Prepare for the AP Macroeconomics exam with these practice questions and answers. This guide covers GDP, unemployment, inflation, fiscal policy, monetary policy, and international finance.
Q: 1. Identify all possible Fiscal Policy interventions in the economy.
Answer: Government spending, government transfers increase or decreaseTaxes increase or decrease
Q: 2. How can the national debt be defined?
Answer: Accumulation of all deficit and surplus in nation’s accounting
Q: 3. Are automatic stabilizers necessary when there is a balanced budget? Explain.
Answer: Not really–there is a balanced budget, so G = T
Q: 4. How would Fiscal Policy best remedy an oppressive recession?
Answer: Government spending, government transfers increase or Taxes decrease
Q: 5. Why is the Tax Multiplier smaller than the Expenditure Multiplier?
Answer: Because if there is a decrease in taxes, people will consume part of their increased disposable income but will also save a portion of it. Remember, taxes can also increase which would certainly decrease spending.
Q: 6. How is the Marginal Propensity to Consume calculated?
Answer: Change in Consumption/Change in Disposable Income
Q: 7. Regarding Fiscal Policy, what would cause output to increase in the short run?
Answer: Decrease in T, Increases in G and Government transfers
Q: 8. How will interest rates react if the national government decreases its budget deficit?
Answer: The government is closing a recessionary gap if it is able to reduce its budget deficit close to full employment. As such, price levels would decrease. Since interest rates are prices, the interest rate would decrease.
Q: 9. What is the Net Exports Effect of Expansionary Fiscal Policy?
Answer: Increase in G or Decrease in T yields increase in interest rate (crowding out if increase in G) yields increased Demand for Money as foreigners want to invest in U.S. (Demand for bonds increases) yields increase in the value of the dollar (appreciation) yields decrease in Exports and increase in Imports yields decrease in Xn yields decrease in GDP.
Q: 10. What does it mean when the federal government has a deficit?
Answer: Not enough tax revenue; they must borrow if they want to spend.
Q: 11. What is the Crowding Out Effect of fiscal policy?
Answer: When G increases, AD increases and shifts Right. When AD shifts Right, the price level increases. The interest rate is a price; hence, interest rates increase. This yields a decrease in Ig and C (Investment and Consumption spending).
Q: 12. What does it mean when the federal government engages in deficit spending?
Answer: Borrowing because G > T. Deficit-spending = debt-financing = bonds.
Q: 13. What is the relationship between the Marginal Propensity to Consume and the Expenditure Multiplier?
Answer: 1/1-MPC = ME
Q: 14. What does a horizontal Aggregate Supply Curve demonstrate?
Answer: Production cannot exceed the price level, so even as production increases or decreases, the price level will not change.
Q: 15. What does Keynes believe will remedy Inflations? Recessions?
Answer: Decrease G and Increase T: Inflation/ Increase G and Decrease T: Recession
Q: 16. What is the relationship between savings and investment in the Loanable Funds Market? What is the interest rate in this market? How is that interest rate determined? How will less Demand for Loanable Funds affect the model? How will more Demand for Loanable Funds affect the model?
Answer: Savings; i.e., NOT SPENDING (the Supply of Loanable Funds) = Investment/borrowing (the Demand of Loanable Funds.) Savings = Ig. Real Interest Rate. Determined by target rate set by Federal Reserve and the selling/buying of bonds in the open market. Less Demand means Interest rates will go down (there is a surplus of supply of loanable funds, so the interest goes down to find buyers/Demand). More Demand means Interest rates will go up (there is a shortage of supply of loanable funds, so the interest rate goes up to find suppliers/savers).
Q: 17. What do classicists believe about the economy (not the Money Supply)?
Answer: Prices flexible upward (upward pressure on prices), economy can self-correct, equilibrium in the long run.
Q: 18. What do Keynesians believe about the economy (not the Money Supply)?
Answer: Prices inflexible downward (downward pressure on prices), economy needs government intervention to correct, so the economy CAN be at equilibrium in the short run.