Use the Answer Sheet for the Multiple Choice answers

Use a separate sheet of paper for the FRQ

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AP Econ Take Home Test Mod 30-40 Due Jan 3nd

Check out the practice problems on my webpage (w/answers before you take the test)
Check out videos on suggested websites if you need clarification.
Check out the PPTs on my webpage.
There are no questions from Mod 40.
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____

1. The cyclically-adjusted budget balance refers to:

A the size of the budget in the current year.
.
B the average size of the budget over the long run.
.
C the swings in the budget as the business cycle changes.
.
D the budget balance if actual output were equal to potential output.
.
E the budget balance if there were no political business cycle.
.

____

2. Suppose that U.S. debt is $7 trillion dollars at the beginning of the fiscal year. During the fiscal year, the
government spending and government transfers are $2 trillion and tax revenues equal $1.5 trillion. At the end
of the fiscal year, the debt is:
A $10.5 trillion.
.
B $6.5 trillion.
.
C $9 trillion.
.
D $7.5 trillion.
.
E $8.5 trillion.
.

____

3. Monetary policy attempts to affect the overall level of spending in the economy by changes in:
A taxes.
.
B taxes and spending.
.
C taxes and interest rates.
.
D interest rates and the quantity of money.
.
E imports and exports.
.

Figure 31-1: Money Market I

____

4. Use the Money Market I Figure 31-1. If the money market is initially in equilibrium at point E and the
central bank _____ bonds, then the interest rate will:
A sells; move toward point H.
.
B sells; move toward point L.
.
C buys; remain at point E.
.
D sells; remain at point E.
.
E buys; move toward point H.
.

Figure 31-2: Changes in the Money Supply

____

5. Use the Changes in the Money Supply Figure 31-2. Fed policy to increase the supply of money and hence
to lower the interest rate from 6% to 4%, is accomplished by action that _______ the _______ government
bonds.
A lowers; price of
.
B increases; interest rate on
.
C decreases; issuing of
.
D increases; supply of
.
E increases; demand for
.

____

6. Suppose the Fed has set a target for the federal funds rate. If initially the equilibrium interest rate happens to
be higher than the target interest rate, then the Fed should:
A sell Treasury bills in the open market, decrease money supply, shift the supply of money
. curve to the left, and increase the interest rate to the target rate.
B purchase Treasury bills in the open market, decrease money supply, shift the supply of
. money curve to the left, and lower the interest rate to the target rate.
C purchase Treasury bills in the open market, increase money supply, shift the supply of
. money curve to the right, and lower the interest rate to the target rate.
D purchase Treasury bills in the open market, increase money supply, shift the supply of
. money curve to the left, and lower the interest rate to the target rate.
E sell Treasury bills in the open market, increase money supply, shift the supply of money
. curve to the left, and increase the interest rate to the target rate.

Scenario 31-1: Money and Interest Rates

Banks decide to do away with fees charged to noncustomers when they use another bank's ATM.
____

7. Use Scenario 31-1. If the Fed wants to maintain the same federal funds rate, it should:
A increase taxes.
.
B decrease government spending.
.
C sell Treasury bills.
.
D buy Treasury bills.
.
E lower the discount rate.
.

____

8. According to the liquidity preference model, what will happen to the money supply curve, the equilibrium
interest rate, and the equilibrium quantity of money, if the Fed sells Treasury bonds in an open market
operation?
A Money Supply Curve shifts leftward, Interest Rate increases , Quantity of Money
. decreases

B
.
C
.
D
.
E
.

____

Money Supply Curve shifts leftward, Interest Rate increases, Quantity of Money
increases
Money Supply Curve shifts leftward, Interest Rate decreases, Quantity of Money
decreases
Money Supply Curve shifts rightward, Interest Rate increases, Quantity of Money
decreases
Money Supply Curve shifts rightward, Interest Rate decreases, Quantity of Money
increases

9. To close a recessionary gap using monetary policy, the Fed should ________ the money supply to ________
investment and consumer spending, and shift the aggregate demand curve to the ________.
A increase; increase; left
.
B decrease; decrease; left
.
C increase; increase; right
.
D decrease; decrease; right
.
E decrease; increase; right
.

