors and corn have both increased.
3. The price of gasoline has recently increased, while at the same time gasoline consumption has also increased. What is happening in the gasoline market?
   1. This is evidence that contradicts the Law of Demand.
   2. The price of crude oil has fallen, shifting the supply of gasoline to the right.
   3. A price ceiling has been imposed in the market for gasoline.
   4. The price of automobiles has increased, shifting the demand for gasoline to the left.
   5. Consumers prefer larger automobiles, shifting the demand for gasoline to the right.
4. If Nation A can produce a good at lower opportunity cost than Nation B can produce the same good, it is said that
   1. Nation A has comparative advantage in the production of that good.
   2. Nation B has comparative advantage in the production of that good.
   3. Nation A has absolute advantage in the production of that good.
   4. Nation B has absolute advantage in the production of that good.
   5. Nation A has economic growth in the production of that good.
5. Which of the following is a consequence of removal of a protective tariff on imported steel?
   1. Imports fall.
   2. Income is transferred from steel consumers to domestic steel producers.
   3. Income is transferred from foreign steel producers to domestic steel producers.
   4. Allocative efficiency is improved.
   5. Aggregate supply is decreased.
6. In recent years, firms that produce cameras have begun to produce fewer 35-mm cameras and more digital cameras. This trend is an example of
   1. how central planners dictate which goods are produced.
   2. the market system answering the question of "how" cameras should be produced.
   3. the market system answering the question of "what" cameras should be produced.
   4. the market system answering the question of "who" should consume the cameras that are produced.
   5. how firms fail to respond to improvements in echnology and changes in consumer tastes.
7. Which of the following transactions would be included in the computation of Gross Domestic Product?
   1. Josh buys a new pair of running shoes.
   2. Nancy offers to babysit her granddaughter.
   3. Katie buys her dad's used car.
   4. Eli cannot go to a concert so he resells his ticket to a friend.
   5. Molly rakes the leaves in her own yard.
8. Brent loses his job at the public swimming pool when the pool closes for the winter. This is an example of
   1. cyclical unemployment.
   2. discouraged worker.
   3. seasonal unemployment.
   4. frictional unemployment.
   5. structural unemployment.
9. Which of the following is not a scarce economic resource?
   1. Labor
   2. Capital
   3. Human wants
   4. Land
   5. Natural resources
10. How does an increasing national debt impact the market for U.S. dollars and the value of the dollar with respect to other currencies?

11. Suppose the price level in the United States has risen in the past year, but production of goods and services has remained constant. Based on this information, which of the following is true?

12. Which of the following is not included in national income?
    1. Wages
    2. Salaries
    3. Interest
    4. Depreciation
    5. Profits
13. Which choice produces a faster rate of economic growth for the United States?
    1. Institution of higher tariffs on imported goods.
    2. More investment in capital infrastructure and less consumption of nondurable goods and services.
    3. Elimination of mandatory school attendance laws.
    4. Annual limits on the number of foreigners immigrating into the United States.
    5. More investment in the military and less investment in higher education.

14. The table above summarizes the local labor market. Based on this information, which of the following is an accurate statement?
    1. The number of discouraged workers has fallen from 2003 to 2004.
    2. Although the population has grown, the labor force has remained constant from 2003 to 2004.
    3. The unemployment rate fell from 33 percent in 2003 to 25 percent in 2004.
    4. The economic recession in 2003 worsened in 2004.
    5. The unemployment rate fell from 25 percent in 2003 to 20 percent in 2004.
15. Which of the following is true of money and financial markets?
    1. As the demand for bonds increases, the interest rate increases.
    2. For a given money supply, if nominal GDP increases, the velocity of money decreases.
    3. When demand for stocks and bonds increases, the asset demand for money falls.
    4. A macroeconomic recession increases the demand for loanable funds.
    5. Equilibrium in the money market occurs where transaction demand for money equals the supply of money.
16. Which of the following would increase the aggregate demand function?
    1. Higher levels of imported goods.
    2. Lower levels of consumer wealth.
    3. A higher real interest rate.
    4. Lower taxes on personal income.
    5. Lower levels of exported goods.

17. The figure above shows aggregate demand (AD) and supply (AS) for the economy. Assuming that aggregate demand remains constant, which of the following best predicts the short-run price level, the long-run price level, and the long-run level of output?

