2000 AP Macro Exam [with some 1995 & 1990 questions]

Transcription

1 2000 AP Macro Exam [with some 1995 & 1990 questions] [*represents what percent of 23,000 students chose the correct answer] [Includes 59 questions from 2000 Macro exam, 35 from 1995 exam, and 6 from 1990 exam] Basic Concepts 1. (*78%) Which of the following is true according to the circular flow model? a. Firms are suppliers in both the product and factor markets. b. Firms are demanders in the product markets and suppliers in the factor markets. c. Households are demanders in both the product and factor markets. d. Households are demanders in the product markets & suppliers in the factor markets. e. The government is a demander in the product market only. 2. (*78%) On the basis of the diagram showing an economy s PPC for two goods, which of the following statements must be true? I. The opportunity cost of moving from point P to point R is 10 units of Y. II. The opportunity cost of moving from point R to point P is 8 units of X. III. The opportunity cost of moving from point Q to point R is 0 units. a. I only b. III only c. I and II only d. II and III only e. I, II, & III Global Trade 3. (*74%) An increase in Japan s demand for U.S. goods would cause the dollar to a. depreciate because of inflation b. depreciate because the U.S. would be selling more dollars to Japan c. depreciate because the U.S. money supply would increase as exports rise d. appreciate because Japan would be buying more U.S. dollars e. appreciate because Japan would be selling more U.S. dollars

2 4. (*65%) As nations specialize in production and trade in international markets, they can expect which of the following domestic improvements? I. Allocation of domestic resources II. Standard of living III. Self-sufficiency a. I only b. II only c. III only d. I and II only e. I, II, and III 5. (*51%) Which of the following would be most likely to occur if the U.S. placed high tariffs on imported goods? a. Workers in the U.S. would have more jobs in the long run. b. Income in the U.S. would be redistributed from the rich to the poor. c. The U.S. standard of living would increase. d. The United States economy would become less efficient. 6. (*58%) Mary Jane is a lawyer who can earn $150 per hour in her law practice. She is also an excellent carpenter who can build cabinets three times as fast as the best carpenter, whose hourly wage is $20 per hour. Which of the following is a correct economic statement? a. Mary Jane has a comparative advantage in law so she should specialize in law & hire a carpenter to make her cabinets. b. Mary Jane has an absolute & comparative Even if she advantage worked in 3 hours both law as and a carpenter carpentry, & so earned she $60 should make her own cabinets while bucks, continuing this is to not practice one half law. of what she could earn as a c. Mary Jane is three times faster than lawyer any in carpenter one hour so ($150 she could bucks). give She up her has law an practice absolute to in become a carpenter. both but a comparative advantage just in lawyering. d. When carpenters work for lawyers, they should charge $150 per hour instead of $20 per hour. e. Because Mary Jane is an excellent carpenter, when the best carpenter works for Mary Jane, he can only charge one third as much, or $6.67 per hour.

3 GDP 7. (*79%) Which of the following would represent an addition to a nation s GDP? a. Ms. Smith purchases a share of stock in an automobile company. b. A retailer increases her stock of imported shoes. c. The government increases its domestic purchases of food for use by the military. d. A corporation sells shoes from last year s inventory. e. A mother sells her car to her daughter. 8. (*70%) If real GDP is increasing at 3% per year & nominal GDP is increasing at 7% per year, which of the following is necessarily true? a. Unemployment is increasing d. The economy is in a recession. b. The price level is increasing. e. The government is running a budget deficit. c. Exports exceed imports. 9. (*44%) Which of the following would best explain a decline in potential GDP? a. Negative net investment Negative net investment d. A decrease means we re in the not infant replacing mortality all the worn rate out real capital. We will be less productive and not reach our b. The discovery of vast new oil deposits e. A decrease in wages profits c. A lower price level potential. The other 4 answers [more oil, lower PL-thus more C, less infant deaths-so more workers, and a decrease in wages will increase AS & potential GDP] will all increase potential GDP. 10. (*60%) As a measure of economic welfare, GDP underestimates a country s production of goods and services when there is an increase in [What is not being counted here?] a. the production of military goods d. household production b. the production of anti-pollution devices e. legal services c. crime prevention services

