Practice AP-style test for Sections 1-4

1. The term ceteris paribus means A. what you give up to get something else. B. all else equal. C. some good or service that someone has a lower opportunity cost in producing. D. some good or service that someone can make with less resources than someone else. E. producing the mix of goods and services that people want to consume that is on the production possibilities curve.

Use the following Figure 1-1 to answer Question 2.

2. Refer to Figure 1-1. What would enable this economy to move from producing point A to point D? I. Producing less cars. II. Producing more Salmon. III. Increasing their stock of labor. A. I only. B. II only. C. III only. D. I or II. E. I, II, or III.

3. Refer to Figure 1-2. Which of the following points are efficient? I. A II. C III. D A. I only. B. II only. C. III only. D. I and II only. E. I, II, and III. 4. Eli and Max can produce two goods in a day, breakfast bars and frog food pellets. In a single day, Max can make 10 breakfast bars or 30 frog pellets, and in a single day Eli can produce 5 breakfast bars or 40 frog pellets. Which of the following describes comparative and absolute advantage for Eli and Max? A. Eli has absolute advantage in producing breakfast bars but Max has comparative advantage in producing breakfast bars. B. Eli has absolute advantage in producing frog food pellets but Max has comparative advantage in

producing frog food pellets. C. Max has comparative advantage in producing both goods. D. Eli has comparative advantage in producing both goods. E. Max has comparative advantage in producing breakfast bars but Eli has absolute advantage in producing frog pellets.

5. If incomes increase, then the market for the inferior good purpletts:
A. B. C. D. E. Equilibrium Price Increase Decrease Decrease No Change Increase Equilibrium Quantity Increase Decrease Increase Increase No Change

6. If there is an improvement in technology for making footballs, then in the market for footballs we would expect to see which of the following? Change in Demand or Supply Increase in demand Increase in supply Decrease in supply Increase in supply Increase in demand Equilibrium price Price increases Price decreases Price increases Price decreases No change in Price Equilibrium quantity Quantity increases Quantity decreases Quantity decreases Quantity increases No change in Quantity

A. B. C. D. E.

7. If the equilibrium price in a market increases and the equilibrium quantity decreases at the same time, we can definitely say that A. Supply and demand have both increased B. Supply has increased C. Supply has decreased D. Supply and demand have both decreased E. Demand has decreased. 8. Which of the following transactions would be included in calculating the real GDP of the United States? A. The sale of tires by Firestone to General Motors to use in the production of SUVs. B. Margaret sells her vacation house in Tennessee that was built in 2001 to Eric in 2010 at a profit. C. A Ford car made in Canada is sold in Canada. D. A store owner in New Jersey decides to issue publicly owned stock in her store. E. A department store in New York is unable to sell Italian leather handbags in spring, and decides to addthem into inventory until fall.

9. In the nation of Pamalonia, only three goods are produced: running shoes, tomatoes, and smart phones. Assume that 2010 is the base year. What was the percentage increase in real GDP from 2010 to 2011?

Price 2009 2010 2011 $100 $150 $200 2 3 4

Quantity Sold $1 $1 $2

Price

Quantity Sold 100 350 400

Price $450 $400 $600 2 3 3

Quantity Sold

A. 5% B. 10% C. 25% D. 70% E. Real GDP cannot be determined using the information provided. Use the following Table 1-1 to answer Questions 10 to 11. Table 1-1 The Population of Maxistan Status Looking for work as a plumber Just graduated from college and is working part time in a clothing store while she looks for a job using her degree Working part time as a greeter at a large store to supplement his retirement pension Looking for a job as a waitress Stay at home dad Working at an ice cream shop after school Works 60 hours per week at a bookstore Working 40 hours per week as an accountant Working part-time as a gardener after school Babysits on weekends

Name Eric Pam Dave Margaret Alex Eli Dora Ben Brian Mackenzie

Age 39 25 70 22 30 15 30 27 17 15

10. Refer to Table 1-1. What is the labor force participation rate of Maxistan? A. 100% B. 75% C. 66.7% D. 87.5% E. 90%

11. Refer to Table 1-1. What is the unemployment rate for Maxistan? A. 15% B. 20% C. 25% D. 37.5% E. 30% 12. Which of the following describes frictional unemployment? I. The unemployment due to time that workers spend in job search. II. A type of unemployment that might actually be desirable. III. The difference between the natural rate of unemployment and structural unemployment. A. I only

B. II only C. III only D. I and II only E. I, II, and III

13. If the rate of inflation increases then, all else equal, what will be a consequence? A. Those who loan money will benefit at the expense of those that borrow money. B. The real interest rate will increase. C. People could end up paying higher taxes even if their real income did not increase. D. Menu costs will decrease. E. People will increase their holding of money.