18. Which of the following is not included in the U.S. GDP?
    1. The U.S. military opens a new base in a foreign country with 1000 U.S. personnel.
    2. Japanese consumers buy thousands of CDs produced in the United States.
    3. An American pop singer performs a soldout concert in Paris.
    4. A French theatrical production tours dozens of American cities.
    5. American construction companies build thousands of new homes all across the United States and Canada.
19. A policy supported by supply-side economists would be
    1. higher taxes on corporate profits.
    2. lower tax rates on interest earned from savings.
    3. removal of investment tax credits.
    4. a longer duration of unemployment benefits.
    5. higher marginal income tax rates to fund social welfare programs.
20. According to the quantity theory of money, increasing the money supply serves to
    1. stimulate short-run production and employment with very little long-run inflation.
    2. increase short-run output, but is the source of long-run inflation.
    3. lower the unemployment rate while also lowering the rate of inflation.
    4. increase the nation's long-run capacity to produce.
    5. decrease short-run real GDP, but increase real GDP in the long run.
21. Of the following choices, the most direct exchange in the circular flow model of a private closed economy is when
    1. households provide goods to firms in exchange for wage payments.
    2. households provide resources to firms in exchange for goods.
    3. households provide revenues to firms in exchange for wage payments.
    4. firms supply goods to households in exchange for revenues.
    5. firms supply resources to households in exchange for costs of production.
22. Suppose that the federal government reclassified the purchase of a new home as consumption spending rather than investment spending. This decision would
    1. increase aggregate demand and decrease real GDP.
    2. decrease aggregate demand and decrease real GDP.
    3. decrease aggregate demand and increase real GDP.
    4. increase aggregate demand and increase real GDP.
    5. have no impact on aggregate demand and real GDP.
23. Suppose that current disposable income is $10,000 and consumption spending is $8000. For every $100 increase in disposable income, saving increases $10. Given this information,
    1. the marginal propensity to consume is .80.
    2. the marginal propensity to save is .20.
    3. the marginal propensity to save is .10.
    4. the marginal propensity to save is .90.
    5. the marginal propensity to consume is .10.
24. When we observe an unplanned decrease in inventories, we can expect
    1. prices to begin to fall.
    2. output to begin to rise.
    3. saving to begin to fall.
    4. output to begin to fall.
    5. planned investment to begin to rise.
25. Stagflation is the result of
    1. a leftward shift in the aggregate supply curve.
    2. a leftward shift in the aggregate demand curve.
    3. a leftward shift in both the aggregate supply and aggregate demand curves.
    4. a rightward shift in the aggregate supply curve.
    5. a rightward shift in the aggregate demand curve.
26. If the short-run aggregate supply curve is horizontal, it is because
    1. there exist many unemployed resources so that output can be increased without increasing wages and prices.
    2. any increase in output requires a corresponding increase in wages and prices.
    3. increases in output cause prices to increase, but wages adjust much less quickly.
    4. falling interest rates increase the demand for goods and services, putting upward pressure on prices.
    5. resources are fully employed so that output can be increased but only if the price level also increases.
27. In a private closed economy, which of the following statements are true?
    1. When unplanned changes in inventories are considered, saving and investment are always equal, no matter the level of GDP.
    2. Real GDP equals real spending in equilibrium.
    3. Households saving can never be negative.
    4. Saving is equal to zero when consumption equals disposable income.
    1. I and II only
    2. II and III only
    3. III and IV only
    4. I, II, and IV only
    5. II, III, and IV only
28. Which of the following is true of a typical contraction of the business cycle?
    1. Consumption is falling, but household wealth is rising.
    2. Consumption is increasing.
    3. Private investment is rising.
    4. Employment and inflation are low.
    5. Private saving rates are rising.
29. Which of the following is most likely to produce stronger economic growth over time?
    1. More rapid consumption of natural resources.
    2. Higher adult illiteracy rates.
    3. A falling stock of capital goods.
    4. Investment tax credits.
    5. Higher taxes on foreign capital investment.
30. If $100 of new autonomous private investment were added to an economy with a marginal propensity to consume of .90, by how much would aggregate demand shift to the right?
    1. $190
    2. $900
    3. $1000
    4. $1900
    5. $90
31. Which of the following is true about the relationship between the M₁, M₂, and M₃ measures of money?
    1. M₁ + M₂ = M₃
    2. M₁ includes checking deposits, while M₂ includes checking and saving deposits.
    3. M₂ includes coin and paper money, but M₁ does not.
    4. M₂ is more liquid than M₁.
    5. M₁ is greater than M₂.
32. Which of the following increases the size of the tax multiplier?
    1. An increase in the marginal propensity to consume.
    2. An increase in the reserve ratio.
    3. An increase in the marginal propensity to save.
    4. A decrease in the spending multiplier.
    5. A decrease in the velocity of money.
33. Which of the following might worsen a nation's trade deficit?
    1. Lower wages relative to other nations.
    2. Lower taxes on corporate profits relative to other nations.
    3. A higher interest rate on financial assets relative to other nations.
    4. A higher rate of inflation relative to other nations.
    5. Other nations remove tariffs and quotas on foreign imports.
34. If the economy is suffering from extremely high rates of inflation, which of the following fiscal policies would be an appropriate strategy for the economy?
    1. Increase government spending and decrease taxes.
    2. Decrease government spending and increase taxes.
    3. Increase government spending with no change in taxes.
    4. The Federal Reserve increases the discount rate.
    5. Decrease taxes with no change in government spending.
35. Which of the following is an example of an expansionary supply shock?
    1. Rapid increasing wages
    2. A greatly depreciated currency
    3. Declining labor productivity
    4. Lower than expected agricultural harvests
    5. Lower input prices in major industries
36. Which of the following fiscal policy combinations would be most likely to slowly increase real GDP without putting tremendous pressure on the price level?
    1. Increase government spending with a matching decrease in taxes.
    2. Decrease government spending with a matching increase in taxes.
    3. Increase government spending with no change in taxes.
    4. The Federal Reserve lowers the reserve ratio.
    5. Increase taxes with a matching increase in government spending.
37. Which of the following is an example of contractionary monetary policy?
    1. The Fed lowers the reserve ratio.
    2. The Fed lowers the discount rate.
    3. The Fed increases taxes on household income.
    4. The Fed decreases spending on welfare programs.
    5. The Fed sells Treasury securities to commercial banks.
38. The economy is in a deep recession. Given this economic situation, which of the following statements about monetary policy are accurate?
    1. Expansionary policy would only worsen the recession.
    2. Contractionary policy is the appropriate stimulus for investment and consumption.
    3. Expansionary policy greatly increases aggregate demand if investment is sensitive to changes in the interest rate.
    4. If the demand for money is perfectly elastic, expansionary monetary policy might be quite effective.
    1. I and II only
    2. III only
    3. III and IV only
    4. IV only
    5. II, III, and IV only
39. Daddy Morebucks withdraws $1 million from his savings account and puts the cash in his refrigerator. This affects M₁, M₂, and M₃ in which of the following ways?

