AP Macroeconomics Practice Exam 1 ❮ 189- E—In the full circular flow model, the role of
government is to collect taxes from firms and
households in exchange for goods and services.
Choice C is tempting, but households supply
resources in exchange for wages, which they
then use to purchase goods and services. - D—All production done in the United States is
counted in U.S. GDP, regardless of the nation-
ality of the entrepreneur. - E—Increased SRAS lowers the price level, but
increased AD increases the price level. The
change in the price level is uncertain, but real
GDP rises. - B—The transaction demand for money rises
with higher levels of nominal GDP. With a
fixed supply of money, increased demand for
money increases the interest rate as consumers
sell financial assets (e.g., bonds), lowering the
bond price and increasing the interest rate. - A—The spending multiplier M = 1/(1 – MPC)
= 1/MPS, so an increase in the marginal propen-
sity to consume increases the multiplier. - B—Asset demand for money is negatively
related to the interest rate. Lower interest rates
decrease the opportunity cost of holding money. - E—This is the only choice that combines con-
tractionary fiscal and expansionary monetary
policy. - B—Increased deficit spending will increase public
borrowing, thus shifting the demand curve to the
right, and increasing the interest rate. - C—Increased optimism shifts investment
demand to the right. - E—At the peak of the business cycle, the econ-
omy is very strong. Real GDP and incomes are
high, unemployment is low, and the threat is a
rapid increase in the price level. - E—An increase in demand for bonds as a finan-
cial asset decreases the demand for money and
lowers the interest rate. A lower interest rate in
the U.S. money market makes the United States
a less attractive place for foreign investors to
place their money. This decreased demand for
dollars depreciates the value of the dollar rela-
tive to foreign currencies.
32. C—Greater optimism shifts the consumption
function upward. The MPC is unchanged.
33. E—If the value of the dollar is high, it makes
American goods more expensive to foreign con-
sumers. This decreases net exports and lowers
U.S. real GDP. All other choices likely increase
real GDP.
34. A—With the economy operating beyond full
employment, look for a combination of expan-
sionary policies. All of the other choices include
a contractionary policy with an expansionary
policy, thus making A the most likely culprit.
35. D—Contractionary monetary policy increases
interest rates. Higher interest rates decrease new
home demand, investment spending, and AD,
and increase the unemployment rate.
36. A—Expanding the money supply decreases the
interest rate, increases investment, and stimu-
lates AD.
37. B—Because the spending multiplier is larger
than the tax multiplier, AD shifts farther to
the right when spending is increased with no
change in taxes. With the economy currently at
full employment, this largest of rightward shifts
in AD will be the most inflationary policy.
38. C—Because M1 is the most liquid measure of
money, it begins with cash and coins.
39. D—For a given MPC, the spending multiplier
exceeds the tax multiplier, which exceeds the
balanced budget multiplier, which is always 1.
40. B—Money creation slows if banks do not lend
all excess reserves.
41. B—More exports means an increased demand
for the dollar. Stronger demand for the dollar
increases the value of the dollar.
42. B—The money multiplier is 1/rr = 10. So
a $500 deposit creates $450 of new excess
reserves, which can multiply to $4,500 of newly
created money.
43. A—Lower levels of investment are the result of
higher interest rates so look for the choice that
describes a decrease in the money supply.