Which of the following statements are true of production possibility frontiers and trade between nations?
Nations specialize and trade based on comparative advantage in production.
Free trade allows each nation to consume beyond the production possibility frontier.
A nation is producing at a point inside of its production possibility frontier. Which of the following is a possible explanation for this outcome?
This nation is experiencing an economic recession.
How would fiscal and monetary policymakers combine spending, tax, and monetary policy to fight a recessionary gap, while avoiding large budget deficits?
Spending Policy:Higher spending
Tax Policy:Higher Taxes
Monertary Policy: Lowering the discount rate
Corn is exchanged in a competitive market. Which of the following definitely increases the equilibrium price of corn?
Supply shifts to the left; demand shifts to the right.
An increase in the Consumer Price Index is commonly referred to as
Which of the following is characteristic of a centrally planned economic system?
Government planners decide how best to produce goods and services.
The government has just lowered personal income taxes. Which of the following best describes the effects that this policy has on the economy?
Higher disposable income, higher consumption, higher real GDP, lower unemployment.
Which of the following are harmed by unexpectedly high rates of inflation?
Savers who have put their money in long-term assets that pay a fixed interest rate.
Persons living on fixed incomes.
Which of the following statements are true?
Dollars earned today have more purchasing power than dollars earned a year from today.
If your nominal income rises 4 percent and your real income falls 1 percent, by how much did the price level change?
5 percent increase
Which of the following best measures changes in the price level of national product?
The GDP deflator.
Which of the following lessens the impact of expansionary fiscal policy?
Higher interest rates that decrease private investment.
Suppose that the unemployment rate falls from 6 percent to 5 percent and the inflation rate falls from 3 percent to 2 percent. Which of the following best explains these trends?
An increase in aggregate supply.
Which of the following scenarios best describes the concepts of scarcity and opportunity cost?
Your state government, in order to increase support for higher education, must cut spending for environmental protection to keep the budget balanced.
Some economists believe that when aggregate demand declines, prices are inflexible or “sticky” in the downward direction. This implies that the aggregate supply curve is
horizontal below full employment.
Which of the following policies best describes supply-side fiscal policy?
Lower taxes on research and development of new technology.
A likely cause of falling Treasury bond prices might be
contractionary monetary policy.
The economy is currently operating at full employment. Assuming flexible wages and prices, how would a decline in aggregate demand affect GDP and the price level in the short run, and GDP and the price level in the long run?
Short-Run GDP: Falls
Short-Run Price Level: Falls
Long-Run GDP: No change
Long-Run Price Level: Falls
In the long run, aggregate supply is
vertical at full employment.
What does the presence of discouraged workers do to the measurement of the unemployment rate?
Discouraged workers are counted as “out of the labor force,” thus understating the unemployment rate, making the economy look stronger than it is.
Which of the following is true of the complete circular flow model of an open economy?
The government collects taxes from firms and households in exchange for goods and services.
Which of the following most likely increases aggregate demand in the United States?
A Mexican entrepreneur founds and locates a software company in St. Louis.
When both aggregate supply and aggregate demand increase, which of the following can be said for certain?
Real GDP rises, but the change in the price level is uncertain.
When nominal GDP is rising, we would expect money demand to
increase as consumers demand more money for transactions, increasing the interest rate.
Which of the following tends to increase the spending multiplier?
An increase in the marginal propensity to consume.
Households demand more money as an asset when
the nominal interest rate falls.
Which of the following represents a combination of contractionary fiscal and expansionary monetary policy?
Fiscal Policy: Higher taxes securities
Monetary Policy:Buying Treasury
Higher levels of consumer wealth and optimism would likely have which of the following changes in the market for loanable funds?
Market for Loanable Funds: Decrease in supply
Interest Rate: Rising
Investment demand most likely increases when
investor optimism improves.
At the peak of a typical business cycle, which of the following is likely the greatest threat to the macroeconomy?
Suppose that households increase the demand for U.S. Treasury bonds as financial assets. Which of the following accurately describes changes in the money market, the interest rate, and the value of the dollar in foreign currency markets?
Money Market: Decreased demand
Interest Rate: Falling
If households are more optimistic about the future, how would the consumption function be affected?
The entire consumption function would shift upward.
U.S. real GDP most likely falls when
the value of the dollar, relative to foreign currencies, is high.
If current real GDP is $5000, and full employment real GDP is at $4000, which of the following combinations of policies might have brought the economy to this point?
A decrease in taxes and a lower discount rate.
If a nation is operating at full employment, and the central bank engages in contractionary monetary policy, the nation can expect the interest rate, the purchases of new homes, and the unemployment rate to change in which of the following ways?
Interest Rate: Increase
New Homes: Decrease
Unemployment Rate: Increase
Expansionary monetary policy is designed to
lower the interest rate, increase private investment, increase aggregate demand, and increase domestic output.
If the economy is experiencing an inflationary gap, which of the following is most likely to worsen the problem?
An increase in government spending with no change in taxes.
Which of the following is a component of the M1 measure of money supply?
Cash and coins
Assuming that households save a proportion of disposable income, which of the following relationships between multipliers is correct?
Spending multiplier > Tax multiplier > Balanced budget multiplier.
The fractional reserve banking system’s ability to create money is lessened if
banks hold excess reserves.
All else equal, when the United States exports more goods and services,
the value of the dollar rises as demand for dollars increases.
If the reserve ratio is 10 percent and a new customer deposits $500, what is the maximum amount of money created?
Suppose today’s headline is that private investment has decreased as a result of an action by the Federal Reserve. Which of the following choices is the most likely cause?
Selling Treasury securities to commercial banks.
If $1000 is deposited into a checking account and excess reserves increase by $700, the reserve ratio must be:
Suppose a nation is experiencing an annual budget surplus and uses some of this surplus to pay down part of the national debt. One potential side effect of this policy would be
decrease interest rates and risk an inflationary period.
Which of the following best describes a key difference between the short-run and long-run aggregate supply curve?
Short-run aggregate supply is upward sloping as nominal wages do not quickly respond to price level changes.
The “crowding out” effect refers to which of the following?
Higher interest rates that result from borrowing to conduct expansionary fiscal policy.
Which of the following is a predictable consequence of import quotas?
Higher consumer prices and a misallocation of resources away from efficient producers.
If the Federal Reserve was concerned about the “crowding out” effect, they could engage in
expansionary monetary policy by lowering the discount rate.
Which of the following would likely contribute to faster rates of economic growth?
Higher government funding of research on clean energy supplies.
A nation that must consistently borrow to cover annual budget deficits risks
a decline in net exports as the nation’s goods become more expensive to foreign consumers.
Economic growth is best described as
an increase in the production possibility frontier and a rightward shift in long-run aggregate supply.
Which of the following is true of automatic fiscal policy stabilizers?
For a given level of government spending, they produce a deficit during a recession and a surplus during an expansion.
Which of the following is an example of expansionary monetary policy for the Federal Reserve?
Buying Treasury securities from commercial banks.
Labor productivity and economic growth increase if
a nation subsidizes education for all citizens.
The short-run Phillips curve depicts the ____ relationship between ____ and ____.
negative, the inflation rate, the unemployment rate
A negative, or contractionary, supply shock will
shift the Phillips curve to the right.
When a nation is operating at the natural rate of employment,
there is no cyclical unemployment.
Which of the following likely results in a permanent increase in a nation’s productive capacity?
National program of child immunization.
Lower interest rates in the United States cause the value of the dollar and exports to change in which of the following ways?
Value of the dollar: Decreasing
U.S. exports: Increasing
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