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Practice Test 5 - AP Macroeconomics

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

  1. A student summarizes four assets: (1) $200 in cash, (2) a share of stock in a firm that may pay dividends, (3) a municipal bond that pays fixed interest, and (4) a computer used to produce graphic design services. Based on the assets described, which asset is most liquid?
  2. Based on the labor market information shown for Granite County, which statement best explains why the unemployment rate rose even though employment also rose from Q3 to Q4? Granite County Labor Market (thousands of people) Q3: Employed = 1,000, Unemployed = 50, Not in labor force = 450 Q4: Employed = 1,030, Unemployed = 70, Not in labor force = 400 Local reports indicate improving conditions encouraged more people to begin searching for work.
  3. As the economy enters a recession, a progressive income tax system causes average tax rates to fall as incomes fall, and unemployment insurance payments rise automatically. In the short run, what is the most accurate effect on aggregate demand (AD), assuming no discretionary policy?
  4. Given the recessionary gap described below, a government is considering a discretionary fiscal package. Which option correctly states the direction of the aggregate demand (AD) change expected from an increase in transfer payments, holding other factors constant, in the short run? Scenario: Real GDP is below potential, unemployment is elevated, and inflation is low.
  5. Given the reserve requirement (rrrr) is 50% and an initial deposit of $600 is made into Bank A, assume no excess reserves and no currency drain. What is the maximum total increase in checkable deposits in the banking system?
  6. Based on the labor market information shown for Metro H, which statement best explains why the unemployment rate could fall even though employment also fell from Week 1 to Week 2? Metro H Labor Market (thousands) - Week 1: Employed 1,000; Unemployed 60; Not in labor force 440 - Week 2: Employed 990; Unemployed 50; Not in labor force 460 Local news reports that some discouraged workers stopped searching for jobs in Week 2.
  7. A country implements reforms that improve contract enforcement and reduce barriers to starting new firms, increasing economy-wide productivity. Based on the LRAS curve shown, which statement best describes the long-run effect? Assume the reforms affect productivity and potential output rather than short-run aggregate demand.
  8. If an economy's nominal GDP increased by 7% in a year while its real GDP increased by 3%, what can be concluded about the price level during that year?
  9. In Country F, real GDP increases by 2% from Year 1 to Year 2. At the same time, a larger share of economic activity shifts to unreported cash-only transactions, and government estimates suggest the underground economy rises from 8% to 12% of total activity. Despite the change in GDP, which limitation of GDP is most clearly illustrated?
  10. Based on the production data shown, which specialization pattern is efficient (maximizes total world output) if the two countries can trade? Assume each country can devote all resources to producing only one good per day. Production Possibilities (maximum units per day) - Country P: Corn 8, Smartphones 4 - Country Q: Corn 6, Smartphones 6
  11. In Country B, real GDP increases by 3% from one year to the next. During the same year, the top 10% of households receive most of the income gains while median real wages are unchanged, and the poverty rate rises slightly. Despite the change in GDP, which conclusion about living standards is most justified?
  12. Based on the labor market information shown, the economy of Pine Ridge is at potential output, but a major coal mine closes permanently due to depleted reserves. Many specialized miners remain unemployed for several months, while nearby hospitals and schools continue hiring at normal rates. Which type of unemployment best describes the unemployed miners in the months after the closure?
  13. Based on the balance of payments information shown for Country C (values in billions of dollars), what is the current account balance (CA)? Use CA=(X−M)+(income received−income paid)CA = (X - M) + (\text{income received} - \text{income paid}).
  14. Based on the foreign exchange market shown for the Indian rupee (INR), investors revise expectations downward about future returns on Indian assets because of increased perceived risk. Holding other factors constant, which change best describes the foreign exchange market for rupees and the resulting exchange rate (price of INR in U.S. dollars, $/INR)?
  15. Given the recessionary gap shown (short-run equilibrium real GDP is below potential), which option correctly distinguishes an automatic stabilizer from a discretionary fiscal action that could increase AD in the short run? Assume: - Potential real GDP (Y*): 10.010.0 trillion - Actual real GDP (Y): 9.59.5 trillion
  16. Assume two countries have the following real risk-free interest rates: Country J: rJ=3%r_J=3\% and Country K: rK=7%r_K=7\%. Based on the real interest rates shown, which statement best describes the effect on the foreign exchange market for Country K's currency in the short run, holding risk constant?
  17. Based on the government budget information shown, which statement correctly interprets short-run stabilization versus long-run debt concerns? Assume the national debt at the end of 2038 is $9,000 billion. In 2039, the government increases spending temporarily during a downturn. - 2039: Government spending $2,800; Tax revenue $2,650; Interest payments $200 (included in spending)
  18. Based on the exchange rate shown, suppose the United Kingdom is the domestic country and the exchange rate is quoted as U.S. dollars per £1. The exchange rate changes from £1 = $1 in Year 1 to £1 = $2 in Year 2. Which statement correctly describes what happened to the pound and one likely implication for U.K. exports to the United States (holding U.K. prices constant in pounds)?
  19. Based on the labor market information shown for Country M, which statement best explains why the unemployment rate fell even though employment did not increase? Over a quarter, many discouraged workers stop searching for jobs and are reclassified from unemployed to not in the labor force. Employment remains unchanged, and output growth is weak.
  20. A country expands access to job training and education, increasing the average skill level of its workforce over several years. Based on the LRAS curve shown, which long-run implication is most consistent with the model?

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