4 11. (75%) If purchases of education and medical care were counted as investment rather than consumption, GDP would a. not change, because there is no change in total(aggregate) expenditures b. increase, because investment is included in GDP but consumption is not c. increase, because consumption is included in GDP but investment is not d. decrease, because investment is weighted more heavily than consumption in calculating GDP e. decrease because consumption is weighted more heavily than investment in calculating GDP. Unemployment, inflation, & business cycles 12. (72%) The official unemployment rate is not an accurate indicator of actual unemployment in the economy because a. structural unemployment is greater than cyclical unemployment at the going wage rate b. full employment is greater than natural unemployment c. the unemployment rate is less than natural unemployment d. the official rate does not include persons who have given up looking for work 13. (64%) An increase in energy costs will most likely cause the price level and real GDP to change in which of the following ways? Price Level Real GDP a. increase increase b. increase decrease c. increase not change d. decrease increase e. decrease decrease An increase in energy costs (resource cost for businesses) will shift the AS curve leftward, which would increase price level and decrease real GDP.

5 14. (58%) A contractionary supply shock would most likely result in a. an increase in AD d. a decrease in the general price level b. an increase in national income e. a decrease in employment c. an increase in GDP SRAS would shift left, incr PL, decr GDP, & decr employment. 15. (82%) If the economy is operating in the intermediate range of the AS curve and if AD increases due to an increase in net exports, then the price level, output, & the unemployment rate are most likely to change in which of the following ways? Price Level Output Unemployment Rate a. increase increase increase b. increase increase decrease c. increase decrease increase d. increase decrease decrease e. decrease decrease increase 16. (78%) The short-run AS curve is likely to shift to the left when there is an increase in a. the cost of productive resources d. the federal budget deficit b. productivity e. imports c. the money supply 17. (54%) Which of the following best explains how an economy could simultaneously experience high inflation and high unemployment? a. The government increases spending without increasing taxes. b. The government increases taxes without increasing spending. c. Inflationary expectations decline. d. Women and teen-agers stay out of the labor force. e. Negative supply shocks cause factor prices to increase

6 21. (38%) Which changes in the AD & AS curves is likely to result in stagflation? a. the AD curve shifts to the left when the economy is in the classical range of the AS curve. b. the AD curve shifts to the right when the economy is in the classical range of the AS curve. c. the AD curve shifts to the right when the economy is in the Keynesian range of the AS curve. d. The AS curve shifts to the left. e. The AS curve shifts to the right. 18. (89%) The intersection of the AS & the AD curve occurs at the economy s equilibrium level of a. real investment and the interest rate d. government expenditures & taxes b. real disposable income and unemployment e. imports and exports c. real domestic output(gdp) and the price level 19. (47%) Which of the following would most likely cause the U.S. economy to fall into recession? a. increase in welfare payments d. a decrease in the required reserve ratio b. increase in exports e. an open market sale of bonds by the Fed c. a decrease in savings by consumers 20. (58%) Which of the following would cause a rightward shift of the AS curve? a. an increase in interest rates b. a tax increase of 50 cents per gallon for gasoline c. an across-the-board reduction of wages in the manufacturing sector d. the passage of legislation mandating a reduction in automobile pollution e. the shutdown of plants and movement of production of goods abroad

7 Classical/Keynesian Economics 22. (80%) Which argument is typically associated with classical economists? a. A market economy is self-correcting and thus will not remain in a recession indefinitely. b. A market economy has stable prices and thus is usually free from inflation. c. A market economy requires a strong government to ensure that the market meets the needs of the people. d. A market economy needs only moderate assistance from the government to avoid an extended recession. e. A market economy eventually results in monopolies in both the input & output markets. 23. (62%) According to the Keynesian saving schedule, when aggregate income increases by a given amount, savings will a. remain the same b. decrease by the amount of the change in income c. increase by the amount of the change in income d. increase by less than the amount of the change in income e. increase by more than the amount of the change in income 24. (49%) An important assumption in Keynesian theory is that a. prices are rigid downward & decreases in AD will lead to an increase in unemployment. b. price rigidity will cause downturns in the economy to self-correct. c. When AD is inadequate, prices will fall. d. When interest rates are high, many businesses borrow money. e. changes in the money supply are the major cause of changes in real output & price level.

