AP Macroeconomics - Unit 8 - 8.1 Final Exam Questions

Graded Assignment
Name:
HST520: AP Macroeconomics | Unit 8 | 8.1 Final Exam
Date:
Graded Assignment
Final Exam
Directions
Mark your answers to the multiple-choice questions on the answer sheet at the end of the multiple-choice
section. Use a black or blue pen.
Remember to complete the submission information on every page you turn in.
Multiple-Choice Questions
1. How do gross domestic product and gross national product differ?
A.
B.
C.
D.
E.
Gross national product does not include depreciation.

Gross domestic product does not include intermediate goods.
Gross national product does not include goods produced domestically by foreign companies.
Gross domestic product is specified in real terms; gross national product is specified in nominal terms.
Gross national product includes only final goods and services.
2. Which of the following is (are) true for the period described in the table below?
Year
1990
1991
1992
1993
I.
II.
III.
A.
B.
C.
D.
E.
Price Level
100
110
120
130
Inflation is increasing.
The price level is increasing.
Inflation is decreasing.
Both II and III.

Both I and II.
II and either I or III.
II only.
III only.
3. If real GDP rises and nominal GNP falls, which of the following must be true?
A. The price level has decreased.
B. Production in the country by foreign firms has grown faster than has production outside of the country by
domestic firms.
C. Either A or B, but possibly both A and B.
D. Both A and B.
E. Either A or B, but not both.
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Graded Assignment
4. If the price level rises by 10%, which of the following must be true?
A.
B.
C.
D.
E.
All consumers will increase their spending by 10% if they are to buy the same things they used to buy.
All prices have risen by 10%.
The prices of each of the goods included in the relevant basket of goods have risen by 10%.
All real incomes have fallen by 10%.
None of these must be true.
5. Over the course of the business cycle, which of the following is most often true?
A.
B.
C.
D.
E.
When unemployment is high, inflation will be high.

When unemployment is low, interest rates will be low.
When the economy is in a trough, unemployment will be low.
When inflation is low, economic growth rates are high.
When unemployment is high, economic growth rates are low.
6. Which of the following must be true in an economy with a government but with no foreign trade?
A. Household saving will be equal to investment.
B. The sum of consumption and saving will be equal to the sum of income and taxes.
C. The sum of household income and business profits must be equal to the sum of consumption,
government spending, and investment.
D. An increase in the government deficit will force an increase in investment.
E. If the government has a balanced budget, household consumption will equal the difference between
income and saving.
7. For an economy operating at full employment, which of the following is true?
A. There is no frictional unemployment.
B. Expansionary fiscal policy will result only in higher price levels and will have no effect on output.
C. The classical model will accurately predict the effects of monetary and fiscal policies, both in the short run
and in the long run.
D. The calculated unemployment rate is zero.
E. The Keynesian model will over-estimate the effect of a change in expenditures on GDP.
8. Which of the following will lead to the greatest decrease in a country 's net exports?
A.
B.
C.
D.
E.
An increase in household consumption

Contractionary fiscal policy
Inflation in foreign countries with no change in the exchange rate
A large purchase of foreign currency by the countrys central bank
A large increase in interest rates in the country

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9. Assume an economy with lump sum taxes and no international trade. If there is full employment and a
marginal propensity to consume of 0.8, what will be the effect of an $800 increase in autonomous
expenditures?
A.
B.
C.
D.
E.
An increase of less than $4,000 in real output

An increase in real output of $4,000
An increase in real output of at least $4,000
An increase in the price level and in increase in output of approximately $4,000
The answer depends critically on whether the economy is in the Keynesian region of the aggregate
supply curve, and the answer cannot be predicted without knowing this.
10. According to the Keynesian model, equal increases in government spending and taxes will result in
which of the following?
A.
B.
C.
D.
E.
Increases in the price level accompanied by increases in output

