This mock mirrors the real CLEP Principles of Macroeconomics exam: 80 multiple-choice questions, a 90-minute time limit, and five answer choices (A–E) per item with exactly one correct answer. The real exam is computer-delivered and 100% multiple choice — there is no free-response, essay, or numeric-entry section. No calculator is provided (macroeconomics uses only light arithmetic you can do by hand), so any computation below is intentionally kept simple.
Scoring: CLEP reports a scaled score from 20 to 80. The American Council on Education (ACE) recommends granting credit at a scaled score of 50, which corresponds to roughly 50% of the raw points. Pace yourself at about 67 seconds per question to finish all 80 in 90 minutes.
Questions are allocated by the College Board's official content weightings (specific percentages chosen within the published ranges, summing to 100%):
| Official content area | Weight | Questions |
|---|---|---|
| Basic Economic Concepts (scarcity, opportunity cost, PPF, comparative advantage) | 13% | 10 |
| Measurement of Economic Performance (GDP, CPI, unemployment, inflation) | 14% | 11 |
| National Income and Price Determination (AD/AS, multiplier, fiscal policy) | 17% | 14 |
| Financial Sector (money, banking, money market, Fed tools) | 16% | 13 |
| Inflation, Unemployment, and Stabilization Policies (Phillips curve, monetary/fiscal policy) | 22% | 18 |
| Economic Growth and Productivity | 9% | 7 |
| Open Economy: International Trade and Finance (exchange rates, balance of payments) | 9% | 7 |
| Total | 100% | 80 |
Bloom target: Apply + Analyze + Evaluate ≥ 60% of items (scenario and analysis stems dominate). Answer-distribution target: each letter A–E used on 15–25% of items (~20% each). Topics are interleaved — the order deliberately mixes content areas the way a real CLEP form does.
1. A) the $90 in wages she gives up by not working. Opportunity cost is the value of the single next-best alternative forgone; the best alternative to studying is the $90 shift. Distractors: B) opportunity cost never sums alternatives. C) relaxing is the third option, not the next-best. D) the cost is real even though studying has no price tag. E) subtracting values is a net-benefit calculation, not opportunity cost. Fix: Opportunity cost = the one next-best option given up, never a sum and never a price paid. [Apply]
2. C) a family buys a newly built house from a developer. New residential construction is counted as investment in this year's GDP. Distractors: A) transfer payments buy no current output. B) trading existing financial assets is not production. D) resale of a used good was counted in its original year. E) same — a good produced three years ago belongs to that year's GDP. Fix: GDP counts only new, final production this year; secondhand sales, transfers, and pure asset trades are excluded. [Apply]
3. E) a cut in interest rates that spurs business investment. Lower rates raise investment (a component of AD), shifting AD right. Distractors: A) higher income taxes cut disposable income and consumption — AD left. B) less government spending — AD left. C) currency appreciation lowers net exports — AD left. D) pessimism reduces consumption — AD left. Fix: AD rises when C, I, G, or net exports rise; check which spending component the event pushes. [Apply]
4. B) currency and checkable deposits. These are the most liquid assets and serve directly as a medium of exchange (the M1 definition). Distractors: A) stocks must be sold first. C) a bond must be sold or matured. D) a house is highly illiquid. E) oil is a commodity, not routinely accepted in payment. Fix: Money's medium-of-exchange role is about immediate spendability; only cash and checkable deposits qualify without conversion. [Understand]
5. D) increasing government spending on infrastructure. Expansionary fiscal policy raises AD to close a recessionary gap. Distractors: A) raising taxes is contractionary. B) selling bonds is contractionary monetary policy, not fiscal. C) raising the reserve requirement is contractionary monetary policy. E) cutting transfers is contractionary. Fix: In a recession, use expansionary fiscal policy (spend more or tax less); anything that shrinks AD is the wrong direction. [Apply]
6. A) Ana has a comparative advantage in shirts and should specialize in shirts. Ana's opportunity cost of one shirt is ½ loaf (6/12) versus Ben's 1 loaf (4/4); Ana's cost is lower, so she specializes in shirts and Ben in loaves. Distractors: B) Ben's shirt cost is higher, not lower. C) comparative advantage cannot be held in both goods. D) Ana produces more loaves (6 > 4), so she — not Ben — holds the absolute advantage in loaves. E) differing opportunity costs guarantee gains from trade. Fix: Comparative advantage goes to the lower opportunity cost; compute cost per unit as the other good given up. [Analyze]
7. E) increased spending on research, education, and physical capital. These raise productive capacity and long-run growth. Distractors: A) transfers redistribute income without adding capacity. B) a temporary rebate is a one-time demand bump, not sustained growth. C) shrinking the money supply is a monetary, price-level matter. D) a higher price level is inflation, not real growth. Fix: Long-run growth comes from more or better resources (capital, human capital, technology), not from one-off demand or price changes. [Understand]