8 25. (73%) What would be the effect of a large increase in labor productivity on the real GDP and the price level? Real GDP Price Level AS1 AD AS2 a. Increase Increase b. Increase Decrease c. No effect Increase d. decrease Increase e. Decrease Decrease PL1 PL AP Exam 26. (46%) Which of the following is true of supply shocks? a. They tend to change both relative prices and the general price level in the economy. b. They affect only the general PL. c. They can be anticipated and offset with appropriate fiscal policy. d. They can be anticipated and offset with appropriate monetary policy. e. They make the AS curve vertical. The change in relative prices (like oil) cause increase in general PL. 27. (45%) Suppose that from 2003 to 2004, unemployment fell from 7.2 to 7.0% and inflation fell from 3.8 to 1.1%. An explanation of these changes might be that the a. AD curve shifted to the left c. AS curve shifted to the left b. AD curve shifted to the right d. AS curve shifted to the right e. short-run Phillips curve shifted to the right AS shifts right, like the graph above. 28. (46%) Which of the following is a key feature of Keynesian economics? a. The level of saving depends mostly on interest rates. b. The level of government expenditure depends mostly on interest rates. c. Supply creates its own demand. d. Macroeconomic equilibrium can occur at less than full employment.

9 29. (35%) According to Keynesian theory, the most important determinant of saving and consumption is the a. interest rate b. price level c. level of income d. level of employment e. flexibility of wages and prices 30. (70%) An inflationary gap could be reduced by a. an increase in government spending b. an increase in the supply of money means less DI & less C, which decreases AD c. an increase in the income tax rate d. a decrease in the discount rate e. a decrease in the reserve requirement 31. (75%) Which of the following would most likely lead to a decrease in AD? a. a decrease in taxes b. a decrease in interest rates means less C, which decreases AD c. an increase in household savings d. an increase in household consumption e. an increase in business firms purchases of capital equipment from retained earnings 32. (52%) Which of the following would result in the largest increase in AD? a. $30 billion increase in military spending and a $30 billion open-market purchase of G bonds b. $30 billion increase in military spending and a $30 billion open-market sale of G bonds c. $30 billion tax cut and a $30 billion open-market sale of G bonds d. $30 billion tax increase and a $30 billion open-market purchase of G bonds e. $30 billion increase in social security payments and a $30 billion open-market sale of G bonds Both policies expand real GDP, but one answer in each of the others contracts real GDP.

10 SRAS/LRAS Question on 95 Exam 33. If AD remains constant, the equilibrium price levels in the short run and in the long run will be OB &? OA 34. If the government uses fiscal policy to get out of the recession, price level will end up at? OC

11 35. (81%) The value of the spending multiplier (ME) decreases when a. tax rates are reduced d. government spending increases b. exports decline e. the marginal propensity to save increases c. imports decline If MPS incr from.10 to.20, the ME would decrease from 10 to (75%) Which of the following policies would a Keynesian recommend during a period of high unemployment and low inflation? a. decreasing the MS to reduce AD b. decreasing taxes to stimulate AD c. decreasing government spending to stimulate AS d. balancing the budget to stimulate AS 37. (47%) Which of the following best explains why equilibrium income will increase by more than $100 in response to a $100 increase in G? a. Incomes will rise, resulting in a tax decrease. b. Incomes will rise, resulting in higher consumption. c. The increased spending raises the aggregate price level. d. The increased spending increases the money supply, lowering interest rates. e. The higher budget deficit reduces investment. The multiplier ensures more C with each round. 38. (56%) Unexpected increases in inventories usually precede a. increases in inflation b. increases in imports c. stagflation d. decreases in production e. decreases in unemployment Ig is more than desired, so lay-offs, decreasing production.