Use the following Table 1-2 to answer Questions 14 to 15. Table 1-2 Market Basket for Nation of Cire 2 Pizzas 1 Football Jersey 12 Hot Wings Price of Pizzas Price of Football Jerseys $16 $40 $18 $50 $20 $50

2009 2010 2011

Price of Hot Wings $0.50 $1.00 $1.50

14. Refer to Table 1-2. If the base year is 2009, what is the approximate price index for 2011? A. 78 B. 108 C. 125 D. 138 E. 150

15. Refer to Table 1-2. What is the approximate rate of inflation from 2009 to 2010? A. 5% B. 6% C. 10% D. 20% E. 26%

16. Which of the following are reasons that the Consumer Price Index (CPI) may overstate the true rate of inflation? I. The market basket used to calculate the Consumer Price Index contains items that typical consumers do not usually purchase. II. Consumers may substitute away from more expensive items in their market basket towards cheaper ones. III. When goods have more features or are improved, it is as if they are cheaper. A. I only B. II only C. III only D. I and II E. II and III 17. Which of the following is captured by the slope of the Aggregate Consumption Function? A. Autonomous consumer spending. B. The marginal propensity to consume. C. The amount of consumer spending. D. The amount of disposable income. D. The change in consumption.

Use the following Figure 1-3 to answer Question 18.

18. Refer to figure 1-3. Which of the following could cause the shift in the aggregate consumption function shown? A. A decline in consumer optimism. B. An increase in consumer incomes. C. An increase decrease) in consumers marginal propensity to consume. D. An increase in autonomous consumer spending. E. An increase in consumer wealth. Use the following Figure 1-4 to answer Question 19.

19. Refer to Figure 1-4. Which of the following could cause the outward shift in Aggregate demand shown? A. Consumers feel wealthier due to a decline in the price level. B. Consumers increase their holding of money in response to an increase in the price level, which drives up the interest rate. C. Consumers INCREASE purchases of foreign made cars. D. Consumers wealth increases as a result of a stock market boom. E. Consumers pay more in taxes.

Use the following Figure 1-5 to answer Question 20.

20. Refer to Figure 1-5. Which of the following would cause the movement of SRAS shown? A. A decline in the price level. B. An increase in the price level. C. An increase in commodity prices. D. A decrease in commodity prices. E. A decrease in the potential output.

21. If there is a negative demand shock in an economy, which of the following will be a consequence? A. The economy will see a decrease in its potential output. B. The price level and real GDP of the economy will decrease. C. The price level and the real GDP of the economy will increase. D. The price level will decrease, but real GDP will increase. E. The price level will increase, but real GDP will decrease.

22. When there is an inflationary gap, Change in AD or AS AD Increases AD Increases SRAS Decreases SRAS Decreases AD Decreases Price Level Increases Decreases Decreases Increases Increases Real Output Increases Decreases Decreases Decreases Increases

A. B. C. D. E.

23. If raising government spending is used to combat a recessionary gap, which of the following is true? A. Aggregate demand would decrease and the price level would decrease. B. Aggregate demand would increase and the price level would not be affected. C. Aggregate demand would decrease and the price level would not be affected. D. Aggregate demand would increase and the price level would decrease. E. Aggregate demand would increase and the price level would increase.

24. If the marginal propensity to save is 0.20, then the multiplier equals A. 0.20 B. 0.80 C. 1 D. 5 E. 8

25. If the marginal propensity to consume is 0.75, then a $100 million increase in government spending would result in a E. $400,000,000 A. $75,000,000 B. $250,000,000 C.$750,0000 D. $2,500,00

increase in real GDP.

Free Response Questions for Sections 1-4 1. In a single day Brody can make 3 robes or 6 slippers and Pam can make 4 robes or 10 slippers. a. Who has absolute advantage in producing robes? Explain. b. What is Brodys opportunity cost of producing slippers? c. Who has comparative advantage in producing robes? Explain. d. What is the minimum price that Pam would be willing to accept to trade with Brody? Explain.

Use the following Figure 1-6 to answer Free Response Question 2.

2. Refer to Figure 1-6. a. Is this economy in short run equilibrium, long run equilibrium, or not in equilibrium? Explain. b. What kind of gap is this? c. What is the unemployment rate in this economy in relationship to the natural rate of unemployment? Explain. d. Suppose the Marginal propensity to consume is 0.80. If the government to use government spending to correct the gap shown, how much would it need to change government spending? Explain.