8. C) make European goods cheaper for U.S. buyers and tend to reduce U.S. net exports. A stronger dollar buys more euros, so European goods cost fewer dollars (imports up) and U.S. goods cost Europeans more (exports down). Distractors: A) a stronger dollar makes U.S. exports more expensive abroad. B) net exports fall, not rise. D) relative prices clearly change. E) if the dollar appreciates, the euro by definition depreciates. Fix: A currency that appreciates makes imports cheaper and exports dearer, lowering net exports. [Apply]
9. B) 5. The spending multiplier is 1/(1 − MPC) = 1/(1 − 0.8) = 1/0.2 = 5. Distractors: A) 0.8 is the MPC itself. C) 1.25 wrongly divides by the MPC. D) 0.2 is the MPS. E) 8 is arithmetic error. Fix: Spending multiplier = 1/(1 − MPC) = 1/MPS; with MPC 0.8, MPS is 0.2 and the multiplier is 5. [Apply]
10. D) sell government securities to banks and the public. Selling bonds drains reserves, shrinks the money supply, and raises rates — contractionary, the right tool against demand-pull inflation. Distractors: A) buying bonds is expansionary. B) lowering the discount rate is expansionary. C) reducing the reserve requirement is expansionary. E) higher government spending is expansionary fiscal policy. Fix: To fight inflation, contract the money supply — the open-market action is to sell bonds. [Apply]
11. C) 125. CPI = (cost of basket now ÷ cost in base year) × 100 = (250 ÷ 200) × 100 = 125. Distractors: A) 25 is only the percentage increase, not the index. B) 50 is unrelated. D) 80 inverts the ratio. E) 150 is arithmetic error. Fix: CPI = (current basket cost / base-year cost) × 100; a 25% rise gives an index of 125. [Apply]
12. A) $900. A single bank can lend only its excess reserves: $1,000 − (10% × $1,000) = $900. Distractors: B) $1,000 ignores required reserves. C) $9,000 is the whole banking system's maximum new lending via the multiplier, not one bank's. D) $10,000 is the system's total new deposits. E) $100 is the required reserve, which the bank keeps, not lends. Fix: One bank lends its excess reserves; the system multiplies them. Don't confuse the single-bank loan with the system total. [Apply]
13. D) unemployment-insurance payments that rise automatically when a recession pushes up joblessness. Automatic stabilizers change with the economy without new legislation. Distractors: A) a new highway law is discretionary. B) an open market purchase is discretionary monetary policy. C) a legislated reserve-requirement change is discretionary. E) a voted tax cut is discretionary. Fix: Automatic stabilizers (unemployment benefits, progressive taxes) operate on their own; anything requiring a new vote or central-bank decision is discretionary. [Apply]
14. E) a sharp increase in the price of a key imported resource such as oil. A supply shock raises production costs and shifts SRAS left. Distractors: A) cheaper oil lowers costs — SRAS right. B) higher productivity — SRAS right. C) lower nominal wages cut costs — SRAS right. D) more workers — SRAS right. Fix: SRAS shifts left when input costs rise; it shifts right when costs fall or productivity rises. [Apply]
15. B) some of its resources are unemployed or being used inefficiently. An interior point is attainable but wasteful — the graphical picture of unemployment/inefficiency. Distractors: A) growth is an outward shift, not an interior point. C) outside points are unattainable; inside points are reachable. D) full employment is on the curve. E) nothing shifted the curve; only usage changed. Fix: Inside = unemployment/inefficiency; on = full employment; outside = unattainable; a shift is a capacity change. [Understand]
16. D) increase bank reserves and the money supply, putting downward pressure on interest rates. Open-market purchases pay banks with new reserves, expanding lending and money and lowering rates. Distractors: A) buying raises reserves, not lowers them. B) the money supply expands. C) the reserve requirement is unchanged by open-market operations. E) currency in circulation is not reduced. Fix: Central bank buys → reserves and money supply up → rates down (expansionary); sells → the reverse. [Apply]
17. A) unemployed and part of the labor force. Someone without a job who is actively searching meets the definition of unemployed and is in the labor force. Distractors: B) actively searching keeps her in the labor force. C) she is not working at all, so not employed part-time. D) a discouraged worker has stopped searching; she is still looking. E) structural unemployment is a type, not an out-of-labor-force status. Fix: Unemployed = no job + actively looking + available; active search is what keeps a person in the labor force. [Apply]
18. C) an inverse trade-off between inflation and unemployment in the short run. The short-run Phillips curve slopes downward: lower unemployment comes with higher inflation. Distractors: A) the relationship is inverse, not positive. B) they are related in the short run. D) unemployment is at the natural rate only in the long run. E) the vertical curve is the long-run Phillips curve. Fix: Short-run Phillips curve = downward-sloping trade-off; long-run Phillips curve = vertical at the natural rate. [Understand]
19. E) the amount of output produced per worker or per hour worked. Productivity is output per unit of labor input. Distractors: A) the number of workers is labor quantity, not productivity. B) an unemployment rate is not output per worker. C) total output alone ignores the labor input. D) a wage is a payment, not a measure of output. Fix: Productivity is always output per input — divide output by labor hours or workers. [Remember]
