AP Macroeconomics : AP Macroeconomics

Study concepts, example questions & explanations for AP Macroeconomics

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Example Questions

Example Question #1 : Other Production Possibility Diagrams

Use the diagram below to answer the following question

Ppf

Which of the following is true about the points in the diagram?

Possible Answers:

Point  and point  both exhibit cyclical forms of unemployment

Unemployment at point  consists of both frictional and structural forms of employment

The unemployment at Point  is equal to the natural unemployment rate 

Unemployment at point  is both cyclical and frictional

There is no unemployment at point 

Correct answer:

Unemployment at point  consists of both frictional and structural forms of employment

Explanation:

On the PPF, the unemployment rate is equal to the natural rate of unemployment which consists of frictional unemployment and structural employment but excludes cyclical unemployment. 

Example Question #1 : Diagrams

Use the following graph to answer the questions below:

 

Ppf econgrowth

Which of the following best explains what caused the movement from PPF1 to PPF2?

Possible Answers:

A change in societal preferences towards consumer goods rather than capital goods

A change in land use from residential use to industrial use

An reduction in cyclical unemployment in the society

An increase in the portion of the population joining the military

An increase in the size of the labour force

Correct answer:

An increase in the size of the labour force

Explanation:

The move from PPF1 to PPF2 represents an increase in the productive potential(possibilities) of the economy. This can be effected by an increase in the productive resources in the economy, which would be represented by an increase in the labour force. 

Example Question #1 : How To Find Production Possibility Diagrams

Use the diagram below to answer the following question:

 

Ppf growth in one good

Which of the following best explains the production possibilities diagram shown?

Possible Answers:

A shift in preferences of the society away from capital goods and towards consumer goods

None of the other answers

An increase in the size of the labor force 

A technological improvement that makes it cheaper to produce consumer goods

An economic boom

Correct answer:

A technological improvement that makes it cheaper to produce consumer goods

Explanation:

The diagram shows an increase in the potential productive capacity of the consumer good production without a corresponding increase in the productive capacity of capital good production. The best answer then is that whatever change happened affected only the capacity to produce consumer goods. Labour force increases would increase the capacity to produce both goods, and so would an economic boom.

Example Question #1 : How To Find Tariffs

Tariffs are used for all of the following EXCEPT __________.

Possible Answers:

protecting domestic businesses

restricting trade from foreign producers

creating a more free and open market for the good being taxed

raising revenue on imports

decreasing the total amount of goods imported

Correct answer:

creating a more free and open market for the good being taxed

Explanation:

A tariff, also known as a "border tax", is a tax placed only on specific goods being imported into a country. A tariff can be used to restrict foreign imports, harm foreign producers in some way, protect domestic businesses, or raise additional revenue. What a tariff never does is open markets and promote absolute free trade.

Example Question #1 : Short Run Phillips Curve Graphs

The short-run Phillips curve depicts which of the following relationships?

Possible Answers:

A direct and positive relationship between unemployment and inflation

A tradeoff between unemployment and inflation

A direct and positive relationship between employment and the real interest rate

A tradeoff between employment and inflation

Correct answer:

A tradeoff between unemployment and inflation

Explanation:

The short-run Phillips curve indicates an inverse relationship between inflation and unemployment. According to the short-run Phillips curve, as unemployment goes up, inflation goes down, and as inflation goes up, unemployment goes down.

The correct answer is therefore "A tradeoff between unemployment and inflation." Recall that a tradeoff refers to an inverse relationship.

The other answer choices are all distortions of the predictions of the short-run Phillips curve. 

 

 

Example Question #1 : Graphs

Which of the following is the best definition of the concept behind the Phillips Curve?

Possible Answers:

The relationship between government spending and the multiplier effect

The relationship between worker pay and productivity.

The relationship between unemployment and inflation

The relationship between net exports and GDP

Correct answer:

The relationship between unemployment and inflation

Explanation:

The Phillips Curve is meant to express the short-run tradeoff between inflation and unemployment.

Example Question #1 : Long Run Aggregate Supply Curve

The long-run aggregate supply curve is likely to shift to the right when which of the following occurs?

Possible Answers:

An increase in government spending due to government stimulus

A decrease in interest rates due to action by the Federal Reserve

An increase in worker productivity due to technological innovation

A higher than estimated multipler effect

Correct answer:

An increase in worker productivity due to technological innovation

Explanation:

An increase in worker productivity will result in the supply curve shifting, because it results in the economy having more potential output.

Example Question #1 : Graphs

A rightward shift of the aggregate demand curve will necessarily result in which of the following?

Possible Answers:

An increase in output and an increase in the price level

A decrease in output and a decrease in the price level

A decrease in output and an increase in price level

An increase in output and a decrease in price level

Correct answer:

An increase in output and an increase in the price level

Explanation:

A rightward shift of the demand curve (i.e. an increase of the demand curve) causes price and quantity to increase.

Since the aggregate demand/aggregate supply (AD/AS) model represents price as price level and quantity as output, a rightward shift of the aggregate demand curve results in an increase in the price level and an increase in output.

If you selected "A decrease in output and a decrease in the price level" you may have found the effects after a leftward, rather than rightward, shift of the aggregate demand curve.

Answer choices "An increase in output and a decrease in price level" and "A decrease in output and an increase in price level" are incorrect because shifts in demand cause both price and output to rise simultaneously or fall simultaneously, but never cause price to rise and quantity to fall or price to fall and quantity to rise.

 

Example Question #1 : How To Find Tax Incentives

A progressive tax structure is designed in order to put more of the tax burden on _______.

Possible Answers:

individual income instead of corporate profits

poorer individuals instead of wealthier individuals

corporate profits instead of individual income

wealthier individuals instead of poorer individuals

sales tax instead of income tax

Correct answer:

wealthier individuals instead of poorer individuals

Explanation:

A progressive tax system is so-called because, as a person or corporation makes more money, the overall tax burden as a percent of income gets progressively higher. A progressive tax seeks to produce more government revenue from those individuals who are perceived as being more able to bear the burden. Progressive taxation is usually popular politically, making it such a widespread form of taxation.

Example Question #1 : Tax Policy

A tax credit describes an element of tax policy that ________.

Possible Answers:

only allows exemptions for people making under a certain income level per year

raises money on investment income

reduces taxes for people who qualify under certain circumstances

allows for an additional tax on goods deemed unseemly

allows for an additional tax on specific kinds of income, such as gambling

Correct answer:

reduces taxes for people who qualify under certain circumstances

Explanation:

Tax law includes small exemptions and refunds, which are known as tax credits. Often, these tax credits are provided for groups of people like homebuyers, parents, and students. Tax credits are also usually seen as a way to lighten specific tax burdens without rewriting or transforming tax policy.

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