Increased imports due to the effects of interest rate changes on exchange rates
Decreased imports due to the effects of tax changes on exchange rates
No change in the price level and a decrease in output
An increase in output and no change in the price level
11. To reduce the possibility of inflation in the U.S. economy, the Fed should:
A.
B.
C.
D.
E.
lower the reserve requirement and buy securities on the open market.
raise the discount rate and buy securities on the open market.
lower the discount rate and sell securities on the open market.
raise the reserve requirement and sell securities on the open market.
raise the reserve requirement and lower the discount rate.
12. The classical model may have contributed to the severity of the Great Depression of the 1930s
because:
A.
B.
C.
D.
E.
it prescribed no fiscal response by the government.

it suggested that the Fed should increase taxes to avoid a deficit.
it failed to recognize the severity of the decrease in the money supply resulting from bank failure.
it failed to recognize that price levels can change when aggregate demand shifts.
it suggested that a contractionary fiscal policy could reduce government budget problems.
13. Expansionary fiscal policy conducted in an economy at full employment will have which combination
of effects in the short run?
A.
B.
C.
D.
E.
An increase in real output and a smaller increase in nominal output

An increase in real output, but a decrease in nominal output
A decrease in real output, but an increase in nominal output
An increase in real output and a larger increase in nominal output
An increase in output, but no decrease in unemployment

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Graded Assignment
14. If the U.S. government conducts contractionary fiscal policy at the same time the Fed conducts
expansionary monetary policy, what will be the most likely effects?
A.
B.
C.
D.
E.
An increase in interest rates and a decrease in unemployment

A decrease in interest rates and an indeterminate change in output
An increase in the price level and a decrease in interest rates
An increase in the value of the dollar in foreign exchange markets and an increase in U.S. imports
An increase in interest rates, an increase in the value of the dollar, and an indeterminate change in
unemployment
15. Which of the following will be an effect of unexpectedly low inflation?

A.
B.
C.
D.
E.
Lenders will benefit at the expense of borrowers.

Workers with long-term wage contracts will suffer a decrease in real income.
The real money supply will increase, and the value of the currency will decrease.
Worker productivity will rise.
None of the above
16. According to the Keynesian model, expansionary fiscal policy will have what effect?
A.
B.
C.
D.
E.
An increase in output and price levels

A decrease in unemployment and inflation
An increase in output and a decrease in the price level
No change in the price level and an increase in output
No change in output and an increase in the price level
17. Which of the following is an important criticism of the consumer price index?
A. It fails to recognize that consumers change their behavior in response to changes in the relative prices of
goods and, as a result, generates an inflation rate that is too high.
B. It calculates the cost of a basket of goods purchased by an average consumer, an individual who doesn t
really exist.
C. It fails to recognize that consumers change their behavior in response to changes in the relative prices of
goods and, as a result, generates an inflation rate that is too low.
D. Because it does not include all goods produced in an economy, it will result in real interest rate
calculations that are too high.
E. Because it includes only consumer goods, it fails to capture what is actually happening in the economy.

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Graded Assignment
18. Which statement correctly describes the relationship between policy actions, interest rates, and bond
prices?
A. If the Fed conducts expansionary monetary policy, the supply of bonds will increase, their price will
decrease, and interest rates will decrease.
B. If the government conducts contractionary fiscal policy, the supply of bonds will increase, their price will
decrease, and interest rates will increase.
C. If the government conducts expansionary fiscal policy, the supply of bonds will increase, their price will
D. If the Fed conducts contractionary monetary policy, the supply of bonds will increase, their price will
E. If the Fed conducts expansionary monetary policy, the demand for bonds will increase, their price will
increase, and interest rates will decrease.
19. An increase in autonomous expenditures will have which of the following effects?
A. An increase in GDP, but no increase in the price level if the economy is in the Keynesian portion of the
aggregate supply curve
B. An increase in both GDP and the price level regardless of the level of unemployment
C. A small increase in GDP and a relatively large increase in the price level if the economy is in the
Keynesian portion of the aggregate supply curve
D. An increase in GDP, but no increase in the price level if the assumptions of the classical model are correct
E. An increase in unemployment and a decrease in the price level if the economy is operating in a region
where the assumptions of the classical model are satisfied
20. Why is stagflation inconsistent with the idea of a Phillips curve?
A. Along a Phillips curve, growth is highest when inflation is low.
B. The Phillips curve suggests a tradeoff between inflation and unemployment.
C. Stagflation forces economists to accept the fact that the Phillips curve is upward rather than downward
sloping.
D. Stagflation is a result of demand shocks rather than supply shocks.
E. Stagflation is inconsistent with the classical model of the economy.
21. According to the Keynesian model, under which conditions will an open market operation by the Fed
have the greatest effect on national income?
A.
B.
C.
D.
E.
When the marginal propensity to save is high

