- C.When full employment is reached, there is about a 5 percent rate of unemployment. Full employment is
reached when the economy is at its productive capacity. At any point after full employment, there is little growth
and only increases in the price level. - C.When the economy is at productive capacity, any increase in demand causes the price level to increase further
and offer no growth to the economy. - B.Cyclical unemployment is a result of the economy experiencing contractionary elements. If Jill loses her job
because she does not possess the skills to accomplish certain tasks assigned to her, then she is considered
structurally unemployed. But because Jill loses her job in the midst of a recession, she is classified as cyclically
unemployed. - B.Contractionary fiscal policy is a combination of increased taxes and decreased spending. The government
does this to fight inflation. Contractionary fiscal policy is using either of the tools (spending or taxes) or using
both tools simultaneously. - B.A tax cut that is temporary during a period of rising price levels will not have a significant impact on growth.
Tax cuts are used to stimulate disposable income, thereby encouraging consumers to spend more money. If a tax
cut is implemented and the price level is rising, the goal of growth could be compromised. Goods and services
would become more expensive at a time when disposable income is temporarily being increased. - B.To an economist, investment means the purchase of capital. The term investmentis used to describe a firm’s
decision to borrow money to buy machines, raw materials, and labor. When investment increases, firms are
choosing to buy more factors of production. - C.Decreasing the tax on imports discourages exports because foreign goods in the United States become
cheaper. When goods become cheaper, consumers buy more foreign goods, thereby increasing the demand for
imports relative to exports. - D. The main purpose of monetary policy is to influence the money supply. The Fed does not control government
spending, nor can it increase GDP or influence taxes. The Fed’s purpose is to influence the money supply, and it
can do this by using three tools (the reserve requirement, open-market securities, and the discount rate). - C.Any level of inflation can occur at the full-employment rate in the long run. The Phillips Curve illustrates the
relationship between inflation and unemployment. In the long run, the inflation rate does not have an impact on
employment. - D. The Fed decreases the money supply by selling government bonds. When bonds are sold, the money supply
decreases. This is an example of contractionary monetary policy. - A.When a tariff is placed on an import, the cost of that good increases. Cars that are imported to the United
States will become more expensive because dealers will initially have to incur the costs of the import. Once the
dealer pays the tariff for the import, it will increase the cost of the car to compensate for the tariff. - E.The Fed cannot induce or control stagflation, wage changes, unemployment, and price changes. The Fed has
three tools it works with (the reserve requirement, open-market securities, and the discount rate), and those three
tools help it control the money supply. - D. If the nominal rate of interest is 6 percent and the inflation rate is 4 percent, then the real rate of interest is 2
percent because inflation erodes interest. For example, if you take out a $100 loan at 3 percent interest per year
and the inflation rate is 1 percent, the real or actual amount you will be paying back is only 2 percent. Inflation
helps borrowers with their debt. - D. The United States defines unemployment as those individuals without jobs but who are looking for work. The
unemployment rate is calculated without considering those who choose not to actively seek work. - C.A major improvement in technology will make it less expensive for firms to produce goods and services. The
aggregate supply curve will shift to the right, indicating an increase in production because of cheaper production
costs. For example, if a new machine were able to convert water into fuel, fuel costs would decrease significantly. - C.In response to an increase in investment in an inflationary time, the government (in an effort to reduce
consumption) should increase taxes. When taxes are increased, the purchasing power of consumers is weakened.
An increase in taxes decreases the amount of disposable income individuals have.
Part IV: AP Macroeconomics & Microeconomics Tests