AP Macroeconomics : AP Macroeconomics

Study concepts, example questions & explanations for AP Macroeconomics

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Example Questions

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Example Question #1 : Ap Macroeconomics

At the beginning of a specified fiscal year, the national debt is equal to $1000. At the end of the fiscal year, the national deficit is equal to $100. The national debt at the end of the fiscal year is equal to ________.

Possible Answers:

$1000

$1100

$100

$900

Correct answer:

$1100

Explanation:

The national debt is the accumulation of national deficits, tabulated every fiscal year.

Therefore, if the national debt at the beginning of the year is $1000 and the deficit for that year is $100, the accumulated nation deficit is $1000+$100=$1100.

If you selected $900, you may have subtracted the deficit that year rather than adding it.

If you selected $100, you may have mistaken the national deficit for the national debt.

If you selected $1000, you may have forgotten to include the new deficit of $100 into the calculation of national debt.

Example Question #1 : Deficit Spending

The British economist who notably advocated deficit spending in order to pull a nation out of a recession or depression is _________.

Possible Answers:

John Maynard Keynes

Adam Smith

William Stanley Jevens

Carl Menger

Alfred Marshall

Correct answer:

John Maynard Keynes

Explanation:

John Maynard Keynes began arguing forcefully in the 1920s that spending in a deficit would actually help a country get out of an economic depression. The Great Depression of the 1930s saw many governments put Keynes' theories to the test, often with economic success. This time period is often known as the Keynesian Revolution.

Example Question #1 : Deficit Spending

According to Keynesian Economics, which of the following would weaken the multiplier effect?

Possible Answers:

An increase in government spending

High velocity of money

Selling government bonds

An increase in interest rates

Correct answer:

An increase in interest rates

Explanation:

The correct answer is that an increase in interest rates would weaken the multiplier effect. The reason is that an increase in interest rates would make it more attractive for consumers to save money, so as a result, there would be less of a propensity to consume.

Example Question #1 : How To Find The Effect Of Deficit Spending On Output

Which of these is a negative aspect of a law mandating a balanced budget?

Possible Answers:

It leads to increasingly high taxes. 

It is pro-cyclical (makes the business cycle more severe)

It leads to fluctuating tax rates. 

It creates excess funds for public projects. 

Correct answer:

It is pro-cyclical (makes the business cycle more severe)

Explanation:

A balanced budget law is pro-cyclical because when the economy enters a recession (GDP decreases), the amount of production the government is able to tax decreases, leading to a decrease in government revenue. The government is unable to spend at a deficit, so the government must decrease expenditures. Government expenditures make up a substantial portion of GDP, so GDP decreases even more. 

Example Question #1 : How To Find The Effect Of Deficit Spending On Aggregate Demand

If the economy is in severe recession, which of the following fiscal policies would a Keynesian economist most likely recommend?

Possible Answers:

An increase in personal income taxes in order to help balance the budget.

A decrease in government transfer payments.

An increase in government spending on public infrastructure, even if this spending results in greater budget deficits.

A decrease in government spending in order to offset the decrease in tax revenues that result from an economy in recession.

Correct answer:

An increase in government spending on public infrastructure, even if this spending results in greater budget deficits.

Explanation:

The correct answer is that a Keynesian Economist would be most likely to advocate increased spending on public infrastructure if the economy was in recession, even if such an increase results in an increase in budget deficits.

The reason for this is that the Keynesians believe that such an increase in public works spending will lead to an increase in aggregate demand.

 

Example Question #1 : Ap Macroeconomics

Each of the following is included in the gross domestic product EXCEPT _________.

Possible Answers:

Transfer payments

Consumption

Government Expenditures

Net Exports

Correct answer:

Transfer payments

Explanation:

To calculate the GDP, we add consumption, investment, government expenditures, and net exports. 

Transfer payments, such as social security, welfare, and unemployment checks, on the other hand, are not included in the calculation of the GDP.

Example Question #1 : Ap Macroeconomics

Which of these methods is a correct model for GDP?

Possible Answers:

Correct answer:

Explanation:

The quantity of money times the velocity of money is equal to the real output times the price level. So, if the above equation is solved for Y, it gives us: 

Example Question #1 : Ap Macroeconomics

Which of the following is NOT a measure of income when using the income approach to calculate GDP?

Possible Answers:

Governmental tax revenue.

Interest and investment income.

Wages and salaries.

Profits from corporations.

Income from farmers.

Correct answer:

Governmental tax revenue.

Explanation:

The income approach to calculating GDP will arrive at the same number as other approaches, such as the production approach or expenditure approach. The five sources of income used to calculate Income GDP, or Gross Domestic Income, are wages and salaries; interest and investment income; corporate profits; farmers' income; and non-farm unincorporated business profits.

Example Question #1 : Tables

In a certain year, nominal gross domestic product grew by 8 percent. The inflation rate was 4 percent. Real gross domestic product for this year was _______.

Possible Answers:

grew by 8 percent

grew by 4 percent

grew by 12 percent

remained constant

Correct answer:

grew by 4 percent

Explanation:

Nominal GDP growth refers to the rate at which real GDP increases. To find real GDP growth (i.e. GDP growth that accounts for inflation), subtract the inflation rate from the nominal GDP growth rate.

In this case, the nominal GDP growth rate is 8 percent, and the inflation rate is 4 percent. Thus, the real GDP growth rate is 4%.

Example Question #1 : How To Use Tables

Countries A & B can produce the following maximum quantities of cars and computers (when they use all their resources to produce one of the goods):

Country A: 500 computers OR 200 cars

Country B: 300 computers OR 100 cars

Which of the following is true about their trade potential?

Possible Answers:

None of the other answers

If Country A and Country B were to enter into a trade agreement, Country B would be the only party to benefit

If Country A and Country B were to enter into a trade agreement, Country A would be the only party to benefit

Country A and Country B can both benefit from trade since each has a comparative advantage in one of the goods

Country A would not accept any trade terms with Country B since it can produce more of both good A and good B

Correct answer:

Country A and Country B can both benefit from trade since each has a comparative advantage in one of the goods

Explanation:

Trade does not depend on absolute advantage (who can produce the most of both goods) but comparative advantage (who can produce one good cheaper than the other). Country A can produce cars more cheaply than country B (1 car costs 2.5 computers for country A while it costs 3 computers for country B). Country B on the other hand can produce computers more cheaply than country A (1 computer costs 0.3 cars in country B while it costs 0.4 cars in country A). Thus they will both benefit from trade. 

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