Multiple-Choice Answers and Explanations
- D.D is the only answer that describes efficiency. All other possible choices are interchangeable and too ambiguous.
The production possibilities curve shifts outward when there is an increase in productive resources or a more
efficient means of using productive resources. - C.The inflation rate in 1976 would be 6 percent because that is the difference between nominal and real GDP.
Remember that nominal GDP is the unadjusted version of output, whereas real GDP is adjusted for inflation. The
difference between the two will give us the inflation rate. - C.A worker who is replaced by a machine is an example of someone who is structurally unemployed. The worker’s
skills have become obsolete for the required job. - B.As labor productivity rises, so does GDP; however, the price level decreases because there is an increase in
supply. When there is an increase in aggregate supply, the price level decreases. This essentially happens in order
to decrease supply. - D. An increase in the marginal propensity to consume increases the value of the spending multiplier. When
people consume more of their additional income, the spending multiplier is increased because more transactions
are taking place in the economy. The higher the marginal propensity to consume, the stronger the impact of the
multiplier becomes. - A.Keynesians hold that an increase in investment will increase aggregate demand. Remember that investment to
an economist is not holding money in an account; rather, investment is when firms purchase capital to expand.
When firms purchase capital, they typically borrow money from banks. When more money is borrowed, the
economy benefits from an increase in consumption and aggregate demand thus increases. - A.Government spending is $500 and the multiplier is 5. With the addition of government spending, the
expenditures curve increases in value because we now have investment, consumption, and government
expenditures. - E.Commercial banks can increase the money supply by lending out excess reserves. When banks have large
amounts of excess reserves, the interest rate on their loans drops to entice investors. Once the interest rate falls,
the public can borrow money for consumption. - D. $500 can be created as a result of $100 in excess reserves in a bank that has a 20 percent reserve requirement.
The $100 eventually turns into $500 because of the money multiplier (1/reserve requirement). - A.When the Federal Reserve lowers the reserve requirement for banks, it is attempting to increase the money
supply. The money supply can increase because banks are allowed to loan excess funds to borrowers. Borrowers
will borrow money at a low interest rate and use it for consumption. The reserve requirement tells banks how
much they have to keep in reserves and how much they may have in excess reserves (loanable funds). - E.If the transaction demand for money increases, banks have an easier time lending out excess reserves. When
the public wants more money for transactions (buying goods and services), the demand for loans increases and
banks have an easier time lending their excess reserves. - C.An increase in spending coupled with a decrease in taxes stimulates growth in the economy. Unemployment
decreases because firms employ more resources (including labor), and consumption increases because disposable
income is increased as a result of a tax cut. - B.A recession can be remedied by decreasing taxes and increasing spending. This is an example of fiscal policy.
Remember that a recession is at least two consecutive quarters of declining GDP. - C.A decrease in the employment level is likely to occur if the government reduces spending and increases taxes.
The contractionary decision by the government may slow or even halt growth. These particular policies are
typically used when the economy is growing too quickly, risking high inflation. - E.Both C and D are correct answers. Depending on producers’ reaction to a tariff, the good will increase in
price, and may decrease in quantity because it becomes more expensive for producers to create the good.
Part IV: AP Macroeconomics & Microeconomics Tests