____ 10. To close an inflationary gap using monetary policy, the Fed should ________ the money supply to ________
investment and consumer spending, and shift the aggregate demand curve to the ________.
A increase; increase; left
.
B decrease; decrease; left
.
C increase; increase; right
.
D decrease; decrease; right
.
E decrease; increase; right
.

Figure 31-3: The Money Supply and Aggregate Demand

____ 11. Use the The Money Supply and Aggregate Demand Figure 31-3. If the Fed intended to encourage
investment and expand the economy, it would _______ government bonds, _______ the money supply, and
_______ interest rates. This is shown in Panel _______.
A buy; increase; decrease; (a)
.
B sell; increase; decrease; (b)
.
C buy; decrease; decrease; (a)
.
D buy; increase; increase; (a)
.
E buy; increase; decrease; (b)
.

Figure 31-5: Monetary Policy I

____ 12. Use the Monetary Policy I Figure 31-5. If the money market is initially at E1 and the central bank chooses
to sell bonds, then:

A
.
B
.
C
.
D
.
E
.

AD2 will shift to the right, creating an inflationary gap.

AD2 may shift to AD1, creating a recessionary gap.
AD1 may shift to AD2, closing an existing recessionary gap.
AD1 will shift to the left, increasing an existing recessionary gap.
AD1 will shift to the left, increasing an existing inflationary gap.

Figure 31-8: Monetary Policy and the ADSRAS Model

____ 13. Use the Monetary Policy and the ADSRAS Model Figure 31-8. The economy is likely to move from
point i to point h due to:
A an increase in the money supply.
.
B raising the discount rate.
.
C a decrease in the money supply.
.
D selling government securities in the open market.
.
E raising the reserve requirement.
.

____ 14. Use the Monetary Policy and the ADSRAS Model Figure 31-8. If the economy is experiencing an
inflationary gap at point h, it can move to point i due to:
A an increase in the money supply.
.
B lowering the discount rate.
.
C a decrease in the money supply.
.

D buying government securities in the open market.

.
E An increase in government spending.
.

____ 15. An increase in the money supply causes ______ in output in the short run, and _______ in output in the long
run.
A a decrease; an increase an
.
B an increase; an increase
.
C no change; an increase
.
D no change; no change
.
E an increase; no change
.

____ 16. If the money supply increases by 10%, in the long run:
A unemployment drops by 10%.
.
B the price level increases by 10%.
.
C real GDP increases by 10%.
.
D unemployment drops by 20%.
.
E the interest rate falls by 10%.
.

____ 17. The concept of monetary neutrality describes a situation in the long run when:
A increases in the money supply have no effect on real variables such as GDP but only
. raises the price level.
B increases in the money supply have no effect on the price level but only raises real GDP.
.
C decreases in the money supply lower real GDP and the price level.
.
D increases in the money supply raise real GDP and the price level.
.
E increases in the money supply raise real GDP but has no impact on employment.
.

Figure 32-1: AD-AS Model

____ 18. Use the AD-AS Model Figure 32-1. Suppose the economy is currently at YE with a price level of P1. Which
of the following would represent the new long-run equilibrium position if the aggregate demand curve shifted
to the right from AD1 to AD2 as a result of an increase in the money supply?
A YE and P2
.
B YE and P1
.
C Y1 and P2
.
D YE and P3
.
E Y1 and P3
.

____ 19. According to the classical model of the price level, an increase in the money supply will create:
A inflation with no long-run increase in real GDP.
.
B inflation and a long-run increase in real GDP.
.
C no inflation and a long-run increase in real GDP.
.
D deflation with no long-run increase in real GDP.
.
E disinflation with no long-run increase in real GDP.
.

____ 20. The inflation tax is:

A the higher tax paid by individuals whose incomes are indexed to inflation.
.
B the taxes paid during periods of inflation.
.
C the reduction in the value of money that is held by the public caused by inflation.
.
D the higher prices consumers pay due to inflation.

.
E the higher nominal wages received by workers due to inflation.
.

____ 21. Historically, governments have turned to seignorage to pay their bills, when:
A the economy is growing.
.
B the government lacks the will to reduce the budget deficit by raising taxes or reducing
. spending.
C the inflation rate is low.
.
D the unemployment rate is low.
.
E the government has a budget surplus.
.

