AP Macroeconomics : AP Macroeconomics

Study concepts, example questions & explanations for AP Macroeconomics

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Example Questions

Example Question #1 : Exchange Rate

Assume the exchange rate from Mexican pesos to American dollars is 8 pesos to $1.

If a bushel of wheat is 12 pesos in Mexico, how many bushels in Mexico could $1200 buy?

Possible Answers:

1260 bushels

400 bushels

1800 bushels

800 bushels

1000 bushels

Correct answer:

800 bushels

Explanation:

There are 8 pesos to the dollar, so multiply 1200 by 8 to get the number of pesos. A bushel costs 12 pesos, so divide by 12 to get 800 bushels. 

Example Question #2 : Exchange Rate

A country with a high rate of return on investments will likely see which of the following?

Possible Answers:

Increase in emigration

Government bond rating decreases

Currency depreciates in value

Exports increase

Currency appreciates in value

Correct answer:

Currency appreciates in value

Explanation:

If a nation has an excellent return on investments, that makes investing in that nation more appealing to foreign and domestic investors. Foreigners will exchange their currencies for the currency of the nation with a high rate of return. Domestic investors may take their investments out of foreign markets and invest domestically to take advantage of the high rate of return. This leads to a high demand for the demand currency, meaning people are willing to pay more to recieve that currency. This causes the currency to appreciate in value. 

Example Question #1 : How To Find Exchange Rate

Choose the correct statement about exchange rates.

Possible Answers:

A forward exchange rate is the rate of currency exchange based on Gross Domestic Product, while a spot exchange rate is the rate of currency exchange based on the inflation rate.

A forward exchange rate is the rate of currency exchange based on future projections, while a spot exchange rate is the rate of currency exchange based on past trends.

A forward exchange rate is the rate of currency exchange for a select few stable currencies, while a spot exchange rate is the rate of currency exchange for all other currencies.

A forward exchange rate is the rate of currency exchange for a future transaction, while a spot exchange rate is the rate of currency exchange for an immediate transaction.

A forward exchange rate is the rate of currency exchange for an immediate transaction, while a spot exchange rate is the rate of currency exchange for a future transaction.

Correct answer:

A forward exchange rate is the rate of currency exchange for a future transaction, while a spot exchange rate is the rate of currency exchange for an immediate transaction.

Explanation:

Because an exchange rate is a fluid marker of the equivalent value of two different currencies, two different measures of an exchange rate are necessary. When a transaction is necessary in the moment, the current exchange rate, or a present marker of relative value between currencies, is used. When the transaction is made but scheduled for exchange on a future date, the forward exchange rate, or a projection of future relative value based on recent trends, is used as the exchange rate.

Example Question #1 : Diagrams

Which of the following explanations best represent the concept of opportunity costs?

Possible Answers:

It includes the explicit costs included in the production of a good, which include all the payments made to the factors of production. 

It is the sum of all the implicit costs represented in all the alternative opportunities foregone in the production of a good

It is the cost of the next best alternative that could be pursued with the resources used to produce a good

It is the sum of all explicit and implicit costs in all of the alternatives foregone to produce the good

None of the other options

Correct answer:

It is the cost of the next best alternative that could be pursued with the resources used to produce a good

Explanation:

The definition of the opportunity cost is the value of the highest valued alternative that is foregone in the production of a good. It is not the sum of all the alternative options, but rather only the most highly valued one.  

Example Question #1 : Production Possibility Diagrams

Which of the following best describes the typical shape of a Production Possibility Frontier?

Possible Answers:

The Production Possibility Frontier is always linear and horizontal.

The Production Possibility Frontier is bowed inward with respect to the origin.

The Production Possibility Frontier is always linear and increasing.

The Production Possibility Frontier is bowed outward with respect to the origin.

Correct answer:

The Production Possibility Frontier is bowed outward with respect to the origin.

Explanation:

The Production Possiblity Frontier is typically bowed outward with respect to the origin, reflecting the law of increasing opportunity costs, which states that as production of a particular good or service increases, costs associated with producing that good or service increase too. 