12 Full.Employ. 39. (63%) The economy on the right is currently experiencing a. inflation b. recession c. expansion $500 d. stagflation e. rapid growth 40. (77%) Correct monetary policy to $400 reach FE GDP is to increase a. the MS b. the RR c. discount rate d. taxes e. exports 41. (36%) The minimum increase in government spending to reach full employment is a. $2,000 b. $1,000 c. $500 d. $200 e. $ (83%) In a closed-private in which the APC is.75, which of following is true? 42. (58%) In the simple Keynesian AE model [not AD/AS] of an economy, changes in Ig or G will lead to a change in which of the following? a. the price level b. the level of output and employment c. interest rates d. the AS curve a. If income is $100, then saving is $75. d. If income is $200, then C is $75 b. If income is $100, then C is $50 e. If income is $500, then saving is $100 c. If income is $200, then saving is $50 AE 45 A E S C+Ig C 0 $800 $1,000 $2,000 Determine what the M is going from A to E; then M X? = $1,000

13 44. (63%) Suppose that DI is $1,000, consumption is $700, and the MPC is.6. If DI then increases by $100, consumption and savings will equal which of the following? Consumption a. $420 $280 b. $600 $400 c. $660 $320 d. $660 $440 e. $760 $340 Fiscal Policy Savings If $700 of $1,000 DI is consumed, then saving is $300. MPC of.6 means if DI increases by $100, then $60 more will be consumed & $40(.4) more will be saved(40%). The $60 added to the $700 already consumed = $760 consumed and the additional $40 saved = $340 saved. 45. (73%) An inflationary gap can be eliminated by all of the following EXCEPT a. an increase in personal income taxes d. a decrease in G b. an increase in the MS e. a decrease in Xn c. an increase in the interest rate Which answer does not slow the economy? 46. (56%) A major advantage of automatic stabilizers in fiscal policy is that they a. reduce the public debt b. increase the possibility of a balanced budget c. stabilize the unemployment rate d. go into effect without passage of new legislation e. automatically reduce the inflation rate

14 47. (70%) In the short run, a contractionary fiscal policy will cause AD, output, and the price level to change in which of the following ways? AD Output Price level a. decrease decrease decrease b. decrease increase increase c. increase decrease decrease d. increase increase increase 48. (52%) Crowding out due to government borrowing occurs when a. lower interest rates increase private sector investment b. lower interest rates decrease private sector investment c. higher interest rates decrease private sector investment d. a smaller money supply increases private sector investment 49. (41%) If, at FE, the G wants to increase its spending by $100 billion without increasing inflation in the short run, it must do which of the following? a. raise taxes by more than $100 billion c. raise taxes by less than $100 b. raise taxes by $100 billion d. lower taxes by $100 billion 50. (42%) Compared to expansionary monetary policies adopted to counteract a recession, expansionary fiscal policies tend to result in a. less public spending c. a high rate of economic growth b. higher interest rates Starting d. from lower a balanced prices budget, G > T; LFM; Interest rates

15 1995 AP Exam 51. (71%) An increase in which will increase the value of the ME? a. The supply of money d. The marginal propensity to consume b. Equilibrium output e. The required reserve ratio c. Personal income tax rates More MPC means less MPS and larger ME. 52. (61%) An AS curve may be horizontal over some range because within that range a. a higher PL leads to higher interest rates, which reduces the MS & C b. changes in the aggregate PL do not induce substitution c. output cannot be increased unless prices and interest rates increase d. rigid prices prevent employment from fluctuating e. resources are underemployed & an increase in AD will be satisfied without any pressure on the PL 53. (45%) What could cause simultaneous increases in inflation & unemployment a. a decrease in government spending d. An increase in inflationary expectations b. A decrease in the money supply e. An increase in productivity c. A decrease in the velocity of money Incr in inflationary expectations would result in higher wage demands, shifting AS left, pushing up PL, and decr unempl. 54. (85%) Which of the following will result in the greatest increase in AD? a. A $100 increase in taxes b. A $100 decrease in taxes c. A $100 increase in government expenditures d. A $100 increase in government expenditures, coupled with a $100 increase in taxes e. A $100 increase in government expenditures, couples with a $100 decrease in taxes 55. (65%) Which of the following will result from a decrease in government spending? a. An increase in output d. A decrease in AS b. An increase in the price level e. A decrease in AD c. An increase in employment

