Question 1

What is the correct formula for the money multiplier?
A)(Required reserve ratio)/(total variable cost)
B)[1 (required reserve ratio)]/(marginal cost)
C)[1-(MPC)]/required reserve ratio
D)1/(required reserve ratio)

Accepted Answer

The correct formula for the money multiplier is simply 1 ÷ the required reserve ratio (shown above as 1/(required reserve ratio)).
Key Takeaway: The formula for the money multiplier is one of the most important ones to remember for your AP Macroeconomics test. Remember that it is simply 1/RRR, where RRR is the required reserve ratio.

Question 2

What is the correct term for a sustained decrease in the general price level within an economy?

Accepted Answer

Deflation is the correct term for a sustained decrease in the general price level within an economy.
Key Takeaway: The opposite of deflation is inflation, a sustained increase in the general price level within a given economy. Always keep in mind that an increase in the price of only one good would not necessarily signal inflation. Rather, it could be part of a broader societal increase that would be inflation. It is always important to look at the economy as a whole.

Question 3

What tool does the government use in order to gauge inflation?

Accepted Answer

The government uses the Consumer Price Index (sometimes shortened to CPI) in order to gauge inflation.
Key Takeaway: To use it properly, the Department of Labor Statistics will look at and measure the prices of items across a broad spectrum of goods to assess for inflation or deflation. They can then effectively adjust social security payments and income tax brackets to compensate for the change in market prices.

Question 4

Which classical economist argued that investment demand does not depend so much upon interest rates, but rather about the expectations about the prosperity of the economy?

Accepted Answer

John Maynard Keynes argued that investment demand does not depend so much upon interest rates, but rather about the expectations about the prosperity of the economy.
Key Takeaway: Keynes was a British economist whose ideas greatly affect modern macroeconomics and economic policies of various governments around the world. His policies and research are the basis for the school of thought that is known as "Keynesian economics" and advocated the use of fiscal policies to help economies out of depressions and recessions.

Question 5

The definition of the budget deficit is basically the difference between government spending and __________ in one year.

Accepted Answer

The definition of the budget deficit is basically the difference between government spending and tax collections in one year.
Key Takeaway: The budget deficit, as stated above, is the difference between what the government spends and what the government brings in (in taxes) in one year. The national debt, then, is the overall accumulation of past budget deficits and shows the total money that the government owes at any one time.

Question 6

Think about making deposits at a commercial bank. If that bank has no excess reserves and the requirement is 20 percent, how much money would be created in new loans from all banks after this bank gets a deposit of $15,000?

Accepted Answer

In this scenario, $60,000 would be created in new loans from all banks after this bank gets a deposit of $15,000.
Key Takeaway: To figure out this problem, first figure out how much the bank would keep: 20% of $15,000, which would be $3,000. They could, therefore, lend out the remaining $12,000. You would then multiply this by the money multiplier, which is 5, to get the total of $60,000.

Question 7

Which of the following is an example of fiat money?

Accepted Answer

Dollar bills are an example of fiat money.
Key Takeaway: Fiat money is basically defined as money that in and of itself does not have any value. Paper money only has value because the government says it does. All of the other items have intrinsic value beyond that of currency.

Question 8

Fae would spend $75 per week even if she did not have a steady income. As it stands, her weekly income is $1,000. If Fae's marginal propensity to consume is 0.8, how much does Fae save per week?

Accepted Answer

No matter what, Fae spends $75 per week. In addition, she spends 80 cents of every dollar she earns, for a total expenditure of $75 + $800 = $875. Subtract that from her total weekly income ($1,000
$875) and you will get $125. Fae can save $125 per week.
Key Takeaway: MPC stands for "marginal propensity to consume." Basically, MPC looks at the proportion of each dollar earned that will go toward individual consumption spending. MPS is, therefore, the marginal propensity to save. Remember that MPC + MPS for any individual consumer always equals one.

Question 9

What happens to the equilibrium price and quantity of oranges if the demand for oranges increases, but the supply of oranges decreases?

Accepted Answer

If the demand for oranges increase, but the supply of oranges decreases, the price will increase, but it cannot actually be determined what will happen to the equilibrium quantity.
Key Takeaway: Although it may seem like the quantity should decrease, it is actually impossible to know how much the supply is decreasing and the degree of the changing supply and/or demand without more infomration.

Question 10

When looking at the phases of a business cycle, the highest point is called a ________ and the lowest point is called a __________.