The correct answer, therefore, is "The Production Possibility Frontier is bowed outward with respect to the origin." The other answer choices are incorrect because they do not accurately account for the law of increasing opportunity costs.

Example Question #1 : How To Find Production Possibility Diagrams

Which of the following explain why a production possibilities frontier would be bowed outward?

Possible Answers:

None of the other answers

Decreasing opportunity costs of producing more goods

Increasing opportunity costs of producing more goods

Increasing and then decreasing opportunity costs of producing more goods

Constant opportunity costs of producing more goods

Correct answer:

Increasing opportunity costs of producing more goods

Explanation:

The bowed-outward shape of the PPF represents increasing opportunity costs of production because it indicates that it is becoming more and more costly to produce the good on the x-axis. This higher cost is represented by the increasingly steep slope of the PPF. The slope of the PPF corresponds to the costs of producing an extra unit of X. The steeper the slope, the steeper the cost.  

Example Question #1 : Diagrams

Which of the following best explains why a production possibilities frontier would have increasing opportunity costs as we move along its length?

Possible Answers:

Moving along the production possibilities frontier requires an increase in the resources available to a country

It is generally more costly for a country to produce capital goods witha  fixed number of resources

None of the other answers

The resources/factors of production become less and less suitable for the new production mix 

It is generally more costly for a country to produce consumer goods with a fixed number of resources

Correct answer:

The resources/factors of production become less and less suitable for the new production mix 

Explanation:

The increasing opportunity costs as you move along a PPF are a result of the resources that are more specialized in the production of one good being used to produce the other good. These resources become less and less productive leading to higher costs. If the two goods are cars and burgers, the more burgers you start to make, the more car mechanics you have to start using to make these burgers (since your resources are fixed). The less productive car mechanics (that is, in the production of burgers) will lead to higher production costs. This is due to the fact that they will earn the same hourly wage as the burger specialists, but produce fewer burgers per hour. The cost of burger production progressively goes up. 

Example Question #1 : Diagrams

Use the following diagram to answer the question below

Ppf

Which of the following points represents the best production outcome for an economy looking for long-term, sustainable growth?  

Possible Answers:

There is insufficient information to answer the question

Both  and  would be equally suitable as they represent points of productive efficiency for the economy

Correct answer:

Explanation:

 would be the most appropriate point since it has a higher quantity of capital goods than point . Capital goods have a greater impact on the long term growth of an economy.  

Example Question #1 : Other Production Possibility Diagrams

Use the diagram below to answer the question below:

Ppf

Which of the following best explains a move from point  to point ?

Possible Answers:

A move from a point on the PPF with higher unemployment to a point on the PPF with lower unemployment

Moving from one productively efficient point on the PPF to another productively efficient point on the PPF

None of the other answers

A move from an inefficient point of production to a more efficient point of production

A move from a point of higher concentration of capital goods to one of higher concentration of consumer goods, involving a greater use of labour as a primary resource of production

Correct answer:

Moving from one productively efficient point on the PPF to another productively efficient point on the PPF

Explanation:

Both point  and  are along the PPF, so they are both productively efficient. For this reason, they represent identical unemployment rates. Additionally there is nothing to convince us that labour is necessarily the primary resource in the production of consumer goods in this economy. 

Example Question #1 : Production Possibility Diagrams

Use the following diagram to answer the questions below:

Ppf efficiency

If the lower diagram represents the marginal costs and marginal benefits of the consumer good to society, which of the following answers correctly represents the characteristics of the points on the production possibilities frontier?

Possible Answers:

Point  is a productively efficient point but allocatively inefficient point

Point  is allocatively efficient but productively inefficient

Point  is an allocatively inefficient point but productively efficient point of production

Point is neither productively efficient nor allocatively efficient

Point  is a point of allocative efficiency and productive efficiency

Correct answer:

Point  is a point of allocative efficiency and productive efficiency

Explanation:

At point , there is allocative efficiency because at this point the society is producing the right mix of goods (supply (marginal cost) of the consumer good matches its demand (marginal benefit])). Point  is on the PPF and as such is also productively efficient since all resources are being used for production at all points on the PPF. 

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