When the marginal propensity to consume is high
When both the marginal propensity to consume and the marginal propensity to save are high
When the economy is at full employment
When the investment demand curve is relatively steep
22. One important difference between adaptive and rational expectations models is that:

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Graded Assignment
A.
B.
C.
D.
E.
rational expectations models use more information.

monetary policy is not effective under adaptive expectations.
fiscal policy wont lead to changes in the price level under adaptive expectations.
rational expectations are formed solely on the basis of past behavior and events.
inflation is impossible under adaptive expectations.
23. In an economy with no foreign trade and a marginal propensity to consume of 0.8, which of the
following will be true?
A.
B.
C.
D.
E.
If taxes are increased by $100M, GDP will decrease by $500M.

If autonomous consumption increases by $50M, GDP will increase by $200M.
If both taxes and government spending increase by $100M, GDP will increase by $250M.
If taxes are decreased by $100M, GDP will increase by $400M.
If autonomous consumption decreases by $100M, GDP will decrease by $800M.
24. Looking at the circular flows model, how can the saving equals investment equation be derived?
A.
B.
C.
D.
E.
By looking at flows into and out of goods markets

By looking at flows into and out of financial markets
By looking at flows into and out of households
By looking at flows into and out of firms
By looking at flows into and out of the government
25. What will be the short-run effect of a 10% increase in the money supply for an economy operating in
the Keynesian portion of the aggregate supply curve?
A.
B.
C.
D.
E.
Real GDP will increase by 10% if velocity doesnt change.

Real GDP and the price level will both increase by 5% if velocity doesnt change.
Real GDP wont change, but the price level will increase by 10% if velocity doesnt change.
Velocity will fall by 5%, the price level will increase by 5%, and real GDP wont change.
According to the quantity theory of money, velocity will fall by 10%, and nothing else will change.
26. Which of the following will make monetary policy more effective in changing nominal GDP?
A.
B.
C.
D.
E.
A fixed velocity of money

A flat investment demand curve
A high marginal propensity to save
A money demand curve that is very flat
An aggregate expenditure curve that is very flat
27. Given the nation has a capital account surplus and a federal budget deficit, which of the following is
an effect of an increase in interest rates?

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Graded Assignment
A.
B.
C.
D.
E.
Lower structural unemployment

An increase in the trade deficit
Aggregate demand and aggregate supply will intersect in a steeper section of the aggregate supply curve
An outward shift in the production possibilities frontier
An inward shift of the consumption possibilities frontier
28. Which of the following pairs of actions suggest that fiscal policy and monetary policy are working in
the same direction?
A. Taxes are lowered, and the discount rate is raised.
B. Government spending increases, and the Fed sells bonds on the open market.
C. Government spending and taxes increase by the same amount, and the required reserve ratio is
increased.
D. Taxes are increased, and the Fed buys bonds on the open market.
E. Government spending and taxes decrease by the same amount, and the Fed sells bonds on the open
market.
29. Which of the following is true if cyclical unemployment is high?
A.
B.
C.
D.
E.
Velocity is low.
Monetary policy has little effect on the price level.
The marginal propensity to consume will be particularly high.
The country s currency has a low value in foreign exchange markets.
The Fed could bring the economy back toward full employment by selling bonds on the open market.
30. For the last several years, the money supply in the fictitious nation of Mauritania has been rising by
10% annually, and inflation has been running at 8%. The central bank is going to cut growth of the
money supply back to 3% annually. Which of the following statements regarding the effects of this
action is true, ceteris paribus?
A.
B.
C.
D.
E.
According to the quantity theory of money, inflation will be 1% in the next year.
According to the quantity theory of money, economic growth will slow down.
If the assumption of rational expectations holds, output will fall by 10% in the next year.
If the assumption of adaptive expectations holds, there will be no effect on output in the following year.
None of the above
31. Which of the following is not a component of aggregate demand?

