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Practice Test 2 - AP Macroeconomics

20 questions. Answer them in any order, then submit to see your score and every explanation.

  1. In an economy operating in the short run, the government increases purchases of goods and services by $50 billion. Households spend 0.800.80 of each additional dollar of disposable income (MPC = 0.800.80), and the rest is saved. Given the change in spending described, what is the most likely total change in real GDP, assuming prices are sticky and there are no other changes in policy?
  2. Based on the government budget information shown in the table, which statement correctly identifies the budget balance in 2026 and explains how the national debt changes from 2025 to 2026? Table 1. Republic of Norland: Federal Budget and Debt (billions of dollars) - 2025: Government spending =1,050= 1{,}050, Tax revenue =1,000= 1{,}000, National debt at end of year =8,000= 8{,}000 - 2026: Government spending =1,120= 1{,}120, Tax revenue =1,030= 1{,}030, National debt at end of year =8,090= 8{,}090 Assume changes in the national debt reflect the year's budget balance and do not include valuation changes.
  3. Following the increase in government spending, Country G implements deficit-financed spending that increases government borrowing in the short run. Which statement best identifies the chain of effects associated with crowding out?
  4. Which of the following events would cause a rightward shift in the market demand curve for new homes?
  5. Based on the balance of payments information shown for Country I (values in billions of dollars), which statement correctly identifies the current account balance and the offsetting financial account balance? Assume CA+FA=0CA + FA = 0 (ignore the capital account).
  6. A student has the following: $60 in currency in a wallet, $900 in a checking account, $2,500 in a savings account, and $1,000 in corporate bonds. Based on the assets described, which statement correctly compares M1 and M2 for this student?
  7. Based on the information shown in the table, which statement best explains why the country experienced long-run economic growth rather than a short-run business-cycle expansion? Assume the economy experienced recessions in 1991, 2001, and 2009, but the long-run trend in output per person continued. Table 1. Real GDP per capita (2017 dollars) - 1990: $32,000 - 2000: $38,000 - 2010: $44,000 - 2020: $52,000
  8. As the economy enters an expansion, Real GDP rises and unemployment falls. Without any discretionary policy action, tax revenue rises and transfer payments fall. Which outcome is most consistent with automatic stabilizers during this expansion?
  9. Based on the circular flow model shown, which choice correctly matches the market to the flow that counts in GDP? DIAGRAM (2-Sector Circular Flow) - Product market includes final goods and services and consumption spending. - Factor market includes labor and wages. Assume all production is new and domestic.
  10. In an economy experiencing inflation, the inflation rate rises unexpectedly from 2% to 6% and remains at 6% for the next two years. One year earlier, a household took a 2-year fixed-rate loan at a 4% nominal interest rate, and the lender set the rate expecting 2% inflation. Which outcome best describes a real economic cost of this sustained, unexpected inflation?
  11. Based on the balance of payments information shown for Country F (values in billions of dollars), which financial account outcome is consistent with the current account shown, using CA+FA=0CA + FA = 0 (ignoring the capital account)? Transactions this year: - Exports of goods and services: +90+90 - Imports of goods and services: −140-140 - Income receipts from abroad: +8+8 - Income payments to foreigners: −18-18
  12. Given the reserve requirement rr=0.25rr=0.25 and an initial deposit of $400 into Bank A, assume banks lend all excess reserves and there is no currency drain. Which factor would most directly limit the banking system from reaching the theoretical maximum increase in deposits predicted by 1/rr1/rr?
  13. In the short run, Congress passes a deficit-financed spending bill. The Treasury increases bond issuance, and the real interest rate rises from 2.5%2.5\% to 3.5%3.5\%. Following the increase in government spending, which statement best describes the effect on private investment and why it occurs?
  14. Based on the foreign exchange market shown for Japanese yen (JPY), assume the exchange rate is measured as U.S. dollars per yen (USD/JPY). Suppose Japanese investors increase purchases of U.S. stocks and bonds, increasing the amount of yen exchanged for dollars. Which of the following best describes the change shown and the resulting change in the value of the yen?
  15. In Country A, real GDP increases by 4% from Year 1 to Year 2 after several large factories expand output. Over the same period, air and water pollution rise sharply, and the government reports higher spending on pollution cleanup and health care related to respiratory illness. Despite the change in GDP, which interpretation best explains why GDP may misrepresent changes in economic well-being in this scenario?
  16. Based on the PPC shown, which change would cause the PPC to shift outward for an economy producing civilian goods and military goods?​
  17. Based on the real interest rates shown in the table, assume investors are choosing between risk-free government bonds in each country and that expected inflation is already incorporated in the real rates. Which outcome is most likely in the short run? Table 4. Real Interest Rates (Annual) - Country R: −1%-1\% - Country S: 2%
  18. Based on the government budget information shown, the government runs a structural deficit even at potential output. At potential output in 2029, planned spending is 5.25.2 trillion and projected tax revenue is 4.94.9 trillion. The national debt at the start of 2029 is 34.034.0 trillion. Ignoring interest, which statement best describes the fiscal position and the debt effect in 2029?
  19. An economy is currently producing at real GDP below potential output. Over time, wages and other input prices fully adjust and markets clear. Based on the LRAS curve shown, what does the LRAS curve imply about the long-run level of real GDP?
  20. Following the increase in government spending, the government finances the spending by borrowing in the loanable funds market. In the short run, which change in the loanable funds market best represents the mechanism that leads to crowding out?

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