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AP Macroeconomics Full-length practice exam 2

60 questions

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Full-length practice exam 2

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Question 1

A country can produce either 100 units of wheat or 50 units of cloth per day. If it currently produces 80 units of wheat, what is the opportunity cost of producing the 80th unit of wheat?

A.0.5 units of clothB.2 units of clothC.1 unit of clothD.50 units of cloth

Question 2

The required reserve ratio is 20%. If the Fed injects $1,000 in new reserves into the banking system, what is the maximum potential expansion of the money supply?

A.$1,000B.$5,000C.$200D.$10,000

Question 3

If the short-run aggregate supply (SRAS) curve shifts left due to a sharp rise in oil prices, the most likely immediate outcome is:

A.Higher price level and higher real GDP.B.Lower price level and lower real GDP.C.Higher price level and lower real GDP (stagflation).D.Higher price level and unchanged real GDP.

Question 4

A worker loses her job at a coal mine because the nation has shifted to renewable energy, making coal uneconomical. This worker is experiencing which type of unemployment?

A.Frictional unemploymentB.Cyclical unemploymentC.Structural unemploymentD.Seasonal unemployment

Question 5

The interest rate on bonds and the price of bonds have an inverse relationship. If the Federal Reserve conducts open market sales of bonds, what happens to bond prices and interest rates?

A.Bond prices rise; interest rates fall.B.Bond prices fall; interest rates rise.C.Bond prices and interest rates both rise.D.Bond prices fall; interest rates fall.

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Question 6

If the price of coffee rises significantly, what is the most likely effect on the demand for tea, a substitute good?

A.Demand for tea decreases, shifting the demand curve left.B.Demand for tea increases, shifting the demand curve right.C.The supply of tea increases, shifting the supply curve right.D.There is no effect on the tea market because markets are independent.

Question 7

Economic growth in the long run is best represented graphically by:

A.A rightward shift of the AD curve.B.A rightward shift of the LRAS curve.C.A movement along the SRAS curve from left to right.D.A leftward shift of the LRAS curve.

Question 8

When an economy has an inflationary gap, the long-run self-correction mechanism works through:

A.Workers demanding higher wages as the labor market tightens, causing SRAS to shift left.B.The government automatically cutting spending to reduce AD.C.The Fed automatically raising the money supply to lower interest rates.D.Firms reducing output due to falling demand as consumers cut back on spending.

Question 9

Two countries can both gain from trade even if one country has an absolute advantage in producing all goods. This is explained by:

A.The principle of absolute advantage — the more productive country always benefits.B.The principle of comparative advantage — each country specializes in the good where its opportunity cost is lower.C.The terms of trade, which always equalize wages across countries.D.Economies of scale, which reduce costs as output expands.

Question 10

In a market with a binding price floor set above equilibrium, which of the following outcomes is most likely?

A.A shortage, because quantity demanded exceeds quantity supplied at the floor price.B.A surplus, because quantity supplied exceeds quantity demanded at the floor price.C.No effect, because markets always clear at the equilibrium price.D.A decrease in supply, as producers find the good unprofitable.

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Question 11

In a closed economy with no government, the equilibrium condition is $Y = C + I$ . If $C = 100 + 0.8 Y$ and $I = 200$ , what is the equilibrium level of income $Y$ ?

A.$1,000B.$1,500C.$3,000D.$300

Question 12

In the money market, an increase in real GDP will shift money demand because:

A.Higher GDP reduces the need to hold money for transactions.B.Higher GDP increases the volume of transactions, raising the demand for money.C.Higher GDP causes the Fed to expand money supply automatically.D.Higher GDP lowers the opportunity cost of holding money.

Question 13

Expansionary monetary policy is expected to increase real GDP in the short run through which transmission mechanism?

A.↑ Money supply → ↓ interest rates → ↑ investment → ↑ AD → ↑ real GDPB.↑ Money supply → ↑ interest rates → ↑ saving → ↑ investment → ↑ real GDPC.↑ Money supply → ↓ taxes → ↑ disposable income → ↑ consumption → ↑ real GDPD.↑ Money supply → ↑ government spending → ↑ AD → ↑ real GDP

Question 14

A decrease in the price of steel (an input to car production) will most likely:

A.Shift the demand curve for cars to the right.B.Shift the supply curve for cars to the right, lowering the equilibrium price.C.Shift the supply curve for cars to the left, raising the equilibrium price.D.Have no effect on the car market because steel and cars are in different industries.

Question 15

If the MPC is 0.8 and the government simultaneously increases spending by $50 billion AND raises taxes by \$ 50 billion, what is the net change in equilibrium GDP (balanced budget multiplier)?

A.$0 (no net change)B.$50 billion increaseC.$200 billion increaseD.$40 billion decrease

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Question 16

Which of the following best explains why fiscal policy may be less effective when an economy is at or near full employment?