20. B) exports and imports of goods and services, plus net income and net transfers. The current account records trade in goods and services along with net income and transfers. Distractors: A) asset purchases and sales belong to the financial/capital account. C) FDI is a financial-account item. D) interest-rate changes are not balance-of-payments entries. E) the budget deficit is a fiscal, not a balance-of-payments, item. Fix: Current account = trade + income + transfers; financial (capital) account = cross-border asset flows. [Understand]
21. E) a recessionary gap, with output below full-employment output. Real GDP short of potential defines a recessionary (contractionary) gap. Distractors: A) an inflationary gap is output above potential. B) long-run equilibrium is output at potential. C) demand-pull inflation occurs above potential. D) the long-run aggregate supply curve is vertical at potential; being below it is not a movement along it. Fix: Below potential = recessionary gap; above potential = inflationary gap; at potential = long-run equilibrium. [Understand]
22. B) lower the nominal interest rate. More money supply with unchanged demand pushes the equilibrium down the money-demand curve — rates fall. Distractors: A) more money lowers, not raises, the rate. C) the money supply shifted, not money demand. D) the rate must change to clear the market. E) a shift in supply changes the equilibrium rate, not just quantity demanded at a fixed rate. Fix: In the money market, more money supply → lower nominal rate; less → higher rate. [Apply]
23. A) crowding out. Deficit borrowing raises interest rates and squeezes private investment — the textbook definition. Distractors: B) the multiplier magnifies spending; it is not the rate effect. C) an automatic stabilizer is a budget item that adjusts on its own. D) crowding in is the opposite (a surplus lowering rates). E) the wealth effect concerns price-level effects on consumption. Fix: Deficit → higher r → less private investment = crowding out; the reverse is crowding in. [Understand]
24. D) the entire rise in nominal GDP was caused by higher prices. If real GDP (quantity) is unchanged but nominal GDP rose, only prices increased. Distractors: A) unchanged real GDP means output did not rise. B) productivity gains would raise real GDP. C) population is irrelevant to the nominal-vs-real split. E) unemployment need not have moved. Fix: Nominal GDP = prices × quantities; if real GDP is flat, any nominal rise is pure price change (inflation). [Analyze]
25. C) an increase in the size and skill of the labor force. More or better resources expand capacity, shifting the PPC outward. Distractors: A) lower unemployment moves the economy toward the curve, not the curve itself. B) reactivating idle factories is again a move toward the curve. D) a higher price level doesn't appear on a PPC. E) moving inside-to-on is a point change, not a shift. Fix: Only changes in resources or technology shift the PPC; changes in resource usage move the operating point. [Apply]
26. B) $160 billion. Multiplier = 1/(1 − 0.75) = 4; ΔGDP = 4 × $40B = $160B. Distractors: A) $40B ignores the multiplier. C) $30B misapplies MPC. D) $53B is arithmetic error. E) $10B is unrelated. Fix: Max ΔGDP = spending multiplier × initial spending = [1/(1 − MPC)] × Δspending. [Apply]
27. E) raise the price level while leaving real output unchanged. In the long run money is neutral: more money raises prices, not real output. Distractors: A) unemployment returns to its natural rate long-run. B) real GDP is set by real factors, not money. C) the natural rate is unaffected by money growth. D) long-run nominal rates rise with inflation (Fisher effect), not fall. Fix: Long-run money neutrality: nominal variables (prices) move with the money supply; real output and the natural rate do not. [Understand]
28. A) shift the supply of loanable funds rightward, lowering the real interest rate. More saving at every rate is a rightward supply shift, so r falls. Distractors: B) saving is supply, not demand. C) more saving is a rightward, not leftward, shift. D) no curve in this market is vertical. E) the equilibrium rate must fall. Fix: More saving = supply of loanable funds right = lower real interest rate (and crowding in). [Apply]
29. D) it equips each worker with more tools and machinery, raising future productivity. More capital per worker raises output per worker over time. Distractors: A) capital investment doesn't chiefly target the price level. B) it does not reduce the money supply. C) it sacrifices some current consumption for future capacity. E) it does not directly move the natural rate of unemployment. Fix: Capital deepening (more capital per worker) is a core engine of rising productivity and growth. [Understand]
30. C) increase demand for the country's currency, causing it to appreciate. Foreigners buying more exports must first buy the currency, raising its demand and value. Distractors: A) rising demand appreciates, not depreciates. B) export demand raises currency demand. D) a demand shift changes the exchange rate. E) exchange-rate effects are separate from domestic interest-rate policy here. Fix: More demand for a country's exports → more demand for its currency → appreciation (floating system). [Apply]
31. B) net exports, equal to exports minus imports. GDP = C + I + G + (X − M). Distractors: A) taxes are not a spending category. C) transfers are excluded because they buy no output. D) saving is not spending on output. E) the money supply is not an expenditure component. Fix: Memorize GDP = C + I + G + NX, where NX = exports − imports. [Understand]
