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Practice Test 7 - AP Macroeconomics

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

  1. An economy produces public goods and private goods. Based on the PPC shown, which point represents an inefficient outcome?
  2. An economy chooses between environmental quality and industrial output. Based on the PPC shown, what is the opportunity cost of increasing industrial output by moving from point C to point D?
  3. In an economy experiencing inflation, the inflation rate is 5% per year for several years, but the rate varies unpredictably between 3% and 7% from year to year. A manufacturing firm signs multi-year contracts with suppliers and must set output and pricing plans in advance. Which cost of inflation is most directly illustrated by the firm's difficulty planning under sustained, variable inflation?
  4. To slow an overheating economy in the short run, the central bank adopts a contractionary monetary policy and raises the reserve requirement. Banks must hold a larger fraction of deposits as reserves, reducing their ability to create money. With liquidity preference unchanged, the money supply decreases. Based on the monetary policy action shown, what is the most likely short-run effect on the nominal interest rate?
  5. Given a reserve requirement of rr=20%rr=20\% and an initial deposit of $1,000\$1{,}000 into Bank A, assume banks lend out all excess reserves and there is no currency drain. Which value equals the money multiplier implied by this reserve requirement?
  6. In the short run, the economy has a recessionary gap. The government enacts an expansionary fiscal policy by increasing government purchases (G) by 60 billion60\text{ billion} with no change in taxes (T), increasing the budget deficit. Following the change in government spending/taxes, which AD–AS outcome is most consistent in the short run?
  7. Based on the supply curves shown, the economy experiences a shift of supply from S1S_1 to S2S_2 after a major hurricane destroys ports and factories, disrupting production and shipping. Which statement best matches the shift shown in the graph?
  8. In Country H, real GDP decreases by 1% from Year 1 to Year 2. During the same period, the share of income earned by the bottom 40% rises, and median real household income increases even though top incomes fall. Despite the change in GDP, which interpretation best explains why GDP may not fully reflect changes in economic well-being?
  9. To avoid using fiscal policy, the central bank pursues short-run stabilization by conducting open market purchases (an expansionary monetary policy). With liquidity preference unchanged, the money supply increases. Based on the monetary policy action shown, which implication is most likely in the short run?
  10. Given a reserve requirement of rr=10%rr=10\% and an initial deposit of $1,000\$1{,}000 into Bank A, assume no currency drain. If banks choose to hold excess reserves equal to 5%5\% of deposits in addition to required reserves, the maximum expansion of checkable deposits will be
  11. Based on the balance of payments information shown for Country J in 2025 (values in billions of dollars), which statement correctly classifies the income flow and determines the current account balance? Transactions (billions): exports of goods and services +200+200, imports of goods and services −190-190, income paid to foreign owners of domestic firms −25-25, income received by domestic residents from foreign investments +5+5.
  12. In an economy experiencing inflation, the inflation rate unexpectedly rises from 2% to 6% and remains near 6% for the next two years. A bank issued a two-year fixed-rate loan at a 5% nominal interest rate, and the borrower's payments are fixed in nominal terms. Which outcome best describes the redistribution effect of the unexpected inflation?
  13. Assume the market for lumber is in equilibrium. A widespread pest infestation destroys a significant portion of the forests used for lumber production. What is the most likely effect on the equilibrium price and quantity of lumber?
  14. Based on the real interest rates shown in the table (assume equal risk and high capital mobility), which outcome is most likely in the short run? Table 2. Real Interest Rates - Home: r=2%r=2\% - Foreign: r=5%r=5\%
  15. Based on the balance of payments information shown for Country J (values in billions of dollars), which option correctly reports the financial account balance? Transactions: - Foreign residents buy $90 of domestic corporate stock - Foreign banks lend $25 to domestic firms - Domestic residents buy $60 of foreign government bonds - Domestic firms build a $20 factory abroad
  16. Following the increase in government spending, Country Y finances a new defense program by issuing additional government bonds. In the short run, this increases the government budget deficit. Which statement best explains why the real interest rate tends to rise in the loanable funds market?
  17. A widespread increase in consumer confidence regarding future job security will most likely cause which of the following changes?
  18. As the economy enters an expansion, real GDP rises above potential and unemployment falls, with no changes in tax laws or spending programs. Which combination of automatic fiscal changes is most likely, and how does it affect the budget balance?
  19. A government increases the share of its budget devoted to basic scientific research for 25 years, expecting private firms to commercialize discoveries later. Based on the policy described, which long-run change is most consistent with the Solow-style determinants of growth?
  20. In an economy experiencing inflation, the inflation rate is 5% per year for three consecutive years. A retiree receives a fixed pension of $2,000 per month with no cost-of-living adjustment, while a worker's nominal wage increases 5% each year. Which statement best identifies the cost of inflation illustrated in this scenario?

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