A.
B.
C.
D.
E.
Sales tax receipts

Government spending
Investment
Consumption
Net exports
32. Which of the following is an effect of increased labor productivity?

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Graded Assignment
A.
B.
C.
D.
E.
An increase in aggregated demand

An increase in aggregate supply
A decrease in aggregate demand
An increase in the marginal propensity to save
An indeterminate change in the consumption possibilities frontier
33. Which type(s) of unemployment exist in an economy at full employment?

A.
B.
C.
D.
E.
Frictional
Structural
Cyclical
Frictional and structural
Frictional and cyclical
34. Suppose the Irish economy is at full employment. Suppose in a few months, the exchange rate of the
Irish national currency, the punt, will decline, giving the Irish relatively less purchasing power in
foreign markets. What will happen to the price level and real GDP in Ireland?
A.
B.
C.
D.
E.
The price level will fall, and real GDP will rise.
The price level will fall, and real GDP will not change.
The price level will rise, and real GDP will rise.
The price level will fall, and real GDP will fall.
The price level will not change, and the real GDP will fall.
35. Which of the following statements about an increase in aggregate demand is false?
A. An increase in aggregate demand can be caused by a decrease in other countries interest rates.
B. An increase in aggregate demand can be the result of another countrys central bank selling large
quantities of their government s bonds.
C. An increase in aggregate demand will result in no change in the price level in the Keynesian model.
D. The increase in aggregate demand resulting from an open market operation does not depend on the
slope of the aggregate supply curve.
E. An increase in aggregate demand will have no effect on GDP in the classical model.
36. Which of the following goals of economic policymakers is generally false?
A.
B.
C.
D.
E.
They try to keep unemployment low to avoid leaving productive resources idle.
They find low inflation desirable because it helps to keep unemployment under control.
They want to keep interest rates low to promote long-term economic growth.
They can be persuaded to oppose free trade by small numbers of people.
They may push central banks to buy bonds prior to elections to help insure they remain in power.
37. Japan imports almost all the oil it uses. Which of the following statements about the effects of an
increase in world oil prices is true?

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Graded Assignment
A.
B.
C.
D.
E.
It may cause the Japanese economy to experience stagflation.

It may cause the Japanese central bank to buy bonds to stabilize the value of the yen.
It will cause demand-pull inflation in the Japanese economy.
It will increase the value of the Japanese yen.
It will increase aggregate demand in the Japanese economy.
38. Stagflation may result from which of the following:

A.
B.
C.
D.
E.
Several decreases in the discount rate over the course of a few months.
Large bond sales by the central bank.
A sharp decrease in households marginal propensity to consume.
The expansion of the consumption possibilities frontier due to the opening of international trade.
Rapid deterioration of national infrastructure, such as roads and telephone cable.
39. Which of the following statements about stagflation is correct?