32. D) using contractionary policy against the inflation worsens unemployment, while using expansionary policy against the unemployment worsens inflation. A leftward SRAS shift raises prices and unemployment, and demand-side policy can fix only one at a time. Distractors: A) expansionary policy raises inflation further. B) contractionary policy raises unemployment further. C) policy still has effects — just conflicting ones. E) stagflation does not vanish costlessly. Fix: With a supply shock, demand-management policy faces a trade-off: fixing inflation worsens unemployment and vice versa. [Analyze]
33. C) shift aggregate demand right, raising both real output and the price level. More consumption and investment increase AD; along an upward-sloping SRAS, output and prices both rise. Distractors: A) more spending shifts AD right, not left. B) these are demand-side changes, not SRAS. D) AD clearly changes. E) LRAS depends on real capacity, not confidence. Fix: Rising C and I shift AD right; short-run result is higher output and a higher price level. [Apply]
34. A) 5. Simple deposit multiplier = 1/reserve ratio = 1/0.20 = 5. Distractors: B) 20 is the percentage, not the multiplier. C) 0.2 is the reserve ratio itself. D) 2 is arithmetic error. E) 10 uses a 10% ratio. Fix: Deposit (money) multiplier = 1 ÷ required reserve ratio; a 20% ratio gives 5. [Apply]
35. E) scarcity — limited resources relative to unlimited wants. Scarcity forces choices, and every choice sacrifices an alternative — the source of opportunity cost. Distractors: A) regulation is not the root of opportunity cost. B) inflation is a separate phenomenon. C) distribution is about who gets output, not why choices cost. D) trade imbalances are macro outcomes, not the origin of scarcity. Fix: Scarcity is the foundational problem; opportunity cost is its direct consequence. [Understand]
36. C) vertical at the natural rate of unemployment. In the long run there is no inflation-unemployment trade-off; unemployment sits at its natural rate whatever the inflation rate. Distractors: A) a permanent trade-off is the discredited long-run view. B) it is not upward-sloping. D) not horizontal. E) it differs from the downward-sloping short-run curve. Fix: Long-run Phillips curve is vertical at the natural rate; only the short-run curve slopes down. [Understand]
37. B) structural unemployment. Her skills no longer match available jobs because technology changed the job mix — structural. Distractors: A) frictional is short-term job search between suitable jobs. C) cyclical is caused by a downturn in the business cycle. D) seasonal is tied to time of year. E) full employment is a state, not a type. Fix: Structural = skills/location mismatch (technology, trade); frictional = normal search; cyclical = recessions. [Apply]
38. D) higher prices and lower output — cost-push inflation. A negative supply shock shifts SRAS left, raising the price level and cutting output. Distractors: A) a supply shock raises, not lowers, prices. B) it raises prices. C) output falls. E) there is a clear effect. Fix: Adverse supply shock → SRAS left → stagflation (prices up, output down). [Apply]
39. A) an increase in real GDP, which raises the volume of transactions. More real transactions require more money, shifting money demand right. Distractors: B) a lower price level reduces money demand. C) lower income reduces money demand. D) a higher nominal rate is a movement along money demand, not a shift. E) a bond sale changes money supply, not demand. Fix: Money demand shifts with real GDP and the price level; the interest rate causes movement along the curve. [Understand]
40. E) still gains from trade by specializing where its opportunity cost is lowest. Absolute advantage in everything doesn't eliminate gains from trade; comparative advantage (relative opportunity cost) still drives specialization. Distractors: A) self-sufficiency forgoes the gains from trade. B) comparative advantage in every good is impossible. C) both parties can gain. D) trade balance is a separate matter. Fix: Gains from trade rest on comparative, not absolute, advantage; even a fully more-productive country benefits from specializing. [Evaluate]
41. D) interest rates rise and some private investment is crowded out. Selling bonds to finance the deficit raises borrowing demand and interest rates, squeezing private investment. Distractors: A) deficit borrowing raises, not lowers, rates. B) rates and investment do change. C) if rates rose, investment falls — but rates rise, not fall, so the pairing is wrong. E) fiscal borrowing does not automatically expand the money supply. Fix: Deficit-financed spending → higher interest rates → crowding out of private investment. [Analyze]
42. E) improvements in the education and job training of the workforce. Human capital is the skills and knowledge embodied in workers. Distractors: A) highways are physical/infrastructure capital. B) money supply is not human capital. C) oil reserves are natural resources. D) robots are physical capital. Fix: Human capital = workers' skills and training; physical capital = tools and structures; keep the two categories distinct. [Understand]
43. B) higher output and a higher price level, opening an inflationary gap. From long-run equilibrium, a rightward AD shift raises output above potential and lifts prices in the short run. Distractors: A) rising AD raises, not lowers, output and prices. C) prices rise. D) output rises. E) the short-run response precedes long-run readjustment. Fix: AD right from long-run equilibrium → short-run boom (output and prices up) = inflationary gap. [Apply]
44. C) $4,000. Money multiplier = 1/0.25 = 4; max new money = 4 × $1,000 = $4,000. Distractors: A) $250 is the required reserve on the injection. B) $1,000 ignores the multiplier. D) $2,500 uses a wrong ratio. E) $10,000 uses a 10% ratio. Fix: Max system money creation = (1/reserve ratio) × new reserves; 25% ratio → multiplier 4. [Apply]
