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Practice Test 6 - AP Macroeconomics

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

  1. In an economy experiencing inflation, the inflation rate rises from 2% to 5% and remains near 5% for several years. A grocery chain prints paper price tags weekly and finds it must reprint tags and update checkout systems much more often as inflation stays elevated. Which cost of inflation is most directly illustrated?
  2. A government reports the following fiscal and macroeconomic conditions: the economy is experiencing inflationary pressure, and the government runs a $50 billion budget deficit. In response, the government cuts government purchases (G) by $35 billion and increases taxes (T) by $15 billion. Following the change in government spending/taxes, which outcome is most likely in the short run?
  3. When expected inflation increases, what typically happens to nominal interest rates, assuming the expected real interest rate remains constant?
  4. Based on the PPC shown, which change would cause the PPC to shift outward for an economy producing civilian goods and military goods? PPC: Civilian Goods vs. Military Goods Military Goods (quantity) | | PPC2_2 | .-'' | .-'' | .-'' PPC1_1 |.-'' .-'' +----------------------------------> Civilian Goods (quantity) PPC2_2 lies outside PPC1_1.
  5. Based on the short-run Phillips Curve shown, the economy moves from point AA to point BB due to a decrease in aggregate demand. Which change is illustrated in the short run?
  6. The economy is in a recessionary gap. The government considers two alternative fiscal policies: Policy 1 increases government purchases (G) by $20 billion; Policy 2 cuts taxes (T) by $20 billion. Assume households spend some fraction of additional disposable income (MPC > 0), and ignore any long-run effects. Following the change in government spending/taxes, which statement best compares the short-run effects on aggregate demand (AD)?
  7. Given the economy-wide constraints described, a country has a fixed pool of 4 million workers with advanced STEM training. The government and private sector want to use this same workforce for (1) expanding semiconductor fabrication and (2) expanding cybersecurity and digital infrastructure for the public sector. Workforce planning indicates semiconductors would require 2.6 million STEM workers and cybersecurity would require 2.1 million STEM workers to meet targets, but only 4 million are available. Which concept best explains the limitation described?
  8. Given the economy-wide constraints described, Country I faces a binding constraint on imported fuel and domestic refining capacity, limiting total gasoline and diesel availability to 20 billion liters per year (a natural resource and physical capital constraint). The government wants to allocate fuel to (i) freight transport to support nationwide distribution of goods and (ii) private commuting, while also (iii) expanding mechanized agriculture to increase crop yields. Annual fuel needs are estimated at 9 billion liters for freight, 10 billion for commuting, and 6 billion for mechanized agriculture, totaling 25 billion liters demanded against 20 billion available. Why must the economy make tradeoffs in this scenario?
  9. Based on the limited resources facing the economy, Country J has a fixed annual government fiscal capacity of 600600 billion (tax revenue plus sustainable borrowing) and also faces limits on specialized construction equipment (physical capital) needed for large public works. The government plans to allocate resources to (i) 350350 billion in climate-adaptation sea walls and drainage systems and (ii) 300300 billion in high-speed rail construction, while also (iii) keeping 150150 billion in existing healthcare funding unchanged. The total planned spending is 800800 billion, which exceeds the 600600 billion fiscal capacity, and the same specialized equipment is required for both major construction projects. Which concept best explains the limitation described?
  10. Based on the AD–AS model shown, suppose a sharp increase in oil prices raises firms' production costs, shifting short-run aggregate supply in the short run. Compared with E1E_1, which outcome occurs at the new short-run equilibrium?
  11. In Country C, a new cash-transfer program raises real GDP by 2% as spending increases. However, most of the additional spending is financed by cutting funding for public parks and community recreation, and average weekly leisure time falls by 3 hours as households work more hours. Despite the change in GDP, which limitation of GDP is illustrated?
  12. A government permanently increases funding for early-childhood education and K–12 teacher training, expecting higher workforce skills in the future. In the long run, which change most directly explains higher potential output?
  13. Based on the labor market information shown for Plainsville, which statement best identifies the main type of unemployment associated with the change from 2023 to 2024? In 2024, a recession reduced consumer spending, leading to broad layoffs in manufacturing and services. At the same time, a separate group of workers in declining coal mining regions remained unemployed due to limited transferable skills. Labor market totals are: 2023: Employed = 2,400, Unemployed = 100, Not in labor force = 500 2024: Employed = 2,300, Unemployed = 200, Not in labor force = 500
  14. Based on the exchange rate shown, suppose the United States is the domestic country and the exchange rate is quoted as Indian rupees per $1. The exchange rate changes from $1 = 50 INR in Year 1 to $1 = 100 INR in Year 2. Which statement correctly describes what happened to the U.S. dollar and one likely implication for U.S. exports to India (holding U.S. prices constant in dollars)?
  15. Based on the balance of payments information shown for Country E (values in billions of dollars), which statement correctly describes the country's trade balance and net capital flows (financial account balance)? Transactions: - Exports of goods and services: $95 - Imports of goods and services: $125 - Net investment income received: $5 - Foreign residents purchase domestic factories (FDI inflow): $40 - Domestic residents purchase foreign bonds: $10
  16. In Country D, real GDP is unchanged from Year 1 to Year 2. However, average weekly hours worked fall as firms adopt a four-day workweek with the same hourly pay, and surveys report more time for family and recreation. Despite the change in GDP, which interpretation best explains the relationship between GDP and well-being here?
  17. Based on the money market shown, money demand shifts right from MD1MD_1 while nominal money supply remains fixed at MSMS. Which statement correctly describes the change in the equilibrium nominal interest rate?
  18. Consider the short-run loanable funds market. The government increases spending and finances it by borrowing, increasing the deficit. Following the increase in government spending, which sequence best describes the mechanism of crowding out?
  19. Based on the monetary policy action shown, the central bank lowers the discount rate as part of an expansionary policy intended to stabilize the economy in the short run. Assuming banks increase borrowing from the central bank, what is the most likely short-run effect on the nominal interest rate in the money market?
  20. Based on the money supply growth shown, assume real GDP grows at a stable 2% and velocity is stable in the long run. Which long-run outcome best illustrates long-run neutrality of money? Table: Policy Change (Economy D)
    VariableInitialNew sustained rate
    Money supply growth4%10%
    Real GDP growth2%2%

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