A.
B.
C.
D.
E.
It will result in increased nominal GDP.

It will result in decreased nominal GDP.
It is characterized by high unemployment and low inflation.
It implies an upward shift in the Phillips curve.
It is a problem easily explained and corrected in the Keynesian model.
40. In early 2000, the U.S. was at full employment. Despite this, a number of presidential candidates were
proposing tax cuts and government spending increases. The most likely effect of these actions under
such circumstances would be:
A. an increase in the marginal propensity to consume and a resulting increase in the full-employment level of
GDP.
B. higher price levels and little or no change in GDP.
C. lower interest rates.
D. an increase in the value of the dollar and a resulting increase in exports.
E. a long-run increase in the productive capacity of the U.S.
41. Which of the following is a valid statement about the Keynesian and classical models of the
macroeconomy?
A. Fiscal policy will affect output in the Keynesian model, but only the price level in the classical model.
B. The economy adapts quickly to demand shocks under the Keynesian model, but not under the classical
model.
C. A sharp decrease in the value of a nations currency will lead to higher price levels in the Keynesian
model, but not in the classical model.
D. Increases in autonomous expenditure will increase aggregate demand in the Keynesian model, but not in
the classical model.
E. An increase in the productive capacity of an economy will result in greater output in both the Keynesian
and classical models.
42. Suppose the government spends $500M on a project that has absolutely no value to the country.
Which statement about this project is correct?

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Graded Assignment
A. If taxes were raised $500M to fund this project, the Keynesian model predicts that this will have no net
effect on output in the economy.
B. If the government raised the money for this project by printing $500M in bonds and selling them to the
Fed, the effect is exactly the same as if they sold the bonds to households.
C. The project will increase aggregate supply because it will increase the total quantity of goods and
services supplied in the economy.
D. If the marginal propensity to save in the economy is equal to 0.25, the Keynesian model predicts that this
project will result in a $2000M increase in GDP.
E. Under the assumptions of the classical model, the result of this project will be increases in both the price
level and equilibrium GDP.
43. A particular economy has consumption of $400M, a government deficit of $100M, taxes of $250M, and
income of $800M. Which of the following statements must be true?
A.
B.
C.
D.
E.
If investment is zero, there is no foreign trade imbalance.

If the trade surplus is $50M, investment will be equal to $100M.
If the capital account surplus is $50M, investment will be equal to $100M.
If the trade surplus is $100M, there will be investment.
None of the above statements is necessarily true.
44. Which piece of information would be least useful in trying to predict the effect of a $700M increase in
government spending on equilibrium GDP?
A.
B.
C.
D.
E.
Marginal propensity to save

The slope of the aggregate supply curve
Whether taxes are raised to pay for the spending increase
The current level of structural unemployment
Whether the bonds used to finance the spending were sold to households or to the Fed
45. Which of the statements relating full employment and full capacity is false?
A. At full employment there is no frictional unemployment; at full capacity there is no structural
unemployment.
B. The full-employment level of output is less than the full-capacity level of output.
C. At full employment there is no cyclical unemployment; at full capacity there is no frictional unemployment.
D. A government spending increase will result in increased output and price levels at full employment, but
only increased price levels at full capacity.
E. In the long run, an economy that starts at full capacity will move to full employment.
46. What would be the effect of a law requiring that government spending equal tax revenues in each
year?
A. Fiscal policy would be completely eliminated as a tool to control the macroeconomy.
B. Monetary policy would be completely eliminated as a tool to control the macroeconomy.
C. Fluctuations in GDP would become less severe.
D. The government spending multiplier would be effectively set to 1.0.
E. The marginal propensity to consume would be cut in half.
47. The total value of T-bonds, including T-notes and T-bills, in existence at any point in time is:
A. the federal government spending deficit.