45. A) 5 percent. Inflation = (210 − 200)/200 = 10/200 = 5%. Distractors: B) 10% forgets to divide by the base. C) 2% is arithmetic error. D) 21% misreads the index. E) 105% treats the ratio as the rate. Fix: Inflation rate = (new CPI − old CPI) / old CPI × 100. [Apply]
46. E) cutting income taxes and buying bonds on the open market. A tax cut (expansionary fiscal) plus an open-market purchase (expansionary monetary) both raise AD. Distractors: A) raising taxes and selling bonds are both contractionary. B) cutting spending and raising reserves are contractionary. C) higher discount rate and higher taxes are contractionary. D) selling bonds and cutting transfers are contractionary. Fix: Expansionary = cut taxes, raise spending, buy bonds, lower the discount rate or reserve ratio. [Apply]
47. D) increasing opportunity costs as more of one good is produced. The bowed-out shape means each extra unit of one good costs progressively more of the other, because resources are specialized. Distractors: A) constant costs give a straight-line PPC. B) costs increase, not decrease. C) unemployment is an interior point, not the curve's shape. E) a bowed PPC can still shift outward. Fix: Bowed-out PPC = increasing opportunity costs; a straight-line PPC = constant costs. [Understand]
48. B) an increase in government spending on public projects. Expansionary fiscal policy raises AD to close a recessionary gap. Distractors: A) higher taxes are contractionary. C) selling bonds is contractionary monetary policy. D) a higher reserve requirement is contractionary. E) cutting transfers is contractionary. Fix: To close a recessionary gap, push AD right — spend more or tax less. [Apply]
49. C) buy government securities on the open market. Open-market purchases are the central bank's routine tool to add reserves and expand the money supply. Distractors: A) raising the reserve requirement contracts money. B) raising the discount rate is contractionary. D) selling bonds contracts money. E) tax rates are fiscal policy, not central-bank tools. Fix: To expand money, the central bank buys bonds; open-market operations are its everyday instrument. [Understand]
50. A) money supply up → interest rates down → investment and consumption up → aggregate demand up. This is the standard expansionary monetary transmission chain. Distractors: B) more money lowers rates, not raises them. C) expansionary policy raises the money supply, not lowers it. D) that describes a contractionary/exchange-rate channel, not the core chain. E) tax changes are fiscal policy and don't reduce aggregate supply here. Fix: Expansionary monetary chain: MS↑ → r↓ → I and interest-sensitive C↑ → AD↑. [Analyze]
51. A) 65 percent. Labor force = employed + unemployed = 60M + 5M = 65M; participation rate = 65M/100M = 65%. Distractors: B) 60% counts only the employed. C) 5% is the unemployed share of adults. D) 92% misuses the numbers. E) 8% is near the unemployment rate (5/65 ≈ 7.7%), a different measure. Fix: Participation rate = labor force ÷ working-age population; unemployment rate = unemployed ÷ labor force. [Apply]
52. C) factors of production such as labor and capital. In the factor (resource) market, households supply firms with land, labor, capital, and entrepreneurship. Distractors: A) goods flow the other way, through the product market. B) taxes flow to government, not firms via the factor market. D) transfers flow from government to households. E) imports come from abroad, not from households. Fix: Households sell factors in the factor market and buy goods in the product market. [Understand]
53. D) its exports become cheaper abroad and rise, while its imports become more expensive and fall. A weaker currency makes domestic goods cheaper for foreigners and foreign goods dearer at home. Distractors: A) depreciation makes exports cheaper abroad. B) imports become more expensive. C) exports rise, not fall. E) the trade balance tends to improve. Fix: Depreciation → exports cheaper (rise), imports dearer (fall) → net exports tend to rise. [Apply]
54. B) the first round of a spending increase enters aggregate demand in full, while part of a tax cut is saved rather than spent. Government purchases are spent entirely on the first round; a tax cut's first round is only the MPC fraction, so its multiplier is smaller. Distractors: A) tax cuts do have a multiplier, just a smaller one. C) tax cuts raise AD. D) the spending multiplier is larger than the tax multiplier. E) government purchases clearly affect real GDP. Fix: Spending multiplier = 1/MPS; tax multiplier = −MPC/MPS (smaller in magnitude) because part of a tax cut leaks into saving. [Analyze]
55. E) sell bonds, raising interest rates and reducing aggregate demand. Contractionary monetary policy cools an inflationary gap. Distractors: A) buying bonds and lowering the discount rate are expansionary. B) a lower reserve requirement is expansionary. C) more government spending is expansionary. D) cutting taxes is expansionary. Fix: To close an inflationary gap, contract — sell bonds, raise rates, shift AD left. [Apply]
56. B) 4 percent. Real rate ≈ nominal rate − expected inflation = 7% − 3% = 4%. Distractors: A) 10% adds instead of subtracts. C) 21% multiplies. D) 3% is the inflation rate. E) 2.3% is unrelated. Fix: Fisher relation: real interest rate ≈ nominal rate − expected inflation. [Apply]