A.The MPC falls to zero at full employment, eliminating the multiplier effect.B.Expansionary fiscal policy primarily raises the price level rather than real output when the economy is at potential.C.The government cannot increase spending when unemployment is low.D.Fiscal policy only works during recessions and has no effect at any other time.

Question 17

The short-run Phillips curve shifts upward (worsens the trade-off) primarily because of:

A.An increase in the labor force participation rate.B.Rising inflation expectations or an adverse supply shock.C.A decrease in aggregate demand that reduces inflation.D.A decrease in the money supply engineered by the Fed.

Question 18

According to the quantity theory of money ( $M V = P Q$ ), if the velocity of money (V) and real output (Q) are constant, a 5% increase in the money supply (M) will cause:

A.A 5% increase in real output (Q).B.A 5% increase in the price level (P).C.A 5% increase in velocity (V).D.No change in any variable, as the equation must always balance.

Question 19

Stagflation is most directly caused by which of the following?

A.A rapid increase in aggregate demand that outpaces productive capacity.B.A negative supply shock that shifts SRAS to the left.C.A large increase in government spending that crowds out private investment.D.A decrease in the money supply that reduces both output and prices.

Question 20

An economy is operating below potential GDP (recessionary gap). Using the Keynesian model, which fiscal policy would best restore full employment?

A.Increase taxes and reduce government spending to balance the budget.B.Increase government spending and/or cut taxes to shift AD right.C.Reduce the money supply to raise interest rates and reduce inflation.D.Allow wages and prices to fall until the economy self-corrects.

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Question 21

The exchange rate is 0.90 euros per dollar. If the dollar appreciates to 1.05 euros per dollar, what happens to U.S. exports and imports?

A.U.S. exports increase and imports decrease.B.U.S. exports decrease and imports increase.C.Both exports and imports increase.D.Net exports are unchanged because trade volumes adjust proportionally.

Question 22

In a flexible (floating) exchange rate system, a U.S. current account deficit tends to be self-correcting because:

A.The government automatically raises tariffs to reduce imports.B.The excess supply of dollars in foreign exchange markets causes the dollar to depreciate, making exports cheaper and imports more expensive.C.The central bank raises interest rates, reducing domestic spending and imports.D.Foreign countries reduce exports to the U.S. to balance bilateral trade.

Question 23

Which of the following is classified as M1 money supply?

A.A 6-month certificate of deposit (CD)B.Demand deposits (checking accounts)C.Money market mutual fund shares held by householdsD.U.S. Treasury bills

Question 24

In a competitive market, the price of good X rises. Which of the following best describes what happens to producer surplus?

A.Producer surplus decreases because higher prices deter consumers.B.Producer surplus increases because sellers receive more above their minimum acceptable price.C.Producer surplus is unchanged because the supply curve does not shift.D.Producer surplus decreases because quantity supplied increases, raising costs.

Question 25

Crowding out occurs when expansionary fiscal policy leads to:

A.Lower private investment because government borrowing raises interest rates.B.Higher private investment because government spending raises incomes.C.Lower price levels because increased supply of goods reduces inflation.D.Lower government spending in future periods to balance the budget.

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Question 26

The law of increasing opportunity costs suggests that a PPC is bowed outward (concave to the origin) because:

A.Resources are perfectly interchangeable between all uses.B.Resources are not equally productive in all uses, so shifting them grows increasingly costly.C.Technology improves as more of a good is produced.D.Demand for each good increases as the economy grows.

Question 27

The CPI in Year 1 is 120 and in Year 2 is 126. A worker earned a nominal wage of $50,000 in Year 1. What nominal wage in Year 2 is required to maintain the same purchasing power?

A.$52,500B.$50,000C.$53,000D.$54,600

Question 28

In the foreign exchange market for the U.S. dollar, which event would cause the dollar to appreciate?

A.U.S. interest rates fall relative to foreign interest rates.B.Foreign investors increase demand for U.S. financial assets.C.U.S. consumers significantly increase imports from abroad.D.The U.S. current account surplus rises.

Question 29

Which of the following best illustrates the economic concept of scarcity?

A.A government imposes a price ceiling on gasoline.B.Human wants exceed the resources available to satisfy them.C.A firm earns zero economic profit in the long run.D.A consumer buys fewer goods when income falls.

Question 30

A point located inside (below) the production possibilities curve (PPC) indicates that an economy is:

A.Operating at full efficiency with no unused resources.B.Producing an output combination that is currently unattainable.C.Using resources inefficiently or leaving some resources unemployed.D.Experiencing economic growth that has shifted the PPC outward.

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Question 31

Which of the following is NOT a limitation of GDP as a measure of economic well-being?