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Graded Assignment
B.
C.
D.
E.
the trade deficit.

less than government spending.
necessarily less than GDP.
the national debt.
48. Which of the following would be a valid statement about a government plan to eliminate a trade
deficit?
A. A decrease in the trade deficit will decrease investment in the country.
B. An effective strategy would be to increase the money supply and increase the value of the national
currency.
C. An effective strategy would be to increase interest rates and increase the value of the national currency.
D. This could be achieved through dramatically increasing aggregate supply.
E. The increase in net exports will result in a decrease in aggregate demand.
49. Crowding out has the effect(s) of:
A. reducing the effectiveness of monetary policy if the crowding out occurs in financial markets.
B. decreasing the value of a nations currency if the crowding out occurs in financial markets.
C. increasing the effectiveness of fiscal policy if the crowding out occurs in financial markets and increasing
the effectiveness of monetary policy if the crowding out occurs in product markets.
D. decreasing the effectiveness of fiscal policy if the crowding out occurs in financial markets and decreasing
the effectiveness of both fiscal and monetary policy if the crowding out occurs in product markets.
E. increasing the price of government bonds if the crowding out occurs in financial markets.
50. Which of the following will make crowding out in credit markets more severe?
A.
B.
C.
D.
E.
A steep investment demand curve

A global credit market
Tax increases
A steep supply curve in the loanable funds market
None of the above
51. The Fed is conducting expansionary monetary policy if it:

A.
B.
C.
D.
E.
increases the discount rate, buys bonds, and sets a lower target for the federal funds rate.
decreases the discount rate and sells bonds.
sets a lower target for the federal funds rate and buys bonds in the open market.
increases reserve requirements and buys bonds in the open market.
buys bonds in the open market and raises the discount rate.
52. If banks become concerned about future conditions and decide to hold larger excess reserves, which
of the following is a likely result?
A. A rise in interest rates

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B.
C.
D.
E.
An increase in bond prices

An increase in aggregate demand
An increase in the money supply
Both C and D
53. The Fed is under no obligation to coordinate its actions with fiscal policy. And in fact, the Fed may
take actions specifically designed to counteract some piece of fiscal policy. An example of fiscal and
monetary policies with opposite effects is:
A.
B.
C.
D.
E.
an increase in taxes and increased sales of bonds by the Fed.

a decrease in government spending and an increase in the discount rate.
a decrease in taxes and a decrease in the target for the federal funds rate.
an increase in government spending and an increase in reserve requirements.
a decrease in taxes and increased purchases of bonds by the Fed.
54. In the fictitious nation of Zagora, a worker can produce either 5 books or 10 televisions in an hour. In
neighboring Plovdiv, a worker can produce either 3 books or 5 televisions in an hour. Which
statement about this situation is true?
A.
B.
C.
D.
E.
Zagora has comparative advantage in the production of books.

Zagora has comparative advantage in the production of televisions.
Workers in Plovdiv cant possibly compete against the super-productive workers in Zagora.
Workers in Zagora cant be expected to compete against the low-wage workers in Plovdiv.
None of the above
55. Given the U.S. has a current account deficit, a large increase in the demand for U.S. computer
programs among Japanese residents will have all the following effects except:
A.
B.
C.
D.
E.
an increase in the exchange rate, expressed in yen per dollar.

an increase in the U.S. capital account surplus.
an increase in investment in Japan.
an decrease in the U.S. trade deficit.
It may have all the above effects.
56. Fiscal policy affects exchange rates because:

A. as government spending increases, the government must buy more and more goods and services from
foreign countries.
B. as government debt increases, interest rates rise, and the value of the currency rises.
C. as government debt increases, interest rates rise, and the value of the currency falls.
D. as the money supply increases, interest rates fall, and the value of the currency rises.
E. as the money supply increases, interest rates fall, and the value of the currency falls.
57. There are many kinds of trade restrictions, and trade restrictions are put into place for many reasons.
Which of the following is not a reason to use trade restrictions?
A. To save natural habitats from over-use

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B.
C.
D.
E.
To protect the jobs of workers in certain industries

To make a political statement regarding the labor policies of another nation
To compensate for higher taxes placed on domestic producers
To create a lower prices for domestic consumers
58. If the value of the U.S. dollar in foreign exchange markets rises:
A.
B.
C.
D.
E.
U.S. exports will become relatively less expensive.

