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AP Macroeconomics Medium practice

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Medium practice

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Question 1

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.

Question 2

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 3

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 4

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.

Question 5

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

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Question 6

A market basket costs $200 in the base year and \$ 230 in the current year. The CPI in the current year is closest to:

A.115B.130C.87D.100

Question 7

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 8

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 9

The multiplier effect on GDP from a change in taxes is different from the multiplier effect from a change in government spending. Given $M P C = 0.75$ , what are the spending multiplier and the tax multiplier, respectively?

A.Spending multiplier = 3; Tax multiplier = −3B.Spending multiplier = 4; Tax multiplier = −3C.Spending multiplier = 4; Tax multiplier = −4D.Spending multiplier = 5; Tax multiplier = −4

Question 10

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 11

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 12

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.

Question 13

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

Question 14

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 15

If expected inflation increases while the nominal interest rate is unchanged, which of the following is most likely to occur in the loanable funds market?

A.Borrowers demand more loanable funds, and lenders supply more, raising the nominal rate.B.Lenders demand a higher nominal rate to preserve the real return; the equilibrium nominal rate rises.C.Real interest rates rise because expected inflation raises the cost of borrowing.D.Both supply and demand for loanable funds shift right by equal amounts, leaving the rate unchanged.

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