AP Macro Economics 2005 Section I

MACROECONOMICS
Section I
Time − 70 minutes
60 questions

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

1 In a mixed economy, what to produce and how 3 Which of the following statements exemplifies the
much to produce are determined by concept of structural unemployment?
A. a central planning agency A. New entrants into the labor force have
B. a private planning agency trouble finding jobs.
C. an international planning agency B. Workers leave their current jobs to find
better jobs.
D. markets and the government
C. Workers are laid off because aggregate
E. large cooperations and small en- demand has declined.
trepreneurs
D. Workers are fired because consumers
2 The major difference between real and nominal have reduced their total expenditures.
gross domestic product (GDP) is that real GDP E. Workers are fired because their skills are
A. excludes government transfer payments no longer in demand.
B. excludes imports
C. is adjusted for price-level changes using
a price index
D. measures only the value of final goods
and services that are consumed
E. measures the prices of a market basket
of goods purchased by a typical urban
consumer

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AP Macro Economics 2005 Section I

4 Assume that for consumers, pears and apples are 5 Federal budget deficits occur when
substitutes. It is announced that pesticides used A. more money is being spent on entitle-
on most apples may be dangerous to consumers’s ment programs than has been allocated
health. As a result of this announcement, which
of the following market changes is most likely to B. the Internal Revenue Service spends
occur in the short run in the pear market? more than it collects in taxes in a given
year
C. the federal government spends more than
it collects in taxes in a given year
D. high levels of unemployment use up tax
collections
E. interest payments on the national debt
increase from one year to the next

6 Under which of the fo11owing conditions would

consumer spending most likely increase?
A. Consumers have large unpaid balances
on their credit cards.
B. Consumers’ wealth is increased by
changes in the stock market.
C. The government encourages consumers
to increase their savings.
D. Social security taxes are increased.
E. Consumers believe they will not receive
pay increases next year.

7 Crowding out is best described as which of the fol-

lowing?
A. The decrease in full-employment output
caused by an increase in taxes
B. The decrease in consumption or private
investment spending caused by an in-
crease in government spending
C. The decrease in government spending
caused by a decrease in taxes
D. The increase in the amount of capital
outflow caused by the increase in gov-
ernment spending
E. The increase in the amount of capital
inflow caused by the increase in govern-
ment spending

8 Under a fractional reserve banking system, banks

are required to
A. keep part of their demand deposits as re-
serves
B. expand the money supply when re-
quested by the central bank
C. insure their deposits against losses and
bank runs

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AP Macro Economics 2005 Section I

D. pay a fraction of their interest income in

taxes
E. charge the same interest rate on all their
loans

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AP Macro Economics 2005 Section I

9 An increase in which of the following will decrease 13 According to the short-run Phillips Curve, there is
aggregate demand? a trade-off between
A. Taxes A. interest rates and inflation
B. Government spending B. the growth of the money supply and in-
C. The federal funds rate terest rates

D. Reserve Requirement C. unemployment and economy growth

E. The discount rate D. inflation and unemployment
E. economic growth and interest rates
10 When the United States States government en-
gages in deficit spending, that spending is primar- 14 A favorable supply shock, such as a decrease in
ily ?ned by energy prices, is most likely to have which of the
A. increasing the required reserve ratio following short-run effects on the price level and
output?
B. borrowing from the World Bank
Price Level Output
C. issuing new bonds A. Decrease No effect
D. appreciating the value of the dollar B. Decrease Increase
E. depreciating the value of the dollar C. Increase Increase
D. Increase Decrease
11 When the Federal Reserve buys government secu- E. No effect No effect
rities on the open market, which of the following
15 Which of the following best explains why many
will decrease in the short run?
United States economists support free interna-
A. Interest rates tional trade?
B. Taxes A. Workers who lose their jobs call collect
C. Investment unemployment compensation.
D. The amount of money loaned by banks B. It is more important to reduce world in-
flation than to reduce United States un-
E. The money supply
employment.
12 Changes in which of the following factors wou1d C. Workers are not affected; only businesses
effect the growth of an economy? suffer.
I. Quantity and quality of human and nat- D. The long-run gains to consumers and
ural resources some producers exceed the losses to other
II. Amount of capital goods available producers.
III. Technology E. Government can protect United States
industries while encouraging free trade.
A. I only
B. I and II only
C. I and III only
D. II and III only
E. I, II, and III