57. A) increase, allowing both countries to consume beyond their own production possibilities curves. Specialization by comparative advantage raises total output; trade lets each consume outside its own PPC. Distractors: B) output rises, not falls. C) both countries gain, not just the absolute-advantage one. D) output is not unchanged. E) identical opportunity costs would eliminate the basis for gains. Fix: Trade based on comparative advantage expands combined output and lets each country consume beyond its PPC. [Understand]
58. C) $20 trillion. Real GDP = nominal GDP ÷ (deflator/100) = 22 ÷ 1.10 = $20 trillion. Distractors: A) $24.2T multiplies instead of divides. B) $11T halves incorrectly. D) $22T ignores the deflator. E) $2T is arithmetic error. Fix: Real GDP = nominal GDP ÷ (GDP deflator ÷ 100). [Apply]
59. E) increase disposable income and consumption, shifting aggregate demand to the right. Lower taxes leave households more to spend, raising consumption and AD. Distractors: A) a tax cut raises disposable income. B) it works mainly through demand, not directly through supply. C) it raises, not reduces, consumption. D) it does affect real GDP. Fix: Tax cut → higher disposable income → more consumption → AD right (expansionary fiscal policy). [Apply]
60. D) an inflationary gap, which puts upward pressure on the price level. Output above potential is an inflationary (expansionary) gap. Distractors: A) a recessionary gap is below potential. B) long-run equilibrium is at potential. C) structural unemployment is a labor-market type, unrelated to being above potential. E) a point inside the PPC is underproduction, the opposite. Fix: Above potential = inflationary gap; below = recessionary gap; at = long-run equilibrium. [Understand]
61. C) increases the money supply, because checkable deposits are counted as money. A new loan credited to a checking account creates new deposit money. Distractors: A) the money supply does change. B) lending increases, not decreases, money. D) it creates a deposit, not new currency. E) required reserves are a fraction of deposits, never above total deposits. Fix: Bank lending creates checkable-deposit money; that is how the banking system expands the money supply. [Understand]
62. A) technological progress that improves how inputs are combined into output. Better technology raises output per worker directly and persistently. Distractors: B) a higher price level is inflation, not productivity. C) higher unemployment lowers output. D) transfers redistribute without raising productivity. E) currency depreciation affects trade, not output per worker. Fix: Technological progress and capital deepening are the durable drivers of higher output per worker. [Understand]
63. E) a debit (capital outflow) in the financial (capital) account. Buying a foreign asset sends funds abroad — a financial-account debit. Distractors: A/B) buying a bond is not trade in goods/services. C) it is a purchase, not a transfer. D) it is not a current-account entry at all. Fix: Cross-border purchases of financial assets are recorded in the financial (capital) account; buying a foreign asset is an outflow. [Apply]
64. D) shift upward, so each unemployment rate is now paired with higher inflation. Higher expected inflation raises actual inflation at every unemployment rate — the short-run curve shifts up. Distractors: A) higher expectations shift it up, not down. B) it does not become horizontal. C) only the long-run curve is vertical. E) expectations do move the curve. Fix: Rising inflation expectations shift the short-run Phillips curve upward (worse trade-off). [Analyze]
65. B) a discouraged worker who is not in the labor force. Wanting a job but not searching removes a person from the labor force and the unemployment count. Distractors: A) not searching means not counted as unemployed. C) frictional unemployment requires active search. D) he is not working. E) "structurally employed" is not a category. Fix: No active search → not in the labor force; discouraged workers are excluded from the unemployment rate. [Understand]
66. D) net exports. Net exports (X − M) is one of the four components of aggregate demand (C + I + G + NX). Distractors: A) the reserve requirement is a monetary tool. B) the natural rate of unemployment is a labor-market concept. C) the money multiplier is a banking concept. E) the GDP deflator is a price index. Fix: AD components are C, I, G, and net exports — nothing about reserves, multipliers, or price indices. [Remember]
67. C) increase money demand and raise the nominal interest rate. More real GDP means more transactions, shifting money demand right and raising the rate. Distractors: A) higher GDP raises, not lowers, money demand. B) real GDP does not shift the money supply. D) money demand changes. E) the money supply is vertical (set by the central bank), not upward-sloping. Fix: Higher real GDP → money demand right → higher nominal interest rate (money supply fixed). [Apply]
68. A) time lags in recognizing a problem and enacting legislation can cause the policy to take effect at the wrong time. Recognition, legislative, and implementation lags can make fiscal policy mistimed. Distractors: B) fiscal policy does affect AD. C) fiscal policy is set by the legislature, not the central bank. D) it does not work instantly — that is the very problem. E) it clearly affects the budget. Fix: Fiscal policy's key weakness is lags; by the time it acts, conditions may have changed. [Understand]
69. B) business investment spending on new equipment. Investment is an injection into the circular flow. Distractors: A) saving is a leakage. C) taxes are a leakage. D) imports are a leakage. E) idle cash is neither spent nor injected. Fix: Injections = I, G, X; leakages = S, T, M. Investment spending is an injection. [Apply]