capital inflows into the United States will increase.
people in the U.S. will purchase fewer imports.
U.S. exports will likely decrease.
All of the above
59. Saying that leakages equal injections give the equation:

A.
B.
C.
D.
E.
T+S+X=G+I+M
Y=C+S+T
Y=C+I+G+X-M
T+S+M=C+G+I+X
T+S+M=G+I+X
60. An economy producing at a level between full employment and full capacity is likely to experience:
A.
B.
C.
D.
E.
zero unemployment.
demand-pull inflation.
cost-push inflation.
a high level of cyclical unemployment.
a high level of seasonal unemployment.
This is the end of the multiple-choice portion of the quiz.

Take a 10-minute break before moving on to Part 2: Free Response.
If your quiz is proctored, ask your proctor for the next section.
If you're taking the unproctored version of the quiz, after your break continue with the next section.

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Graded Assignment
Name:
Date:
1.
31.
2.
32.
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33.
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34.
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35.
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36.
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37.
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44.
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45.
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48.
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60.

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Graded Assignment
Name:
Date:
Directions
Neatly write your responses in the spaces provided. Use a blue or black pen. Dont write in the margins.
Remember to complete the submission information on every page you turn in.
You have 60 minutes to do this portion of the Final. The first ten minutes are a mandatory reading period. You
may plan or outline your answer, but you may not start writing it. Spend the next 25 minutes on the first
question and the final 25 minutes on the other two questions.
Free-Response Questions
1. Macroeconomics can be a difficult topic to define. For the most part, it can be defined by the specific topics
with which it is concerned. Among these are output, inflation, unemployment, interest rates, and international
trade. At first these topics may seem unrelated, but some thought shows that they are intimately related.
A. The AD/AS model describes changes in the economy by relating real GDP (output) and the price level.
I.
Compare and contrast the Keynesian portion of the AD/AS model with the classical portion of
the AD/AS model, and explain how the level of production is determined in each situation. Use
graphs to explain your answer. (12 points)

Page 15 of 19
Graded Assignment
Name:
Date:
II. Compare and contrast changes in aggregate demand and changes in aggregate supply in the
AD/AS model. Use graphs to explain your answer. (12 points)
B. The Phillips curve relates inflation and unemployment.

I.
Using the AD/AS model, discuss the changes to the economy that the Phillips curve explains well,
and describe under what conditions the Phillips curve fails to explain economic behavior. Include
graphs of the Phillips curve and the AD/AS model in your answer. (12 points)

Page 16 of 19
Graded Assignment
Name:
Date:
II. In the late 1990s, the U.S. economy experienced a period of extremely low inflation and extremely
low unemployment. Use the AD/AS model to explain what sort of change in the economy would
cause this. Include a graphical analysis in your answer, and provide two examples of what might
bring about this event. (12 points)
C. Explain the relationship between interest rates and unemployment. How do changes in the
interest rate affect the level of unemployment in the economy? (10 points)
D. Consider the relationship between interest rates and inflation.

I.
Explain the difference between real and nominal interest rates. (9 points)
II. If the Fed takes actions that will change interest rates, how is this likely to affect inflation? (9
points)

Page 17 of 19
Graded Assignment
Name:
Date:
2. The U.S. economy experienced large trade deficits in the 1980s and 1990s and tremendous economic growth
in the mid- and late-1990s.
A. Trade deficits have an effect on inflation. Explain the relationship between trade deficits and
investment verbally and mathematically using the concept of the balance of payments. (10 points)
B. Explain verbally the relationship between investment and long-term economic growth and
describe the relationship graphically in an AD/AS graph. (10 points)
C. Many people believe trade deficits are a serious problem and need to be eliminated.
I.
Explain the three actions the Fed could take to reduce the trade deficit in the U.S., and explain
carefully how these actions would result in a reduced trade deficit. (10 points)
II. What effect would these three actions from part I of the question have on GDP? Describe the
effects on each of the components of aggregate demand. Include an AD/AS graphical analysis of
your answer. (7 points)