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AP Macro Economics 2005 Section I

Questions 16-17 refer to the following graph 18 The unemployment rate measures the percentage
of a country’s production possibilities curve. of
A. people in the labor force who do not have
jobs
B. people in the labor force who have a part-
time job but are looking for a full time
job
C. people who do not have jobs and have
given up looking for work
D. people in the adult population who do
not have jobs
E. people in the adult population who have
temporary jobs
16 If two coats are currently being produced, the op- 19 The classical economists argued that involuntary
portunity cost of producing the third coat is unemployment would be eliminates by
A. 85 belts A. increasing government spending to in-
B. 75 belts crease aggregate demand
C. 40 belts B. increasing the money supply to stimulate
D. 15 belts investment spending
E. 10 belts C. self-correcting market forces stemming
from flexible prices and wages
17 The best combination of belts and coats for this D. maintaining the growth of the money
economy to produce is supply at a constant rate
A. 95 belts and 1 coat E. decreasing corporate income taxes to en-
B. 85 belts and 2 coat courage investment
C. 70 belts and 3 coat 20 Which of the following can be considered a leakage
D. 40 belts and 4 coat from the circular flow of economic activity?
E. indeterminate with the availab1e infor- A. Investment
mation B. Government expenditures
C. Consumption
D. Exports
E. Saving

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AP Macro Economics 2005 Section I

21 An increase in the marginal propensity to ? causes 25 If AD and AS represent aggregate demand and ag-
an increase in which of the following? gregate supply curves, respectively, and the arrows
A. Marginal Propensity to save indicate the movement of the curves, which of the
following graphs best illustrates long-run economic
B. Spending Multiplier growth?
C. Saving rate
D. Exports
E. Aggregate Supply
22 Mexicans increase their investment in the United
States, the supply of Mexican pesos to the foreign
exchange market and the dollar price of peso will
most likely change in which of the following ways?
Supply of Pesos Dollar price of Peso
A. Increase Increase
B. Increase Decrease
C. Decrease Increase
D. Decrease Decrease
E. Decrease Not change
23 If a commercial bank has no excess reserves and
the reserve requirement is 10 percent, what is the
value of new loans this single band can issue of a
new customer deposits $10, 000
A. $100,000
B. $90,333
C. $10,000
D. $9,000
E. $1,000
24 An increase in government spending with no
change in taxes leads to a
A. lower income level
B. lower price level
C. smaller money supply
D. higher interest rate
E. higher bond price

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AP Macro Economics 2005 Section I

26 Assume that the economy is at full-employment equilibrium in the diagram shown above. Which of the following
would lead to stagflation?
A. A leftward shift of the short-run aggregate supply curve only
B. A rightward shift of the short-run aggregate supply curve only
C. A leftward shift of the aggregate demand curve only
D. A rightward shift of the aggregate demand curve only
E. A rightward shift in both the short-run aggregate supply curve and the aggregate demand curve
27 If the real interest rate in country X increases relative to the real interests rate in Country Y and there are no
trade barriers between the two counties, then for Country X which of following will be true of its capital flow,
the value of its currency, and its exports?