70. E) nominal wages and other input prices will fall, shifting short-run aggregate supply right and returning output to potential. With a recessionary gap, high unemployment eventually lowers wages/prices, shifting SRAS right until output returns to potential. Distractors: A) prices fall, not rise, easing the gap. B) AD does not shift on its own here. C) LRAS is set by real capacity and does not shift left. D) the gap self-corrects rather than persisting forever. Fix: Long-run self-correction of a recessionary gap works through falling input prices shifting SRAS right. [Analyze]
71. E) real GDP per capita. Adjusting for both prices and population, real GDP per capita best tracks material living standards over time. Distractors: A) nominal GDP mixes in inflation. B) population alone measures nothing about output. C) the money supply is not a living-standard measure. D) the unemployment rate captures only labor-market slack. Fix: Living standards over time = real GDP per capita (inflation- and population-adjusted). [Understand]
72. B) attract foreign financial capital, increasing demand for the currency and causing it to appreciate. Higher real returns draw in foreign capital, raising demand for the currency. Distractors: A) higher rates increase, not decrease, currency demand. C) the currency appreciates, not depreciates. D) capital flows do move the exchange rate. E) the exchange rate does respond. Fix: Higher domestic real rates → capital inflows → currency demand up → appreciation. [Analyze]
73. A) the central bank sells government bonds to reduce the money supply. Selling bonds drains reserves and contracts money — contractionary. Distractors: B) a tax cut is expansionary. C) a lower discount rate is expansionary. D) more government spending is expansionary. E) a lower reserve requirement is expansionary. Fix: Contractionary = sell bonds, raise the discount rate or reserve ratio, cut spending, raise taxes. [Apply]
74. C) benefit borrowers, who repay loans in dollars worth less than the dollars they borrowed. Unexpected inflation erodes the real value of fixed-dollar debt, helping borrowers at lenders' expense. Distractors: A) lenders are hurt, not helped. B) fixed-income recipients lose purchasing power. D) the real value of debt falls. E) inflation erodes the purchasing power of cash. Fix: Unexpected inflation transfers wealth from lenders (and fixed-income holders) to borrowers. [Analyze]
75. D) keep just a fraction of deposits as reserves and lend out the rest, which enables the banking system to create money. Fractional-reserve banking is the basis of money creation. Distractors: A) 100% reserves would be full-reserve banking. B) banks do make loans. C) they lend deposit money, not treasury-printed currency. E) banks can and do run short of reserves. Fix: Fractional reserves + lending = the mechanism through which banks create money. [Understand]
76. A) 4. Spending multiplier = 1/MPS = 1/0.25 = 4. Distractors: B) 0.25 is the MPS. C) 1.33 misapplies the formula. D) 2.5 is arithmetic error. E) 0.75 is the MPC. Fix: Spending multiplier = 1/MPS = 1/(1 − MPC); with MPS 0.25 it is 4. [Apply]
77. E) lead to continually accelerating inflation, while unemployment returns to its natural rate in the long run. Pushing unemployment below the natural rate keeps raising expected and actual inflation without a lasting unemployment gain. Distractors: A) there is a real cost — accelerating inflation. B) inflation rises, not falls. C) inflation does change. D) the natural rate is not lowered by this policy. Fix: Trying to hold unemployment below the natural rate yields accelerating inflation, not a permanent job gain. [Evaluate]
78. B) risen by about 2 percent. Real GDP per-capita growth ≈ real GDP growth − population growth = 3% − 1% = 2%. Distractors: A) the sign is positive, not negative. C) growth exceeds population growth, so per capita rises. D) 4% adds instead of subtracts. E) −3% ignores the calculation. Fix: Per-capita growth ≈ output growth − population growth. [Apply]
79. D) run an offsetting financial (capital) account surplus, attracting a net inflow of foreign capital. The balance of payments nets to zero, so a current-account deficit is matched by a financial-account surplus (capital inflow). Distractors: A) the accounts offset, not match in the same direction. B) the offset is definitional, not coincidental. C) a deficit need not mean rapid inflation. E) it does not require a fixed exchange rate. Fix: Current-account deficit ↔ financial-account surplus; the two accounts sum to (approximately) zero. [Analyze]
80. C) incorrect — in the long run, faster money growth raises only the inflation rate, while unemployment returns to its natural rate. Money is long-run neutral; sustained money growth produces inflation, not a permanently lower unemployment rate. Distractors: A) more money does not permanently create jobs. B) it is not correct in the long run. D) printing money raises AD, not lowers it — but still can't cut unemployment permanently. E) the long-run Phillips curve is vertical, not downward-sloping. Fix: Long-run money neutrality: chronic money growth buys inflation, not a permanently lower natural rate of unemployment. [Evaluate]
1. A) the $90 in wages she gives up by not working. Opportunity cost is the value of the single next-best alternative forgone; the best alternative to studying is the $90 shift. Distractors: B) opportunity cost never sums alternatives. C) relaxing is the third option, not the next-best. D) the cost is real even though studying has no price tag. E) subtracting values is a net-benefit calculation, not opportunity cost. Fix: Opportunity cost = the one next-best option given up, never a sum and never a price paid. [Apply]