16 Expenditures 57. (48%) If private investment of $100 is added to the economy, the equilibrium levels S C+Ig Questions refer to the diagram(rt), which depicts an economy s C function. C 56. (56%) If the MPC increases, the equilibrium C2 levels of income and consumption will C1 change in which of the following ways? Equil. Level Equil. Level $700 of Income of Consumption 45 a. No change No change b. No change Increase 0 $1,500 $2,000 Real Income c. Increase No change A larger MPC means a smaller MPS, and a larger M. d. Increase Increase This will increase income and result in more C at e. Decrease Decrease the new level of equilibrium income (GDP). of income and consumption will change in which of the following ways? Equil. Level Equil. Level of Income of Income a. Increase Decrease b. Increase Increase c. Increase No change d. No change Increase e. No change No change

17 58. (61%) The graph indicates equilibrium at E for a closed economy without G. If the addition of G results in equilibrium at F, which of the following is true? a. G is $300 and the multiplier is 5. b. G is $100 and the multiplier is 5. c. G is $100 and consumption increased by $500. d. G and Ig increase by $500. e. Consumption and GDP increase by $500 each. AE $300 $ E C+Ig+G C+Ig 0 $1,000 $1,500 GDP 59. (84%) According to Keynesian theory, decreasing taxes and increasing G will most likely change consumption and unemployment in which of the following ways? Consumption Unemployment a. Decrease No change b. Decrease No change c. Increase Decrease d. Increase Increase e. No change Decrease 60. (79%) In an economy at full employment, a presidential candidate proposes cutting the government debt in half in 4 years by increase T and reducing G. According to Keynesian theory, implementation of these policies is most likely to increase a. unemployment d. aggregate supply b. consumer prices e. the rate of economic growth c. aggregate demand F

18 61. (79%) If the economy is in a severe recession, which of the following is the fiscal policy most effective in stimulating production and employment? a. Government spending increases. b. Government spending decreases. c. Personal income taxes are increased. d. The Fed sells bonds on the open market. e. The Fed buys bonds on the open market. 62. (27%) Faced with a large federal budget deficit, the government decides to decrease expenditures and tax revenues by the same amount. This action will affect output and interest rates in which of the following ways? Output Interest Rates a. Increase Increase b. Increase Decrease c. No change Decrease d. Decrease Increase e. Decrease Decrease An equal decrease in G & T [Let s say by $10 billion] would decrease GDP by $10 billion. The decrease in GDP would decrease PL which would cause a decrease in interest rates. 63. (28%) If crowding out only partially offsets the effects of a tax cut, which of the following changes in interest rates and GDP are most likely to occur. Interest Rates GDP Partially means GDP increases. Starting from a a. Increase Increase balanced budget, the tax cut would put the G in deficit b. Increase Remain unchanged and the G borrowing would increase demand for money c. Increase Decrease in the LFM and push up interest rates. d. Remain unchanged Increase e. Decrease Decrease

19 Money and the Fed 64. (61%) In the Keynesian model, an expansionary monetary policy will lead to a. lower real interest rates and more investment b. lower real interest rates and lower prices c. higher real interest rates and lower prices d. higher real interest rates and higher real income e. higher nominal interest rates and more investment 65. (58%) Which of the following will most likely occur in an economy if more money is demanded than is supplied? a. the amount of investment spending will increase. d. interest rates will decrease b. the demand curve for money will shift to the left e. interest rates will increase. c. the demand curve for money will shift to the right. 66. (64%) When consumers hold money rather than bonds because they expect the interest rate to increase in the future, they are holding money for what purposes? a. transactions c. speculation (asset) b. unforeseen expenditures d. illiquidity When interest rates are too low, people will hold more asset (speculation) money. They don t want to tie up their money into interest rate bearing assets (like CDs & bonds) getting low returns. They will hold the speculative money speculating interest rates will go back up. Money Creation 67. (80%) If on receiving a checking deposit of $300 a bank s ER increased by $255, the RR must be: a. 5% b. 15% c. 25% d. 35% e. 45%