Capital Flow Currency Exports

A. Inflow Appreciation Increase
B. Inflow Appreciation Decrease
C. Inflow Depreciation Increase
D. Outflow Depreciation Increase
E. Outflow Appreciation Decrease

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AP Macro Economics 2005 Section I

28 If central bank sells securities in the open market, 31 A change in which of the fo1llwing will cause the
which of the following set of events is ? to follow? short-run aggregate supply curve to shift?
A. An increase in the money supply, a de- I. The price level
crease in interest rate, and an increase in II. Government spending
aggregate demand
III. The cost of all inputs
B. An Increase in the money supply, an in-
crease in interest rates, and a decrease in A. I only
aggregate demand B. II only
C. An increase in interest rates, an increase C. III only
in the government budgets deficit, and a D. I and II only
movement toward surplus
E. I, II, and III
D. A decrease in the money supply, an in-
crease in the interest rates, and a de- 32 In an economy with lump-sum taxes and no inter-
crease in in aggregate demand national sector, assume that the aggregate supply
E. A decrease in the money supply, a de- curve is horizontal. If the marginal propensity to
crease in interest rates, and a decrease consume is equal to 0.8, which of the following will
in aggregate demand necessarily be true?
A. The average propensity to consume will
29 The federal funds rate is the interests rate that be less than the marginal propensity to
A. Federal Reserve charges the government consume.
on its loans B. The government expenditure multiplier
B. banks charge one another for short-term will be equal to 5.
loans C. A $10 increase in consumption spending
C. banks charge their best customers will bring about an $80 increase in dis-
D. equalize the yield on government bonds posab1e income.
and corporate bonds D. Wealth will tend to accumulate in the
E. equal to the inflation rate hands of a few people.
E. The economy will be running a deficit,
30 According to the long-run Phillips curve, which of since consumption expenditures exceed
the following is true? personal saving.
A. Unemployment increases with an in-
crease in inflation.
B. Unemployment decreases with an in-
crease in inflation.
C. Increased automation will lead to lower
levels of structural unemployment in the
long run.
D. Changes in the composition of the overall
demand for labor tend to be deflationary
in the long run.
E. The natural rate of unemployment is in-
dependent of monetary and fiscal policy
changes that affect aggregate demand.

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AP Macro Economics 2005 Section I

33 Country A can produce either 2 tons of cocoa or 36 According to the theory of rational expectations
4 cars with 10 units of labor, Country B can pro- a fully anticipated expansionary monetary policy
duce either 5 tons of cocoa or 25 cars with 10 units will
of labor. Based on this information, which of the A. increase potential output
following is true?
B. increase unemployment
A. Country A has an absolute advantage in
the production of cocoa, while Country C. have no impact on real output
B has a comparative advantage in the D. promote the production of consumer
production of cocoa. goods over capital goods
B. Country A has a comparative advantage E. result in deflation
in the production of cocoa, while Coun-
try B has a comparative advantage in the 37 In an economy with a horizontal aggregate supply
production of cars. curve, an increase in government spending wi11
C. Country A has an absolute advantage in cause output and the price level to change in which
the production of cocoa, while Country of the following ways?
B has a comparative advantage in the Output Price Level
production of cars. (A) Decrease Increase
D. Country A has a comparative advantage (B) Increase Increase
in the production of both goods. (C) Increase No change
E. Neither country has a comparative ad- (D) No change Increase
vantage in the production of either good. (E) No change No change

34 Which of the following is included in the computa- 38 The aggregate demand curve is downward sloping
tion of gross domestic product? because as the price level increases the
A. Government transfer payments, such as A. purchasing power of wealth decreases
unemployment benefits B. demand for imports decreases
B. Purchases of used goods, such as used C. demand for interest-sensitive expendi-
cars tures increases
C. Child care tasks performed by househus-
D. demand for domestically produced sub-
bands
stitute goods increases
D. Total value of business inventories
E. real value of fixed assets increases
E. Additions to business inventories
35 In the country of Agronomia, banks charge 10 per-
cent interest on all loans. If the general price level
has been increasing at the rate of 4 percent per
year, the real rate of interest in Agronomia is
A. 14%
B. 10%
C. 6%
D. 4%
E. 2.5%

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AP Macro Economics 2005 Section I