A.GDP excludes the value of household production and volunteer work.B.GDP measures total market value of all final goods and services produced.C.GDP does not account for income distribution or inequality.D.GDP includes spending on pollution cleanup, which may reflect harm rather than welfare.

Question 32

The U.S. Federal Reserve raises interest rates. Tracing the effects through the foreign exchange market: which of the following best describes the full chain of effects on net exports?

A.↑ U.S. interest rates → capital inflow → dollar appreciates → exports ↓, imports ↑ → NX decreases.B.↑ U.S. interest rates → capital outflow → dollar depreciates → exports ↑, imports ↓ → NX increases.C.↑ U.S. interest rates → lower AD → imports decrease → NX increases.D.↑ U.S. interest rates → dollar depreciates → exports ↑ → NX increases.

Question 33

In the AD/AS model, a decrease in aggregate demand (AD) with a downward-sticky price level will most likely result in:

A.Lower price level and unchanged real GDP.B.Lower real GDP with the price level unchanged in the short run.C.Higher price level and lower real GDP simultaneously.D.Unchanged real GDP and unchanged price level.

Question 34

A bank has $500 million in deposits and a required reserve ratio of 10%. If the bank holds only required reserves, what is the maximum amount the bank can lend?

A.$500 millionB.$50 millionC.$450 millionD.$4,500 million

Question 35

In the long run, an increase in aggregate demand with an economy already at full employment will result in which of the following, according to classical macroeconomic theory?

A.Higher real GDP and a higher price level.B.Higher price level only; real GDP returns to potential.C.Lower price level and lower real GDP.D.Permanently higher real GDP with no change in the price level.

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Question 36

A bank's T-account shows: Assets — Reserves $40M, Loans \$ 160M; Liabilities — Deposits $200M. The required reserve ratio is 15%. How much can this bank lend in additional loans?

A.$10 millionB.$30 millionC.$160 millionD.$0 (the bank is already at its lending limit)

Question 37

In the foreign exchange market, which of the following causes the supply of dollars to increase (shift right)?

A.U.S. residents increase purchases of foreign goods and assets.B.Foreign tourists increase spending in the United States.C.Foreign companies increase direct investment in U.S. factories.D.The U.S. Federal Reserve raises interest rates.

Question 38

Which of the following best describes the role of the money market diagram in macroeconomics?

A.It shows how the price level is determined by the interaction of AD and AS.B.It determines the nominal interest rate through the interaction of money supply and money demand.C.It shows how commercial banks create money through the fractional reserve process.D.It illustrates the trade-off between inflation and unemployment.

Question 39

Which of the following correctly describes the Federal Reserve's policy tools for controlling the money supply?

A.Open market operations, the discount rate, and the required reserve ratio.B.Government spending, taxation, and the discount rate.C.Open market operations, the prime rate, and income tax rates.D.The exchange rate, open market operations, and government spending.

Question 40

A country pegs its currency to the U.S. dollar at an overvalued rate. To maintain this peg, the central bank must:

A.Buy its own currency using foreign reserves, reducing domestic money supply.B.Print more of its own currency to satisfy excess demand.C.Lower interest rates to attract capital inflows.D.Raise tariffs on imports to reduce demand for foreign currency.

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Question 41

Which of the following events would shift the Aggregate Demand (AD) curve to the right?

A.A significant increase in personal income taxes.B.A decrease in consumer confidence about the future.C.A decrease in interest rates that stimulates business investment.D.An appreciation of the domestic currency that makes exports more expensive abroad.

Question 42

The labor force participation rate is 60% and the unemployment rate is 5%. If the working-age population is 200 million, how many people are unemployed?

A.6 millionB.10 millionC.3 millionD.12 million

Question 43

The current account of the balance of payments records which of the following?

A.A U.S. firm purchasing a factory in Mexico.B.A foreign investor buying U.S. Treasury bonds.C.U.S. exports of goods and services to foreign countries.D.Changes in official reserve assets held by the Federal Reserve.

Question 44

The Federal Reserve conducts open market operations by purchasing government securities. What is the immediate effect on the money supply and interest rates?

A.Money supply decreases; interest rates rise.B.Money supply increases; interest rates fall.C.Money supply increases; interest rates rise.D.Money supply decreases; interest rates fall.

Question 45

Country A's opportunity cost of producing 1 unit of wheat is 3 units of cloth. Country B's opportunity cost of producing 1 unit of wheat is 2 units of cloth. Which of the following trade arrangements could benefit both countries?

A.Country A exports wheat to Country B at a rate of 4 cloth per wheat.B.Country B exports wheat to Country A at a rate of 2.5 cloth per wheat.C.Country A exports wheat to Country B at a rate of 1.5 cloth per wheat.D.No trade is beneficial because Country B has lower opportunity costs.

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Question 46

In the AD/AS model, an economy is initially at long-run equilibrium. Which combination of events creates an inflationary gap?