20 68. (62%) The money-creating ability of the banking system will be less than the maximum amount indicated by the money multiplier when a. interest rates are high b. the velocity of money is rising c. people hold a portion of their money in the form of currency d. the unemployment rate is low 69. (71%) RR is 20%. If a bank initially has no ER and $10,000 cash is deposited in the bank, the maximum amount by which this bank may increase its loans is a. $2,000 b. $8,000 c. $10,000 d. $20,000 e. $50, (86%) RR is 15% and that bank receives a new DD of $200. Which of the following will most likely occur in the bank s balance sheet? Liabilities(DD) Required Reserves a. increase by $200 increase by $170 b. increase by $200 increase by $30 c. increase by $200 no change d. decrease by $200 decrease by $30 e. decrease by $200 decrease by $170 The Fed and Monetary Policy 71. (89%) The Federal Reserve can increase the money supply by a. selling gold reserves to the banks b. selling foreign currency holdings c. buying government bonds on the open market d. borrowing reserves from foreign governments

21 72. (73%) An increase in the money supply is most likely to have which of the following short-run effects on real interest rates and real output? Real Interest Rates Real Output a. decrease decrease b. decrease increase c. increase decrease d. increase no change e. no change increase 73. (81%) Under which of the following conditions would a restrictive (contractionary) monetary policy be most appropriate? a. high inflation d. low interest rates b. high unemployment e. a budget deficit c. full employment with stable prices 74. (82%) The Fed can change the U.S. money supply by changing the a. number of banks in operation d. prime rate b. velocity of money e. discount rate c. price level 75. (*30%) If the money stock decreases but nominal GDP remains constant, which of the following has occurred? a. income velocity of money has increased. d. price level has decreased. b. income velocity of money has decreased. e. real output has decreased. c. price level has increased. A decreasing MS, because of high inflation, could be offset by an increase in the velocity of money.

22 76. (54%) Policy-makers concerned about fostering long-run growth in an economy that is currently in a recession would most likely recommend which of the following combinations of monetary and fiscal policy actions? Monetary Policy Fiscal Policy a. sell bonds reduce taxes b. sell bonds raise taxes c. no change raise taxes d. buy bonds reduce spending e. buy bonds no change Buying bonds will increase MS & decrease the interest rate, increasing Ig. Reducing T would cause a deficit, resulting in G borrowing and higher interest rates. Raising T or reducing G would result in job losses, resulting in negative profit expectations, reducing Ig [LR growth]. 77. (76%) Open market operations refer to which of the following activities? a. the buying and selling of stocks in the New York stock Market b. the loans made by the Fed to member commercial banks c. the buying and selling of government securities by the Federal Reserve d. the government s purchases and sales of municipal bonds e. the government s contribution to net exports 78. (58%) An open market sale of bonds by the Fed will most likely change the money supply, the interest rate, and the value of the U.S. dollar in which of the following ways? Money Supply Interest Rate Value of the Dollar a. increase decrease decrease b. increase decrease increase c. decrease decrease decrease d. decrease increase increase e. decrease increase decrease

23 79. (82%) Commercial banks can create money by a. transferring depositors accounts at the Fed for conversion to cash b. buying Treasury bills from the Federal Reserve c. sending vault cash to the Fed d. maintaining a 100% reserve requirement e. lending excess reserves to customers 80. (65%) If the RR is 20%, the existence of $100 worth of ER in the banking system can lead to a maximum expansion of the money supply equal to a. $20 b. $100 c. $300 d. $500 e. $ (71%) If the Fed lowers the RR, which of the following would most likely occur? a. Imports will rise, decreasing the trade deficit. b. The rate of saving will increase. c. Unemployment and inflation will both increase. d. Businesses will purchase more factories and equipment. e. The budget deficit will increase. More MS means lower I.R. & more Ig 82. (61%) If the public s desire to hold money as currency 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 decrease AS. c. Banks would be less able to decrease AS. d. Banks would be more able to expand credit. e. Banks would be less able to expand credit 5 x $100=$500 Holding currency means less ER & higher I.R.