Assets Liabilities

Total Reserves $15,000 Demand Deposits: $100,000

Securities 70,000
Loan 15,000

39 A commercial bank is facing the conditions given above. If the reserve requirement is 12 percent and the bank
does not sell any of its securities, the maximum amount of additional lending this bank can undertake is
A. $15,000
B. $12,000
C. $3,000
D. $1,800
E. 0

40 According to Keynesian analysis, if government ex- 42 If a country has a current account deficit, which of
penditures and taxes are increased by the same the following must be true?
amount, which of the following will occur? A. It must also show a deficit in its capital
A. Aggregate supply will decrease. account.
B. Aggregate supply will increase. B. It must show a surplus in its capital ac-
C. Aggregate demand will be unaffected. count.

D. Aggregate demand will decrease. C. It must increase the purchases of foreign

goods and services.
E. Aggregate demand will increase.
D. It must increase the domestic interest
41 If investors feel that business conditions will de- rates on its bonds.
teriorate in the future, the demand for loans and E. It must limit the flow of foreign capital
real interest rate in the loanable funds market will investment
change in which of the following ways in the short-
run? 43 The long-run growth rate of an economy will be
Demand for Loans Real Interest Rate increased by an increase in all of the following EX-
(A) Increase Increase CEPT
(B) Increase Decrease A. capital stock
(C) Decrease Increase
B. labor supply
(D) Decrease Decrease
(E) Decrease Not change C. real interest rate
D. rate of technological change
E. spending on education and training

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AP Macro Economics 2005 Section I

44 Assume that the government implements a deficit-reduction policy that resu1ts in changes in aggregate income
and output. Then the Federal Reserve engages in monetary policy actions that reverse the changes in income
and output caused by fiscal po1icy action. Which of the following sets of changes in taxes, government spending,
the required reserve ratio, and the discount rate is most consistent with these policies?
Government Required
Taxes Spending Reserve Ratio Discount Rate
(A) Increase Increase Decrease Increase
(B) Increase Decrease Decrease No change
(C) Increase Decrease Increase Decrease
(D) Decrease Increase No change Increase
(E) Decrease Decrease Decrease Increase

45 With an increase in investment demand in the 47 Which of the following best explains why trans-
United States, the real interest rate rises. In this fer payments are not included in the calculation of
situation, the most likely change in the capital gross domestic product?
stock in the United States and in the international A. Transfer payments are used to pay for
value of the dollar would be which of the following? intermediate goods, and intermediate
Capital Stock in International Value goods are excluded from gross domestic
United States of the Dollar product.
A. Increase Decrease B. Transfer payments are a government ex-
B. Increase No change penditure, and government expenditures
C. Increase Increase are excluded from gross domestic prod-
D. Decrease Increase uct.
E. No change Decrease
C. Recipients of transfer payments have not
46 Which of the following events will most likely cause produced or supplied goods and services
an increase in both the price level and real gross in exchange for these payments.
domestic product?
D. Recipients of transfer payments are usu-
A. The prime rate increases. ally children, and income earned by chil-
B. Exports increase. dren is excluded in gross domestic prod-
uct.
C. Income taxes increase.
E. Recipients of transfer payments are
D. Crude oil prices decrease.
sometimes not citizens of the United
E. Inflationary expectations decrease. States.

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AP Macro Economics 2005 Section I

48 Suppose that a typical consumer buys the follow- 52 An unanticipated decrease in aggregate demand
ing quantities of three commodities in 1993 and when the economy is in equilibrium will result in
1994. A. a decrease in voluntary unemployment
1993 per 1994 per
B. a decrease in the natural rate of unem-
Commodity Quantity Unit price Unit price
ployment
Food 5 units $6.00 $5.00
Clothing 2 units $7.00 $9.00 C. a decrease in aggregate supply
Shelter 3 units $12.00 $19.00 D. an increase in unplanned inventories
Which of the following can be concluded about E. an increase in the rate of inflation
the consumer price index(CPI) for this individu-
als from 1993-1994? 53 Which of the following would be true if the actual
A. It remains unchanged rate of inflation were less than the expected rate of
inflation?
B. It decreased by 25%
A. Inflation had been underpredicted.
C. It decreased by 20%
B. The real interest rate had exceeded the
D. It increased by 25% nominal interest rate.
E. It increased by 20% C. The real interest rate had been negative.
49 If an economy’s aggregate supply curve is upward D. People who borrowed funds at the nom-
sloping, an increase in government spending will inal interest rate during this time period
most likely result in a decrease in the wou1d lose.
A. real level of output E. The economy would expand because of
B. price level the increased investment and spending

