AP Macroeconomics Practice Exam 2 ❮ 209
- D—Investment tax credits provide incentives
for firms to invest in capital equipment and
new factory construction. This policy stimulates
economic growth and productivity.
- C—With an MPC = 0.90, M = 10, so increased
investment shifts AD $1,000 to the right.
- B—Remember, M2 includes M1 but also
includes less liquid forms of money like savings
accounts. If you added M1 and M2, you would
be adding M1 twice.
- A—Tm = M × MPC. A larger MPC increases
the size of Tm.
- D—Higher inflation than other nations causes
goods to be more expensive relative to those
produced abroad, causing a drop in net exports.
- B—High inflation rates require a decrease in
AD, and this is the only contractionary fiscal
policy. Fed policy is not fiscal; it is monetary.
- E—Lower factor prices in major industries rep-
resent decreased costs of production, and this
creates an increased SRAS.
- E—This balanced budget policy increases real
GDP at a slower rate than the other expansion-
ary options.
- E—Selling securities pulls excess reserves out of
the banking system, decreasing the money supply.
- B—Expansionary policy lowers interest rates
and is more effective if investment increases
greatly. If money demand is perfectly elastic,
increased money supply does not lower interest
rates, thus failing to stimulate investment.
- E—Moving money from savings to cash
increases M1, but both savings and cash are
already included in M2, so it has no effect on
these two larger measures of money.
- D—The short-run Phillips curve portrays
the inverse relationship between inflation and
unemployment rates. In the long run, it is verti-
cal at the natural rate of unemployment.
- C—The U.S. dollar is not “backed” by any
physical asset or commodity.
- A—The money multiplier is 10, so withdrawing
$1 million leads you to conclude that money in
circulation falls by $10 million, but the original
$1 million is still in circulation, so money falls
by $9 million.
- E—Know how fiscal policy affects real GDP
and unemployment.
- B—The Fed does not make changes in tariff
and quota policy.
- C—Have a strong knowledge of fiscal and mon-
etary policies.
- A—Budget deficits emerge during a recession
because net taxes fall when incomes fall. The
trend is reversed during expansion.
- E—Know all combinations of fiscal and mon-
etary policy.
- D—The central bank wants to increase the
money supply to lower interest rates. Combine
the expansionary fiscal with the expansionary
monetary policy, and the bank risks inflation.
- B—Long-run AS rises if the productive capacity
of the economy rises and more productive labor
and capital resources have this effect.
- C—Lower interest rates decrease foreign
demand for U.S. securities, depreciating the
dollar. “Cheap” dollars make U.S. exports more
affordable to foreigners, increasing exports.
- A—A horizontal money demand curve implies
that increasing the money supply does not lower
the interest rate. Investment is constant, and
AD does not increase.
- B—Know how monetary policy affects invest-
ment, AD, and employment.
- A—If short-run AS shifts rightward, the short-
run Phillips curve shifts down, or leftward.
The short-run unemployment rate falls below
the natural rate but eventually rises back to the
natural rate and a lower rate of inflation, as
expectations readjust to the new AS.
- D—Higher Japanese incomes increase net
exports in the United States, increasing the
value of the dollar versus the yen, decreasing the
value of the yen versus the dollar.
- E—Know how fiscal policy affects AD, real
GDP, and the price level.