40. What is the main difference between the shortrun and long-run Phillips curve?
    1. The short-run Phillips curve is downward sloping and the long-run Phillips curve is upward sloping.
    2. The short-run Phillips curve is upward sloping and the long-run Phillips curve is vertical.
    3. The short-run Phillips curve is horizontal and the long-run Phillips curve is upward sloping.
    4. The short-run Phillips curve is downward sloping and the long-run Phillips curve is vertical.
    5. The short-run Phillips curve is vertical and the long-run Phillips curve is upward sloping.
41. Which of the following insures the value of the U.S. dollar?
    1. The euro and other foreign currencies held by the Federal Reserve.
    2. Gold bars in Fort Knox.
    3. The promise of the U.S. government to maintain its value.
    4. The value of the paper on which it is printed.
    5. An equal amount of physical capital, land, and natural resources.
42. The reserve ratio is .10 and Daddy Morebucks withdraws $1 million from his checking account and keeps it as cash in his refrigerator. How does this withdrawal potentially impact money in circulation?
    1. Decreases by $9 million.
    2. Decreases by $1 million.
    3. Decreases by $100,000.
    4. Increases by $1 million.
    5. Decreases by $10 million.
43. If the economy were experiencing a recessionary gap, choose the option below that would be an appropriate fiscal policy to eliminate the gap, and the predicted impact of the policy on real GDP and unemployment.

44. Monetary tools of the Federal Reserve do not include which of the following choices?
    1. Buying Treasury securities from commercial banks.
    2. Changing tariffs and quotas on imported goods.
    3. Changing the reserve ratio.
    4. Changing the discount rate.
    5. Selling Treasury securities to commercial banks.
45. Of the following choices, which combination of fiscal and monetary policy would most likely reduce a recessionary gap?

46. For a given level of government spending, the federal government usually experiences a budget _____during economic _____ and a budget _____ during economic _____.
    1. deficit, recession, surplus, expansion
    2. surplus, recession, deficit, expansion
    3. deficit, expansion, surplus, recession
    4. surplus, recession, surplus, expansion
    5. deficit, recession, deficit, expansion
47. Suppose that Congress and the Fed agreed to combine fiscal and monetary policies to lessen the threat of inflation. Which of the following combinations would likely accomplish this goal?