Accepted Answer

When looking at the phases of a business cycle, the highest point on the cycle is called a peak and the lowest point is called a trough (note that answer A is backwards).
Key Takeaway: When moving from the peak to the trough, economists say that the economy is experiencing a recession. When moving from a trough to a peak, economists say that the economy is experiencing a boom (or an expansion) because the GDP is increasing.

Question 11

Julia is currently on maternity leave from her position at La Gourmande Francaise. Is Julia considered to be employed or unemployed?

Accepted Answer

Julia is considered to be employed.
Key Takeaway: According to the U.S. Bureau of Labor Statistics, an individual is employed if they are temporarily not working (this could be receiving pay or not), but has a position to which he or she will return. Because Julia is only on maternity leave and is, presumably, returning her to position at a later date, she is considered to be employed.

Question 12

What are goods that are used together called?

Accepted Answer

Goods that are used together are called complements.
Key Takeaway: Typically, an increase in the price for one complement causes a decrease in the demand for the other complement. Complements are seen a lot in the travel industry. For example, if the price of hotel rooms goes way up, you may see a decrease in demand for airline tickets or rental cars.

Question 13

When government spending (G) goes up, does the aggregate demand curve (AD) shift? If so, which way?
A)No
B)Yes. The curve shifts to the left.
C)Yes. The curve shifts to the right.
D)It is impossible to tell given the information.

Accepted Answer

When government spending (G) goes up, the aggregate demand curve shifts to the right.
Key Takeaway: Remember that the AD curve always shifts when the various components of spending within the economy change. This could be from government, individual firms, consumption, and/or exports.

Question 14

What does MPC stand for?

Accepted Answer

MPC stands for "marginal propensity to consume."
Key Takeaway: Basically, MPC looks at the proportion of each dollar earned that will go toward individual consumption spending. MPS is, therefore, the marginal propensity to save. Remember that MPC + MPS for any individual consumer always equals one.

Question 15

If the MPC is 0.7, what is the marginal propensity to save?
A))5
B))1
C))3
D)None of the above

Accepted Answer

If the MPC is 0.7, the marginal propensity to save is 0.3.
Key Takeaway: MPC stands for "marginal propensity to consume." Basically, MPC looks at the proportion of each dollar earned that will go toward individual consumption spending. MPS is, therefore, the marginal propensity to save. Remember that MPC + MPS for any individual consumer always equals one.

Question 16

If the MPC is 0.8, then what is the tax multiplier?

Accepted Answer

If the MPC is 0.7, then the tax multiplier is ?4.
Key Takeaway: To figure this out, use the formula:
?MPC = ?0.8 = ?0.8 = ?4
(1
MPC) (1
0.8) 0.2

Question 17

__________ is the ease with which an asset, typically money, can be converted into spendable form.

Accepted Answer

Liquidity is the ease with which an asset, typically money, can be converted into spendable form.
Key Takeaway: Currency is considered to be extremely liquid, as it's the easiest form of money to convert into spendable form. Checks, credit cards, and money in savings are all considered to be much less liquid.

Question 18

How do economists compare how rich or poor different nations are?

Accepted Answer

Economists compare how rich or poor different nations are by measuring per capita GDP.
Key Takeaway: Because countries vary so much as far as land mass or population is concerned, economists prefer to look at GDP per capita (per person in the economy). This allows economists to analyze living standards across many nations.

Question 19

What does a country have if the total value of its commodity exports is greater than the value of its imports?

Accepted Answer

A country has a trade surplus is the total value of its commodity exports is greater than the value of its imports.
Key Takeaway: The difference between the exports and imports of a country over a given period of time is known as the balance of trade. If the country has a favorable balance of trade, it is known as a trade surplus. That country has a trade deficit if the opposite is true-the total value of its commodity imports is greater than the value of its exports.

Question 20

What is the correct term for the price of a country's domestic currency in terms of a given foreign currency?

Accepted Answer

The exchange rate is basically the price of a country's domestic currency in terms of a given foreign currency.
Key Takeaway: In most places, exchange rates are determined by supply and demand in the market. The opposite, fixed exchange rates, are set by government forces and were largely given up by the United States and most of the world's countries in the 1970s. Although governments still sometimes intervene in order to keep order, exchange rates world over are mainly determined by supply and demand.

Quiz 30: (AP) Macroeconomics: Part A

What is the correct formula for the money multiplier? A)(Required reserve ratio)/(total variable cost) B)[1 (required reserve ratio)]/(marginal cost) C)[1-(MPC)]/required reserve ratio D)1/(required reserve ratio)