All AP Macroeconomics Resources
Example Questions
Example Question #1 : Deficit Spending
At the beginning of a specified fiscal year, the national debt is equal to $1000. At the end of the fiscal year, the national deficit is equal to $100. The national debt at the end of the fiscal year is equal to ________.
$1000
$900
$100
$1100
$1100
The national debt is the accumulation of national deficits, tabulated every fiscal year.
Therefore, if the national debt at the beginning of the year is $1000 and the deficit for that year is $100, the accumulated nation deficit is $1000+$100=$1100.
If you selected $900, you may have subtracted the deficit that year rather than adding it.
If you selected $100, you may have mistaken the national deficit for the national debt.
If you selected $1000, you may have forgotten to include the new deficit of $100 into the calculation of national debt.
Example Question #2 : Deficit Spending
The British economist who notably advocated deficit spending in order to pull a nation out of a recession or depression is _________.
Adam Smith
William Stanley Jevens
Carl Menger
Alfred Marshall
John Maynard Keynes
John Maynard Keynes
John Maynard Keynes began arguing forcefully in the 1920s that spending in a deficit would actually help a country get out of an economic depression. The Great Depression of the 1930s saw many governments put Keynes' theories to the test, often with economic success. This time period is often known as the Keynesian Revolution.
Example Question #3 : Deficit Spending
According to Keynesian Economics, which of the following would weaken the multiplier effect?
Selling government bonds
An increase in government spending
High velocity of money
An increase in interest rates
An increase in interest rates
The correct answer is that an increase in interest rates would weaken the multiplier effect. The reason is that an increase in interest rates would make it more attractive for consumers to save money, so as a result, there would be less of a propensity to consume.
Example Question #4 : Deficit Spending
Which of these is a negative aspect of a law mandating a balanced budget?
It is pro-cyclical (makes the business cycle more severe)
It leads to fluctuating tax rates.
It leads to increasingly high taxes.
It creates excess funds for public projects.
It is pro-cyclical (makes the business cycle more severe)
A balanced budget law is pro-cyclical because when the economy enters a recession (GDP decreases), the amount of production the government is able to tax decreases, leading to a decrease in government revenue. The government is unable to spend at a deficit, so the government must decrease expenditures. Government expenditures make up a substantial portion of GDP, so GDP decreases even more.
Example Question #1 : Effect Of Deficit Spending On Aggregate Demand
If the economy is in severe recession, which of the following fiscal policies would a Keynesian economist most likely recommend?
An increase in government spending on public infrastructure, even if this spending results in greater budget deficits.
A decrease in government transfer payments.
An increase in personal income taxes in order to help balance the budget.
A decrease in government spending in order to offset the decrease in tax revenues that result from an economy in recession.
An increase in government spending on public infrastructure, even if this spending results in greater budget deficits.
The correct answer is that a Keynesian Economist would be most likely to advocate increased spending on public infrastructure if the economy was in recession, even if such an increase results in an increase in budget deficits.
The reason for this is that the Keynesians believe that such an increase in public works spending will lead to an increase in aggregate demand.
Example Question #1 : Other Gdp Gross Domestic Product
Each of the following is included in the gross domestic product EXCEPT _________.
Consumption
Net Exports
Government Expenditures
Transfer payments
Transfer payments
To calculate the GDP, we add consumption, investment, government expenditures, and net exports.
Transfer payments, such as social security, welfare, and unemployment checks, on the other hand, are not included in the calculation of the GDP.
Example Question #1 : Gross Domestic Product
Which of these methods is a correct model for GDP?
The quantity of money times the velocity of money is equal to the real output times the price level. So, if the above equation is solved for Y, it gives us:
Example Question #1 : Gross Domestic Product
Which of the following is NOT a measure of income when using the income approach to calculate GDP?
Profits from corporations.
Interest and investment income.
Governmental tax revenue.
Wages and salaries.
Income from farmers.
Governmental tax revenue.
The income approach to calculating GDP will arrive at the same number as other approaches, such as the production approach or expenditure approach. The five sources of income used to calculate Income GDP, or Gross Domestic Income, are wages and salaries; interest and investment income; corporate profits; farmers' income; and non-farm unincorporated business profits.
Example Question #1 : Gross Domestic Product
In a certain year, nominal gross domestic product grew by 8 percent. The inflation rate was 4 percent. Real gross domestic product for this year was _______.
grew by 4 percent
grew by 8 percent
grew by 12 percent
remained constant
grew by 4 percent
Nominal GDP growth refers to the rate at which real GDP increases. To find real GDP growth (i.e. GDP growth that accounts for inflation), subtract the inflation rate from the nominal GDP growth rate.
In this case, the nominal GDP growth rate is 8 percent, and the inflation rate is 4 percent. Thus, the real GDP growth rate is 4%.
Example Question #1 : Tables
Countries A & B can produce the following maximum quantities of cars and computers (when they use all their resources to produce one of the goods):
Country A: 500 computers OR 200 cars
Country B: 300 computers OR 100 cars
Which of the following is true about their trade potential?
If Country A and Country B were to enter into a trade agreement, Country B would be the only party to benefit
Country A and Country B can both benefit from trade since each has a comparative advantage in one of the goods
Country A would not accept any trade terms with Country B since it can produce more of both good A and good B
None of the other answers
If Country A and Country B were to enter into a trade agreement, Country A would be the only party to benefit
Country A and Country B can both benefit from trade since each has a comparative advantage in one of the goods
Trade does not depend on absolute advantage (who can produce the most of both goods) but comparative advantage (who can produce one good cheaper than the other). Country A can produce cars more cheaply than country B (1 car costs 2.5 computers for country A while it costs 3 computers for country B). Country B on the other hand can produce computers more cheaply than country A (1 computer costs 0.3 cars in country B while it costs 0.4 cars in country A). Thus they will both benefit from trade.
All AP Macroeconomics Resources
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