C. interest rate 54 If the Federal Reserve institutes a policy to reduce

D. unemployment rate inflation, which of the following is most likely to
increase?
E. government’s budget deficit
A. Tax rates
50 An increase in which of the following consistent B. Investment
with an outward shift of the production possibili-
ties curve? C. Government spending

A. Transfer payments D. Interest rates

B. Aggregate demand E. Gross domestic product

C. Long-run aggregate supply 55 To stimu1ate investment in new plant and equip-

D. Income tax rates ment without increasing the level of real output,
the best policy mix is to
E. Exports
A. decrease money supply and increase gov-
51 An increase in which of following will lead to higher ernment spending
inflation and lower unemployment? B. increase the money supply and decrease
A. Exports government spending
B. Aggregate demand C. decrease the money supply and increase
C. Labor productivity income taxes

D. Government spending D. increase money supply and decrease in-

come taxes
E. The international value of domestic cur-
rency E. decrease income taxes and increase gov-
ernment spending

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AP Macro Economics 2005 Section I

56 Assume that the reserve requirement is 20 percent, 59 Which of the following would cause the United
but banks voluntarily keep some excess reserves. A States dollar to increase in value compared to the
$ 1 million increase in new reserves will result in Japanese yen?
A. an increase in the money supply of $5 A. An increase in the money supply in the
millon United States
B. an increase in the money supp1y of less B. An increase in interest rates in the
than $5 millon United States
C. a decrease in the money supp1y of $1 mil- C. An increase in the United States trade
lion deficit with Japan
D. a decrease in the money supply of $5 mil-
D. The United States purchase of gold on
lon
the open market
E. a decrease in the money supply of more
than $5 million E. The sale of $2 billion dollars worth of
Japanese television sets to the United
57 Assume that a perfectly competitive financial mar- State
ket for loanable funds is in equilibrium. Which of
the following is most likely to occur to the quantity 60 Assume that the supply of loanable funds increase
demanded and quantity supplied of loanable funds in Country X. The international value of Country
if the government imposes an effective interest rate X’s currency and Country X’s exports will most
cei1ing? likely change in which of the following ways?
Quantity Demanded Quantity Supplied International Value of Country X’s
Country X’s Currency Exports Country X’s Currency Exports

A. Increase Increase A. Decrease Decrease

B. Increase Decrease B. Decrease Increase
C. No change No change C. Increase Decrease
D. Decrease Increase D. Increase Increase
E. Decrease Decrease E. Not change Not change
58 If the economy is operating at full employment and
there is a substantial increase in the money supply,
the quantity theory of money predicts an increase
in
A. the velocity of money
B. real output
C. interest rates
D. unemployment
E. the price level

END OF SECTION I

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AP Macro Economics 2005 Section I

Answer Keys to 2005 AP Macro Economics Multiple Choice Question

Item No. Correct Answer Item No. Correct Answer

1 D 31 C
2 D 32 B
3 E 33 B
4 D 34 E
5 D 35 C
6 B 36 C
7 B 37 C
8 A 38 A
9 B 39 C
10 C 40 E
11 A 41 D
12 E 42 B
13 D 43 C
14 B 44 B
15 D 45 C
16 D 46 B
17 E 47 C
18 A 48 E
19 49 D
20 B 50 C
21 B 51 C
22 B 52 D
23 53 D
24 54 D
25 55 B
26 A 56 B
27 B 57 B
28 D 58 E
29 B 59 B
30 E 60 B

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