A.AD shifts left while SRAS shifts right.B.AD shifts right, moving actual GDP above potential GDP.C.LRAS shifts right, increasing potential GDP above actual GDP.D.SRAS shifts left, reducing real GDP below potential.

Question 47

A nation runs a large government budget deficit. Using the open-economy loanable funds framework, what is the likely effect on the nation's current account?

A.Current account surplus, because government borrowing reduces domestic consumption and thus imports.B.Current account deficit, because higher real interest rates attract foreign capital, appreciate the currency, and reduce net exports.C.No change to the current account, because domestic saving adjusts to finance the deficit.D.Current account surplus, because the deficit reduces domestic investment, freeing up goods for export.

Question 48

Nominal GDP in Year 2 is $800 billion. The GDP deflator for Year 2 is 125 (base year = 100). What is real GDP in Year 2?

A.$1,000 billionB.$640 billionC.$675 billionD.$800 billion

Question 49

Country A has a trade surplus with Country B. Which of the following is a likely explanation, all else equal?

A.Country A's currency is overvalued relative to Country B's.B.Country A's interest rates are much higher than Country B's, attracting large capital inflows.C.Country A's currency is undervalued, making its exports cheap for Country B.D.Country A imposes no trade restrictions, allowing free imports from Country B.

Question 50

Automatic stabilizers help smooth the business cycle without new legislative action. Which of the following is the best example of an automatic stabilizer?

A.A government stimulus package passed during a recession.B.A central bank cutting interest rates during a downturn.C.Progressive income taxes and unemployment insurance benefits.D.A balanced-budget requirement that forces spending cuts during recessions.

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Question 51

A country's GDP is $500 bi l l i o ninY e a r 1 an d$ 550 billion in Year 2, both measured in Year 1 prices. The general price level rose 4% between Year 1 and Year 2. What is the real GDP growth rate?

A.4%B.10%C.6%D.14%

Question 52

The natural rate of unemployment consists of which two types of unemployment?

A.Cyclical and structural unemploymentB.Frictional and structural unemploymentC.Frictional and cyclical unemploymentD.Seasonal and structural unemployment

Question 53

If the nominal interest rate is 7% and the expected inflation rate is 4%, what is the real interest rate?

A.11%B.3%C.4%D.7%

Question 54

The long-run Phillips curve (LRPC) is vertical at the natural rate of unemployment (NRU). This vertical shape implies that:

A.Higher inflation permanently reduces unemployment below the NRU.B.In the long run, there is no trade-off between inflation and unemployment.C.The short-run Phillips curve is also vertical.D.Any level of inflation is consistent with the natural rate of unemployment.

Question 55

The Fed raises the discount rate. How does this tool of monetary policy affect commercial bank lending?

A.Banks borrow more from the Fed, increasing reserves and expanding lending.B.Banks borrow less from the Fed, reducing reserves and contracting lending.C.Banks immediately reduce their required reserve ratio.D.Banks increase open market purchases of government securities.

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Question 56

Real GDP per capita in Country A rose from $40,000 to \$ 42,000 over ten years. The population grew from 10 million to 12 million over the same period. Which statement best evaluates living standards?

A.Living standards rose because total real GDP increased.B.Living standards rose modestly — real GDP per capita increased 5% over a decade.C.Living standards fell because population grew faster than real GDP.D.Living standards cannot be assessed without knowing the unemployment rate.

Question 57

The consumption function is $C = 200 + 0.75 Y_{d}$ . If disposable income $(Y_{d})$ increases by $400 billion, by how much does consumption change?

A.$200 billionB.$300 billionC.$400 billionD.$100 billion

Question 58

An economist argues that expansionary fiscal policy in the long run primarily increases the price level rather than real GDP. This position is most consistent with which framework?

A.The Keynesian model, which emphasizes the multiplier effect.B.The classical/monetarist model, which holds that LRAS is vertical and real GDP returns to potential.C.The short-run AD/AS model without crowding out.D.The Phillips curve, which predicts that lower unemployment always reduces inflation.

Question 59

The short-run Phillips curve shows a trade-off between inflation and unemployment. If the government pursues expansionary fiscal policy, where does the economy move along the short-run Phillips curve?

A.Toward higher inflation and lower unemployment.B.Toward lower inflation and higher unemployment.C.Along the long-run Phillips curve toward lower unemployment.D.Upward along the long-run Phillips curve.

Question 60

During the expansion phase of the business cycle, which combination of macroeconomic trends is most likely?

A.Rising real GDP, falling unemployment, rising inflationB.Rising real GDP, rising unemployment, falling inflationC.Falling real GDP, falling unemployment, rising inflationD.Stable real GDP, stable unemployment, stable prices

AP Macroeconomics Full-length practice exam 2 — Free with Answer Explanations | Test Practice Hub