24 83. (86%) Which of the combinations is most likely to cure a severe recession? Open-Market Operations Taxes Gov. Spending a. Buy securities Increase Decrease b. Buy securities Decrease Increase c. Buy securities Decrease Decrease d. Sell securities Decrease Decrease e. Sell securities Increase Increase 84. (61%) The demand for money increases when national income increases because a. spending on goods and services increases d. the MS increases b. interest rates increase e. the budget deficit increases c. the public becomes more optimistic about the future 85. (76%) Suppose the RR is 20% and a single bank with no ER receives a $100 DD from a new customer. The bank now has excess reserves equal to a. $20 b. $80 c. $100 d. $400 e. $ (45%) Which of the following is most likely to increase if the public decides to increase its holding of currency? a. Interest rate Holding more MS means banks d. Employment b. The price level have less money, so higher I.R. e. The reserve requirement c. Disposable personal income 87. (47%) During a mild recession, if policymakers want to reduce unemployment by increasing investment, which of the following policies would be most appropriate? a. Equal increases in government expenditure and taxes b. An increase in government expenditure only c. An increase in transfer payments d. An increase in the reserve requirement e. Purchase of government securities by the Fed

25 88. (73%) Which of the following monetary and fiscal policy combinations would most likely result in a decrease in AD? Discount Rate Open-Market Operations Gov. Spending a. Lower Buy bonds Increase b. Lower Buy bonds Decrease c. Raise Sell bonds Increase d. Raise Buy bonds Increase e. Raise Sell bonds Decrease 89. (35%) Under which of the following circumstances would increasing the MS be most effective in increasing real GDP? Interest Rates Employment Business Optimism a. High Full High b. High Less than full High c. Low Full High d. Low Full Low e. Low Less than full Low 90. (57%) According to both Monetarists and Keynesians, which of the following happens when the Fed reduces the discount rate? a. The demand for money decreases and market interest rates decrease. b. The demand for money increases and market interest rates increase. c. The supply of money increases and market interest rates decrease. d. The supply of money increases and market interest rates increase. Reducing the D.R. sends signal to banks to lower their prime rate which incr MS & decr I.R. 91. (79%) All of the following are components of the MS in the U.S. EXCEPT a. paper money b. gold bullion c. checkable deposits d. coins e. demand deposits

26 92. (77%) If a banking system s reserves (TR) are $100 billion, DD are $500 billion, and the banking system is fully loaned-up, then the RR must be a. 10% b. 12.5% c. 16.6% d. 20% e. 25% 93. (58%) Which of the following would increase the value of the ME? a. an increase in government expenditure b. An increase in exports c. a decrease in government unemployment benefits d. a decrease in the MPC e. a decrease in the MPS 94. (76%) According to the monetarists, inflation is most often the result of a. high federal tax rates b. increased production of capital goods c. decreased production of capital goods d. an excessive growth of the money supply e. upward shifts in the consumption function 95. (67%) What would occur if the international value of the U.S. dollar decreased? a. U.S. exports would rise. b. More gold would flow into the U.S. c. U.S. demand for foreign currencies would increase. d. The U.S. trade deficit would increase. e. Americans would pay less for foreign goods. A decrease in MPS (say, from.5 to.1) would increase the value of the M (from 2 to 10). A depreciated dollar makes our products cheaper. Incr in MS results in incr in PL. This inflation results in incr in nominal(money) GDP. Workers will demand higher nominal wages because of higher PL. 96. (48%) According to the classical model, an increase in the MS causes an increase in which I. The price level II. Nominal Gross Domestic Product III. Nominal wages a. I only b. II only c. III only d. II and III only e. I, II, and III