____ 22. The short-run Phillips curve shows:

A a direct relationship between unemployment and inflation.
.
B an inverse relationship between unemployment and inflation.
.
C consequences of the misperceptions theory.
.
D the optimum level of employment.
.
E an inverse relationship between unemployment and the real interest rate.
.

Figure 34-1: Expected Inflation and the Short-Run Phillips Curve

SRPC0 is the Phillips curve with an expected inflation rate of 0%; SRPC2 is the Phillips curve with an
expected inflation rate of 2%.

____ 23. Use the Expected Inflation and the Short-Run Phillips Curve Figure 34-1. Suppose that this economy
currently has an unemployment rate of 6%, inflation of 0%, and no expectation of future inflation. If the
central bank increases the money supply such that aggregate demand shifts to the right and unemployment
falls to 4%, then inflation would:
A decrease to 2%.
.
B not change.
.
C increase to 2%.
.
D increase to 4%.
.
E increase to 8%.
.

____ 24. Suppose that commodity prices across the economy begin to fall and consumers and firms begin to expect a
lower rate of future inflation. What do we expect to happen to the SRAS curve and short-run Phillips curve?
A The SRAS curve will shift to the left, and the short-run Phillips curve will shift
. downward.
B The SRAS curve will shift to the right, and the short-run Phillips curve will shift
. downward.
C The SRAS curve will shift to the left, and the short-run Phillips curve will shift upward.
.
D The SRAS curve will shift to the right, and the short-run Phillips curve will shift upward.
.
E The LRAS curve will shift to the right, and the short-run Phillips curve will shift upward.
.

Figure 34-3: Short-Run Phillips Curve

____ 25. Use the Short-Run Phillips Curve Figure 34-3. The natural rate of unemployment is:

A
.
B
.
C
.
D
.
E
.

3%.
5%.
7%.
8%.
1%.

____ 26. The non-accelerating inflation rate of unemployment, or NAIRU is:

A the inflation at which the unemployment rate does not change over time.
.
B there is a trade-off between unemployment rate and inflation.
.
C the unemployment rate at which inflation does not change over time.
.
D a rate where it is possible to achieve lower unemployment by accepting higher inflation.
.
E the unemployment rate that corresponds to zero unemployment.
.

____ 27. The long-run Phillips curve shows the relationship between:
A potential aggregate output and the natural rate of unemployment at a given rate of
. expected inflation.
B the expected inflation and the actual inflation after the expectation becomes embedded in
. people's minds.
C the aggregate output and the aggregate price level in the economy at a given rate of
. expected inflation.
D the unemployment and inflation after expectations of inflation have had time to adjust to
. experience.
E the real interest rate and investment spending.
.

____ 28. The process of bringing down inflation that has been embedded into expectations is called:
A disinflation.
.
B deflation.
.
C hyperinflation.
.
D natural rate of inflation.
.
E stagflation.
.

____ 29. When the economic situation is such that monetary policy can no longer be used because the nominal rate of
interest cannot fall below zero, it is called:
A the liquidity preference.
.
B the money neutrality.
.
C the revealed preference trap.
.
D the money illusion.
.
E the liquidity trap.
.

____ 30. Which of the following years is often described as the worst year of the Great Depression?
A 1913
.
B 1933
.
C 1953
.
D 1973
.
E 1863
.

____ 31. Because classical economists stressed mostly the long run, they:
A perceived the economy as being mostly self-adjusting.
.
B favored the use of fiscal policy over monetary policy.
.
C expected the government to purge the rottenness out of the system.
.
D favored the use of monetary policy over fiscal policy.
.
E favored the coordinated use of both monetary and fiscal policy.
.

____ 32. The school of economics that dominated economic thinking prior to the Great Depression was the:
A business cycle theorists.
.
B classical school.
.
C post-Keynesian school.
.
D Marxists.
.

E monetarists.
.

____ 33. Which one of the following statements is TRUE?

A Keynes treated short-run macroeconomics as a minor issue.
.
B Keynes emphasized the short-run effects of shifts in aggregate demand on aggregate
. output, employment, and prices whereas the classical economists focused on the long-run
determination of the aggregate price level.
C The classical economists believed that the short-run aggregate supply curve was upward
. sloping.
D The classical economists emphasized the short-run effects of shifts in aggregate demand
. on aggregate output, whereas Keynes focused on the long-run determination of the
aggregate price level.
E Keynes saw no role for the government in affecting the business cycle.
.