48. Congress has embarked on another round of expansionary fiscal policy to boost employment and get reelected. As chair of the Fed, how would you reduce the "crowding out" effect and what macroeconomic problem might your policy exacerbate?
    1. Increase the reserve ratio, risking the devaluation of the dollar.
    2. Sell Treasury securities, risking inflation.
    3. Buy Treasury securities, risking a recessionary gap.
    4. Lower the discount rate, risking inflation.
    5. Lower the discount rate, risking cyclical unemployment.
49. Which of the following is likely to shift the long-run aggregate supply curve to the right?
    1. A nation that devotes more resources to nondurable consumption goods, rather than durable capital goods.
    2. Research that improves the productivity of labor and capital.
    3. More restrictive trade policies.
    4. Annual limits to immigration of foreign citizens.
    5. A permanent increase in the price of energy.
50. Holding all else equal, which of the following Fed monetary policies would be used to boost U.S. exports?
    1. Increasing the discount rate.
    2. Increasing the reserve ratio.
    3. Buying Treasury securities.
    4. Lowering tariffs.
    5. Removing import quotas.
51. Which of the following could limit the ability of the Fed to conduct expansionary monetary policy?
    1. Money demand is nearly perfectly elastic.
    2. Investment demand is nearly perfectly elastic.
    3. Banks make loans with all excess reserves.
    4. Households carry very little cash, holding their money in checking and saving deposits.
    5. Money supply is nearly perfectly inelastic.
52. Which of the following is a predictable advantage of expansionary monetary policy in a recession?
    1. It decreases aggregate demand so that the rice level falls, which increases demand for the dollar.
    2. It increases investment, which increases aggregate demand and increases employment.
    3. It increases aggregate demand, which increases real GDP and increases the unemployment rate.
    4. It keeps interest rates high, which attracts foreign investment.
    5. It decreases the interest rate, which attracts foreign investment in U.S. financial assets.
53. Suppose the economy is in long-run equilibrium hen temporary expansionary supply hock is felt in the economy. This changes the hort-run Phillips curve, the short-run unemployment ate, and the long-run unemployment ate in which of the following ways?

54. As the Japanese economy expands, in what ways do U.S. net exports, the values of the dollar, and yen change?

55. Suppose the President plans to cut taxes for consumers and also plans to increase spending on the military. How does this affect real GDP and the price level?
    1. GDP increases and the price level decreases.
    2. GDP decreases and the price level increases.
    3. GDP stays the same and the price level increases.
    4. GDP decreases and the price level decreases.
    5. GDP increases and the price level increases.
56. U.S. dollars and the European Union's (EU) euro are exchanged in global currency markets. Which of the following are true?
    1. If inflation is high in the EU and the price level in the United States is stable, the value of the dollar appreciates.
    2. If the Fed increases the money supply, the value of the dollar depreciates.
    3. If EU consumers are less inclined to purchase American goods, the dollar appreciates.
    4. If U.S. income levels are rising relative to incomes in the EU, the euro depreciates.
    1. I and II only
    2. III only
    3. II and IV only
    4. I, II, and IV only
    5. I and IV only
57. If in a given year the government collects more money in net taxes than it spends, there would exist
    1. a current account deficit.
    2. a budget surplus.
    3. a trade surplus.
    4. a budget deficit.
    5. a trade deficit.
58. Which component of a nation's balance of payments recognizes the purchase and sale of real and financial assets between nations?
    1. The capital account.
    2. The official reserves account.
    3. The current account.
    4. The trade deficit account.
    5. The trade surplus account.
59. An import quota on foreign automobiles is expected to
    1. increase domestic efficiency, and protect domestic producers at the expense of foreign producers.
    2. decrease the price of automobiles, and protect domestic consumers at the expense of foreign producers.
    3. increase the price of automobiles, and protect domestic producers at the expense of consumers.
    4. increase the price of automobiles, and protect domestic consumers at the expense of domestic producers.
    5. decrease domestic efficiency, and protect domestic producers at the expense of domestic autoworkers.
60. When a large increase in aggregate demand has an even greater increase in real GDP, economists refer to this as
    1. the balanced budget multiplier.
    2. the money multiplier.
    3. the foreign substitution effect.
    4. the wealth effect.
    5. the spending multiplier.