27 97. (47%) If the Fed undertakes a policy to reduce interest rates, international capital flows (financial capital like CDs & bonds) will be affected in which of the following ways? a. Long-run capital outflows from the U.S. will decrease. b. Long-run capital inflows to the U.S. will increase. c. Short-run capital outflows from the U.S. will decrease. d. Short-run capital inflows to the U.S. will decrease. e. Short-run capital inflows to the U.S. will not change. 98. (73%) If the Fed wishes to use monetary policy to reinforce Congress fiscal policy changes, it should a. increase the MS when government spending is increased b. increase the MS when government spending is decreased c. decrease the Ms when government spending is increased d. increase interest rates when government spending is increased e. decrease interest rates when government spending is decreased Economic Schools of Thought Lower U.S. Interest rates will result in fewer financial capital inflows to the U.S. This would keep the interest rate from going up. 99. (53%) According to the monetarists, which is true of expansionary fiscal policy? a. It will cause interest rates to rise and crowd out private investment spending. b. It should not be used so long as there is a national debt. c. It should be used only when resources are unemployed and the inflation rate is low. d. It will decrease aggregate (total) income. The Debt and the Deficit 100. (71%) Which of the following will occur if the federal government runs a budget deficit. a. The expenditure multiplier will increase. b. The size of the national debt will increase. c. The economy s output will decrease. d. State governments will run a budget surplus to offset the federal deficit. e. Interest rates will tend to decline.

28 2 nd Most Missed Question On 1995AP Exam [26% correct] Ducky Country Food Clothing Ducky 20 hours 50 hours Wucky 10 hours 20 hours a. Ducky has a comparative advantage in the production of both food and clothing. b. Wucky has a comparative advantage in the production of both food and clothing. c. Ducky has a comparative advantage in food production, & Wucky has a comparative advantage in clothing production. d. Ducky has a comparative advantage in clothing production, & Wucky has a comparative advantage in food production. e. Neither country has a comparative advantage in the production of either good. Country Food Clothing Ducky 20 hrs 50 hrs 1C = 2.5F;.4C = 1F Wucky 10 hrs 20 hrs 1C = 2F;.5C = 1F Terms of Trade might be 1C = 2.2F Wucky

29 Outputs v. Inputs Remember that with outputs or quantity, the larger number indicates absolute advantage; that country can produce more from the same inputs, so is more efficient. And with inputs (hours), the smaller number indicates absolute advantage; that country is more efficient because it can produce a good quicker than the other with the same inputs.

30 C Comparative Advantage The countries of: Fuzzy and Wuzzy Fuzzy A B C D E F DCC: Fuzzy Wuzzy A B C D E F DCC: Wuzzy Plums G = 3 P Plums G = 5 P Grapes /3 G = 1P Grapes /5 G = 1P Terms of Trade 1 Grape = Plums 1. In Wuzzy, the opportunity cost of 1 grape is (1/2/3/4/5) plums. 2. Fuzzy has a comparative advantage in & should produce (plums/grapes). 3. The terms of trade will be 1 grape for somewhere between (3&5/2&6) plums. 4. Assume that if Fuzzy did not specialize it would produce combo C and if Wuzzy did not specialize it would produce combo B. The gains from specialization and trade are: (0/100/150) plums and (0/100/150) grapes. 4

31 Monetarist View of Transmission Mechanism v. Keynesian View 10 MS1 MS2 10% DI(K) Investment Demand AD 1 AD2(M) AD 2 AS DI(M) 8% 8% 6% D m(k) 6% PL2 PL 2 0 Money Market Dm(M) 0 Dm is more inelastic [I.R. more sensitive] QID1 QID2 QID2 DI is more elastic [or more responsive] Also, the Keynesians don t think the lower interest rate is as important as profit expectations. PL 1 Keynesian view is that DI is rather steep so monetary policy is not that strong. Fiscal policy is top banana. (K) YR Y* YI Mainly, we end up just getting inflation. AD2 AD1 AS

32 The End You are now ready to make a 5 on the test.