____ 34. Keynesians argued that monetary policy would NOT be effective if:
A there was a liquidity trap.
.
B the Fed was independent of political pressure.
.
C other countries did not follow monetary policy similar to that of the United States.
.
D no one bought bonds when the Fed conducted open-market operations.
.
E the investment demand curve was downward sloping.
.

____ 35. Friedman argued that with a ______ money supply, velocity is so ______ that there's not much point in using
monetary policy.
A steady increase in the; large
.
B constant; small
.
C steady increase in the; constant
.
D constant; large
.
E steady increase in the; volatile
.

____ 36. Monetarists argue that:

A the Federal Reserve System should allow the money supply to increase at a slow, steady
. annual rate.
B since velocity is unstable, a fixed annual increase in the money supply will exacerbate

.
C
.
D
.
E
.

inflation in the long run.

self-correction is less effective than activist monetary policy.
fiscal policy should always be used before monetary policy.
the economy will self-correct without activist monetary policy.

____ 37. Fiscal policy can:

A be more political than monetary policy.
.
B be less political than monetary policy.
.
C be neutral like monetary policy.
.
D have the same impact on all citizens.
.
E be coordinated with monetary policy to avoid political influence.
.

____ 38. The following recommendation is consistent with which view of the macroeconomy? The government
should avoid deficit spending because of the crowding-out effect on investment spending.
A classical
.
B Keynesian
.
C monetarist
.
D modern consensus
.
E supply-side
.

____ 39. If a country has a population of 1,000, an area of 100 square miles, and a GDP of $5,000,000, then its GDP
per capita is:
A $500.
.
B $5,000.
.
C $50,000.
.
D $5,000,000.
.
E $50.
.

____ 40. From 20072008 Nation A saw real GDP increase from $100 billion to $106 billion. The population of Nation
A also grew from 50 million to 51 million from 20072008. The annual growth rate in real GDP per capita
was approximately:
A 1%.
.
B 3%.
.
C 4%.
.
D 6%.
.
E 2%
.

____ 41. The skills, training, and education possessed by workers contribute to economic growth and are known as:
A saving.
.
B technological capital.
.
C natural resources.
.
D output of labor.
.
E human capital.
.

____ 42. Physical capital would include:

A the education or knowledge a worker has in his or her physical being.
.
B the tools a worker has to work with.
.
C the money available for the worker to use.
.
D shares of stock.
.
E the natural resources a worker has to work with.
.

____ 43. Growth accounting estimates the:

A increase in the population rate over time.
.
B increase in the inflation rate over time.
.
C contribution of each major factor in the aggregate production function to economic
. growth.
D increase in the rate of technological progress over time.
.

E increase in the rate of educational attainment over time.

.

____ 44. Investment spending:

A must be paid for by consumption by domestic households.
.
B comes from either savings from domestic households or savings of foreign households.
.
C is paid for by capital outflows.
.
D must be paid for by government spending.
.
E rises when consumption rises.
.

____ 45. Economists are optimistic that growth can continue in the face of resource scarcity because:
A the level of oil reserves is vastly understated by the oil industry.
.
B prices of scarce resources fall and provide incentives to use more of those resources.
.
C prices of scarce resources rise and provide incentives to find alternative energy sources.
.
D resource scarcity no longer limits economic growth in the twenty-first century.
.
E the government can always lower income taxes to spur more long-run growth.
.

Problem
1. The unemployment rate in Megalopolis is less than the natural rate of unemployment.
(a) Using a correctly labeled graph of the aggregate demand and aggregate supply, show the current real gross
domestic product and price level in Megalopolis.
(b) Identify an open market operation that would restore the economy to full employment output.
(c) Using a correctly labeled graph of the money market, show the effect of the open market operation
identified in (b) on:
(i) the nominal interest rate
(ii) the quantity of money
(d) Show in the graph in (a) the effect of the change in the nominal interest rate identified in (c)(i) on the price
level and real gross domestic product.
(e) Explain how the change in the nominal interest rate you identified in (c)(i) will affect gross domestic
investment.

(f) Assume that input prices are flexible. In the absence of any monetary or fiscal policy, expalin what will
happen to the following:
(i) short run aggregate supply
(ii) price level