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Practice Test 3 - AP Macroeconomics

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

  1. Given the economy-wide constraints described, an economy has a fixed productive capacity this year: its available machines and infrastructure can produce either consumer goods or investment goods. The national plan calls for producing 900 units of consumer goods and 300 units of investment goods, but feasibility studies show the economy can produce at most 1,000 total units this year given existing physical capital. Which fundamental economic problem is illustrated by this situation?
  2. Based on the limited resources facing the economy, a country has a fixed annual government budget of 400 billion400\text{ billion} and a legal borrowing limit that prevents additional deficit spending. In the same year, it faces (i) a required 220 billion220\text{ billion} program to modernize aging bridges and power grids and (ii) a required 260 billion260\text{ billion} increase in defense readiness. Both programs must be funded from the same budget, and cutting other spending below current law is not permitted. Given the economy-wide constraints described, which fundamental economic problem is illustrated by this situation?
  3. Based on the government budget information shown, the government increases spending by $0.4 trillion during a downturn while keeping tax rates unchanged. As a result, the annual budget moves from balance to a $0.4 trillion deficit. The national debt at the start of the year is $29.0 trillion. Which statement best distinguishes the short-run purpose from a long-run issue related to the debt?
  4. In Country E, real GDP increased by 2% from 2024 to 2025 after a major hurricane destroyed homes and infrastructure in late 2024. In 2025, construction spending on repairs and replacement surged. Despite the change in GDP, which interpretation best explains why GDP may not indicate an improvement in economic well-being?
  5. A person holds (i) $150 in currency, (ii) $1,200 in a checking account, (iii) $3,500 in a savings account, (iv) $4,000 in corporate bonds, and (v) a credit card with a $2,000 limit. Based on the assets described, which set lists only items included in M1?
  6. In Country F, real GDP increased by 1.5% from 2024 to 2025. At the same time, authorities estimated that a growing share of work shifted into unreported cash transactions, and reported market wages and sales data captured less of total activity. Despite the change in GDP, which limitation of GDP is most directly illustrated?
  7. Based on the labor market information shown for City S, which type of unemployment is most directly described? A recent college graduate spends eight weeks sending applications and interviewing before accepting an entry-level job. The overall economy is expanding and firms are hiring.
  8. In an economy experiencing inflation, the inflation rate rises from 2% to 6% and remains near 6% for three years. Households respond by keeping smaller cash balances and making more frequent trips to the bank and ATM to move funds into interest-bearing accounts. Which cost of inflation is most directly illustrated?
  9. Based on the exchange rate shown (quoted as Swiss francs per 1 U.S. dollar), which statement correctly describes what happened to the Swiss franc and the likely effect on Swiss import prices from the United States (in francs)? Period 1: 1 USD = 1.00 CHF Period 2: 1 USD = 0.80 CHF
  10. Given the reserve requirement rr=0.20rr=0.20 and an initial deposit of $1,000\$1{,}000 into Bank A, assume Bank A initially has no excess reserves. Bank A makes the maximum loan and the borrower deposits the loan proceeds into Bank B. What is the maximum loan Bank B can make from that new deposit?
  11. Based on the information shown in the table, which explanation best accounts for the long-run increase in living standards? The country's primary growth driver is institutional improvement: courts began enforcing contracts more reliably, and corruption declined. A secondary factor was rising investment in machinery. Table 5. Real GDP per capita (2010 dollars) - 1995: $9,000 - 2005: $12,000 - 2015: $16,000 - 2025: $21,000
  12. Based on the balance of payments information shown for Country C (values in billions of dollars), which transaction is recorded in the financial account rather than the current account? Transactions for Country C: - Domestic firms sell software services to foreign buyers: $40 - Domestic households buy imported automobiles: $55 - Domestic investors receive dividends from foreign firms: $8 - Foreign investors buy shares of domestic companies: $20
  13. A movement along the demand curve for coffee is caused by a change in which of the following?
  14. Based on the production data shown, which statement correctly describes the gains from specialization? Production Possibilities (maximum units per day) - Country Estara: 9 computers or 3 bicycles - Country Fjordland: 6 computers or 6 bicycles Suppose each country initially splits resources evenly between the two goods.
  15. As the economy enters a recession, suppose real GDP falls and tax revenues decrease automatically while certain transfer payments increase automatically. In terms of budget balance changes, which statement is most accurate without assuming discretionary policy or that stabilizers fully prevent recessions?
  16. Given a reserve requirement of rr=12.5%rr=12.5\% and an initial deposit of $800, assume banks lend out all excess reserves and there is no currency drain. What is the maximum possible total amount of checkable deposits supported by this initial deposit?
  17. Country Z's currency depreciates from 2.0 Z-dollars per 1 U.S. dollar to 2.5 Z-dollars per 1 U.S. dollar. Before the depreciation, Country Z exported 120120 billion of goods and services and imported 150150 billion. In the short run, the quantity response is limited, but prices in foreign currency adjust quickly. Following the change in the exchange rate, which outcome is most consistent with the effects of a weaker domestic currency on exports, imports, and net exports (NX)?
  18. In Country I, real GDP decreases by 2% in a year. During the same year, many households substitute unpaid elder care at home for paid nursing services, and the number of hours spent in household caregiving increases. Despite the change in GDP, which interpretation best explains why measured GDP may not match changes in total production relevant to living standards?
  19. In Country G, real GDP increases by 5% after factories expand output. Over the same year, air quality worsens and residents report more days of illness, while firms and households spend more on air filters and health care. Despite the change in GDP, which conclusion about living standards is most justified?
  20. In the short run, the economy is experiencing inflationary pressure. The government increases taxes (T) by 15 billion15\text{ billion} and decreases government purchases (G) by 15 billion15\text{ billion}, moving the budget toward a surplus. Following the change in government spending/taxes, which outcome is most likely in the short run?

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