Download AP Practice Exam Part I Name: In the circular flow model of

AP Practice Exam
Part I
Name: _______________________
1. In the circular flow model of economics, which of the following is a leakage?
a. Savings
b. Investment
c. Wages
d. Government Spending
e. Exports
2. If the real interest rate is 2% and the nominal interest rate is 6% then the expected rate of inflation is:
a. 0%
b. 2%
c.4%
d. 8%
e. 6%
3. Suppose that last year the price level increased and the production of goods and services increased. Which of
the following must be true? Nominal GDP:
a. Increased but real GDP decreased
b. Increased while the value of real GDP cannot be determined
c. Stayed the same while real GDP increased
d. Increased and real GDP increased
e. Decreased while real GDP increased
4. Given the information provided below, what is the unemployment rate?
Population
1,000
Labor Force
800
Employment
600
a. 20%
b. 25%
c. 33%
d. 40%
e. 50%
5. Which of the following are consistent with the observed relationship between growth in real GDP and changes
in the unemployment rate?
a. A rise in the unemployment rate accompanies a fall in real GDP.
b. An exceptionally strong business recovery is associated with a greater percentage of the labor force being
employed.
c. Negative real GDP growth is associated with a fall in the unemployment rate.
d. A, and B are both correct
e. A, B and C are all correct
6. Which of the following individuals is considered frictionally unemployed? A person who is not working and:
a. Is in the process of looking for a new job.
b. Does not have the skills needed in the job market.
c. Was laid off during a recession.
d. Was laid off due to an increase in the minimum wage.
e. Has given up looking for a job.
7. Which is true of the natural rate of unemployment?
a. It equals the actual rate of unemployment in short-run equilibrium.
b. It includes both frictional and structural unemployment.
c. It measures cyclical unemployment.
d. It changes in the business cycle.
e. It increases over time.
8. A Canadian recession will affect the US aggregate supply and demand in which of the following ways?
Aggregate Supply
Aggregate Demand
a. Increase
Increase
b. Increase
Decrease
c. Decrease
Increase
d. Decrease
Decrease
e. No change
Decrease
9. Which of the following will shift the aggregate demand curve to the left?
a. Expansionary monetary policy
b. An increase in the aggregate price level
c. An increase in the value of household assets
d. An increase in the Consumer Confidence Index
e. A decrease in planned business investment
10. If the MPC to consume in an economy is .9 million and the government increases spending by $10 million, GDP
will increase by how much?
a. $9 million
b. $10 million
c. $19 million
d. $90 million e. $100 million
11. Which of the following policies might provide a remedy when the equilibrium output in an economy is below the
potential level of output?
a. Decrease government spending
b. Raise the federal funds rate
c. Reduce transfer payments
d. Cut taxes
e. Sell more government securities
12. Which of the following is a liability for a commercial bank?
a. Deposits
b. Loans
c. Reserves
d. Treasury securities e. its building and equipment
13. If the interest rate is 2%, what is the present value of $1 paid to you in one year?
a. Less than $1
b. $1
c. $1.02
d. $1.04
e. $1.20
14. Which of the following is a component of the M1 money supply?
a. Gold
b. Cash
c. Savings deposits
d. Treasury Bills
e. Certificates of deposits
15. If the reserve ratio is 5%, what is the maximum amount of money that could be created by a new deposit of
$1000?
a. $1,000
b. $1,020
c. $1,050
d. $10,000
e. $20,000
16. Advances in technology such as ATM machines have had what effect on the demand for money and the interest
rate?
Money demand
Interest rate
a. Increase
increase
b. Increase
decrease
c. Decrease
increase
d. Decrease
decrease
e. No change
decrease
17. Which of the following will increase the demand for money?
a. A decrease in the aggregate price level
b. An increase in the use of mobile devices such as iPhones for payments
c. A decrease in the interest rate
d. An increase in the supply of money
e. An increase in real GDP
18. Which of the following will increase the interest rate in the market for loanable funds?
a. A decrease in the expected rate of return from investment spending
b. An increase in government budget deficits
c. An increase in the aggregate savings rate
d. A decrease in expected inflation
e. An increase in capital inflows
19. When government borrowing increases interest rates it is known as:
a. Crowding out
b. Fiscal policy
c. Monetary policy
d. Financial regulation
e. Expansionary monetary policy
20. According to the quantity theory of money, the money supply times the velocity of money is equal to:
a. Nominal GDP
b. Real GDP
c. Full employment real GDP
d. The price level
e. A constant value
21. An open market sale of securities by the Federal Reserve will lead to which of the following?
a. An increase in the demand for money
b. An increase in interest rates
c. A decrease in investment demand
d. An increase in aggregate demand
e. An increase in the price level
f. None of the above
22. An increase in expected inflation is likely to have which of the following effects?
a. Shift the long-run Phillips curve to the right
b. Shift the short-run Phillips curve downward
c. Increase the actual inflation rate
d. Decrease the unemployment rate
e. Shift the short-run aggregate supply curve to the right
23. Which of the following policies could the Federal Reserve implement to combat inflation created by
expansionary fiscal policy?
a. Lower the reserve requirement
b. Raise the discount rate
c. Buy Treasury securities
d. Raise taxes
e. Reduce government spending
24. Which of the following is contractionary fiscal policy?
a. Raising the reserve the requirement
b. Decreasing transfer payments
c. Decreasing taxes
d. Raising government spending
e. Increasing the Federal Funds rate
25. If a country currently has a positive national debt and a balanced budget, how would a decrease in taxes affect
the country’s deficit and debt?
Deficit
Debt
a. Increase
increase
b. Increase
decrease
c. Decrease
increase
d. Decrease
decrease
e. Decrease
No change