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 : Tax Policy

In order, the four phases of the business cycle are:

Possible Answers:

expansion, peak, contraction, and trough

contraction, expansion, peak, and trough

expansion, contraction, peak, and trough

peak, contraction, expansion, and trough

Correct answer:

expansion, peak, contraction, and trough

Explanation:

The four phases of the business cycle are expansion, peak, contraction, and trough. Real GDP growth is positive during an expansion, followed by a point at which real GDP growth peaks, then begins to decline during a contraction, and finally a bottoming out at the point of the trough. Each of the other answer choices represents a distortion of this order.

Example Question #1 : National Saving

If the income level in a given economy increases by $100 and spending increases by $80, the marginal propensity to save in that economy is equal to which of the following?

Possible Answers:

0.2

0.5

0.8

0.75

Correct answer:

0.2

Explanation:

The marginal propensity to consume is calcuated by the change in consumption over the change in income. In this example, the marginal propensity to consume is 80/100 = 0.8. However, the problem asks for the marginal propensity to save and not the marginal propensity to consume.

In any economy, whatever money is not used for consumption is considered savings. Therefore, to find the marginal propensity to save, subtract the marginal propensity to consume from 1. Thus, 1 - 0.8 = 0.2. The marginal propensity to consume in this problem would be 0.2.

Example Question #1 : How To Find Consumption

An excise tax levied by a state government on gasoline is paid to the government by __________.

Possible Answers:

the individual owners of gas stations

only individuals who buy a certain amount of gasoline

any individual who buys the gasoline

the oil company who sells the gasoline

Correct answer:

the oil company who sells the gasoline

Explanation:

An excise tax is an indirect tax, or one that is not paid directly by consumers, but instead by the producers of the good being taxed. Gasoline excise taxes are typically paid by the oil companies who refine, produce, and sell the gasoline, in order to offset pollution and other trandportation costs governments incur from the sale of gas. Quite often, the cost of the tax to the company is passed on to the consumer in the form of higher prices.

Example Question #1 : Real Output

Which of the following is not a part of the business cycle?

Possible Answers:

Expansion

Plateau

Trough

Contraction

Correct answer:

Plateau

Explanation:

The four phases of the business cycle are expansion, peak, contraction, and trough. A plateau is not one of these four phases.

Example Question #1 : Real Output

How does an increase in imports affect a nation's GDP?

Possible Answers:

An increase in imports decreases a nation's GDP. 

An increase in imports raises a nation's GDP.

An increase in imports does not affect a nation's GDP.

Correct answer:

An increase in imports does not affect a nation's GDP.

Explanation:

Using the GDP equation , we see that any imports will be added to either Consumption or Investment, but will be subtracted from Net Exports by the same amount. This leads to a net change of zero. 

Example Question #1 : Real Output

A recessionary gap occurs when __________.

Possible Answers:

real output is equal to potential output

real output exceeds potential output

nominal output exceeds potential output

potential output exceeds real output

Correct answer:

potential output exceeds real output

Explanation:

A recessionary gap is defined as a situation in which real output is below potential output. In other words, the economy could be producing more than it is.

The answer choice "real output exceeds potential output" is incorrect; it describes an inflationary gap.

The answer choice "nominal output exceeds potential output" is incorrect; inflationary and recessariony gaps refer to real output levels, not nominal levels.

 

Example Question #3 : Fiscal Policy

Which of the following is not a tool used by the Federal Reserve?

Possible Answers:

Buying and selling bonds via open market operations

All of these tools are used by the Federal Reserve

Increasing aggregate demand through fiscal policy

Adjusting the discount rate

Adjusting the reserve requirements for banks

Correct answer:

Increasing aggregate demand through fiscal policy

Explanation:

Fiscal policy is the use of government spending to influence the economy. As such, fiscal policy is outside of the scope of the Federal Reserve's powers - fiscal policy can only be initiated by Congress.

Example Question #1 : Fiscal Policy

Which of the following is the most effective fiscal policy if potential GDP exceeds current GDP?

Possible Answers:

Government spending increases.

The tax rate increases.

The Federal Reserve buys US Treasury bonds.

The Federal Reserve sells US Treasury bonds.

Correct answer:

Government spending increases.

Explanation:

If potential GDP exceeds current GDP, the country is in a recessionary gap. The fiscal policies that are effective in closing a recessionary gap are to increase government spending or to decrease (not increase) taxes.

Note that Federal Reserve operations are monetary, not fiscal, policies.

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