Page 18 of 19
Graded Assignment
Name:
Date:
3. In Country X, GDP is $400B below the full-employment level of output. Government officials have measured
the marginal propensity to consume at 0.75.
A. The government wants to use fiscal policy to bring the economy back to full employment.
I.
If the government wants to achieve this through a change in spending, what change would be
necessary? (8 points)
II. If the government wants to achieve this through a change in taxes, what change would be
III. If the government wants to achieve this without creating a budget deficit, what change would be
B. Say that for a variety of reasons, the government shows that it is not up to the task of conducting
fiscal policy. The central bank steps up and does something about it. If a 1% decrease in interest
rates leads to an increase in investment of $50B, how should the central bank's interest rate
targets change? (13 points)

Page 19 of 19

AP Macroeconomics - Unit 8 - 8.1 Final Exam Questions

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AP Macroeconomics - Unit 8 - 8.1 Final Exam Questions

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HST520: AP Macroeconomics | Unit 8 | 8.1 Final Exam

Gross national product does not include depreciation.

Both II and III.

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HST520: AP Macroeconomics | Unit 8 | 8.1 Final Exam

When unemployment is high, inflation will be high.

An increase in household consumption

2009 K12 Inc. All rights reserved.

HST520: AP Macroeconomics | Unit 8 | 8.1 Final Exam

An increase of less than $4,000 in real output

Increases in the price level accompanied by increases in output

it prescribed no fiscal response by the government.

An increase in real output and a smaller increase in nominal output

2009 K12 Inc. All rights reserved.

HST520: AP Macroeconomics | Unit 8 | 8.1 Final Exam

An increase in interest rates and a decrease in unemployment

15. Which of the following will be an effect of unexpectedly low inflation?

Lenders will benefit at the expense of borrowers.

An increase in output and price levels

2009 K12 Inc. All rights reserved.

HST520: AP Macroeconomics | Unit 8 | 8.1 Final Exam

When the marginal propensity to save is high

2009 K12 Inc. All rights reserved.

HST520: AP Macroeconomics | Unit 8 | 8.1 Final Exam

rational expectations models use more information.

If taxes are increased by $100M, GDP will decrease by $500M.

By looking at flows into and out of goods markets

Real GDP will increase by 10% if velocity doesnt change.

A fixed velocity of money

2009 K12 Inc. All rights reserved.

HST520: AP Macroeconomics | Unit 8 | 8.1 Final Exam

Lower structural unemployment

31. Which of the following is not a component of aggregate demand?

Sales tax receipts

32. Which of the following is an effect of increased labor productivity?

2009 K12 Inc. All rights reserved.

HST520: AP Macroeconomics | Unit 8 | 8.1 Final Exam

An increase in aggregated demand

33. Which type(s) of unemployment exist in an economy at full employment?

2009 K12 Inc. All rights reserved.

HST520: AP Macroeconomics | Unit 8 | 8.1 Final Exam

It may cause the Japanese economy to experience stagflation.

38. Stagflation may result from which of the following:

39. Which of the following statements about stagflation is correct?

It will result in increased nominal GDP.

2009 K12 Inc. All rights reserved.

HST520: AP Macroeconomics | Unit 8 | 8.1 Final Exam

If investment is zero, there is no foreign trade imbalance.

Marginal propensity to save

2009 K12 Inc. All rights reserved.

HST520: AP Macroeconomics | Unit 8 | 8.1 Final Exam

the trade deficit.

A steep investment demand curve

51. The Fed is conducting expansionary monetary policy if it:

2009 K12 Inc. All rights reserved.

HST520: AP Macroeconomics | Unit 8 | 8.1 Final Exam

An increase in bond prices

an increase in taxes and increased sales of bonds by the Fed.

Zagora has comparative advantage in the production of books.

an increase in the exchange rate, expressed in yen per dollar.

56. Fiscal policy affects exchange rates because:

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