2. C) a family buys a newly built house from a developer. New residential construction is counted as investment in this year's GDP. Distractors: A) transfer payments buy no current output. B) trading existing financial assets is not production. D) resale of a used good was counted in its original year. E) same — a good produced three years ago belongs to that year's GDP. Fix: GDP counts only new, final production this year; secondhand sales, transfers, and pure asset trades are excluded. [Apply]
3. E) a cut in interest rates that spurs business investment. Lower rates raise investment (a component of AD), shifting AD right. Distractors: A) higher income taxes cut disposable income and consumption — AD left. B) less government spending — AD left. C) currency appreciation lowers net exports — AD left. D) pessimism reduces consumption — AD left. Fix: AD rises when C, I, G, or net exports rise; check which spending component the event pushes. [Apply]
4. B) currency and checkable deposits. These are the most liquid assets and serve directly as a medium of exchange (the M1 definition). Distractors: A) stocks must be sold first. C) a bond must be sold or matured. D) a house is highly illiquid. E) oil is a commodity, not routinely accepted in payment. Fix: Money's medium-of-exchange role is about immediate spendability; only cash and checkable deposits qualify without conversion. [Understand]
5. D) increasing government spending on infrastructure. Expansionary fiscal policy raises AD to close a recessionary gap. Distractors: A) raising taxes is contractionary. B) selling bonds is contractionary monetary policy, not fiscal. C) raising the reserve requirement is contractionary monetary policy. E) cutting transfers is contractionary. Fix: In a recession, use expansionary fiscal policy (spend more or tax less); anything that shrinks AD is the wrong direction. [Apply]
6. A) Ana has a comparative advantage in shirts and should specialize in shirts. Ana's opportunity cost of one shirt is ½ loaf (6/12) versus Ben's 1 loaf (4/4); Ana's cost is lower, so she specializes in shirts and Ben in loaves. Distractors: B) Ben's shirt cost is higher, not lower. C) comparative advantage cannot be held in both goods. D) Ana produces more loaves (6 > 4), so she — not Ben — holds the absolute advantage in loaves. E) differing opportunity costs guarantee gains from trade. Fix: Comparative advantage goes to the lower opportunity cost; compute cost per unit as the other good given up. [Analyze]
7. E) increased spending on research, education, and physical capital. These raise productive capacity and long-run growth. Distractors: A) transfers redistribute income without adding capacity. B) a temporary rebate is a one-time demand bump, not sustained growth. C) shrinking the money supply is a monetary, price-level matter. D) a higher price level is inflation, not real growth. Fix: Long-run growth comes from more or better resources (capital, human capital, technology), not from one-off demand or price changes. [Understand]
8. C) make European goods cheaper for U.S. buyers and tend to reduce U.S. net exports. A stronger dollar buys more euros, so European goods cost fewer dollars (imports up) and U.S. goods cost Europeans more (exports down). Distractors: A) a stronger dollar makes U.S. exports more expensive abroad. B) net exports fall, not rise. D) relative prices clearly change. E) if the dollar appreciates, the euro by definition depreciates. Fix: A currency that appreciates makes imports cheaper and exports dearer, lowering net exports. [Apply]
9. B) 5. The spending multiplier is 1/(1 − MPC) = 1/(1 − 0.8) = 1/0.2 = 5. Distractors: A) 0.8 is the MPC itself. C) 1.25 wrongly divides by the MPC. D) 0.2 is the MPS. E) 8 is arithmetic error. Fix: Spending multiplier = 1/(1 − MPC) = 1/MPS; with MPC 0.8, MPS is 0.2 and the multiplier is 5. [Apply]
10. D) sell government securities to banks and the public. Selling bonds drains reserves, shrinks the money supply, and raises rates — contractionary, the right tool against demand-pull inflation. Distractors: A) buying bonds is expansionary. B) lowering the discount rate is expansionary. C) reducing the reserve requirement is expansionary. E) higher government spending is expansionary fiscal policy. Fix: To fight inflation, contract the money supply — the open-market action is to sell bonds. [Apply]
11. C) 125. CPI = (cost of basket now ÷ cost in base year) × 100 = (250 ÷ 200) × 100 = 125. Distractors: A) 25 is only the percentage increase, not the index. B) 50 is unrelated. D) 80 inverts the ratio. E) 150 is arithmetic error. Fix: CPI = (current basket cost / base-year cost) × 100; a 25% rise gives an index of 125. [Apply]
12. A) $900. A single bank can lend only its excess reserves: $1,000 − (10% × $1,000) = $900. Distractors: B) $1,000 ignores required reserves. C) $9,000 is the whole banking system's maximum new lending via the multiplier, not one bank's. D) $10,000 is the system's total new deposits. E) $100 is the required reserve, which the bank keeps, not lends. Fix: One bank lends its excess reserves; the system multiplies them. Don't confuse the single-bank loan with the system total. [Apply]
13. D) unemployment-insurance payments that rise automatically when a recession pushes up joblessness. Automatic stabilizers change with the economy without new legislation. Distractors: A) a new highway law is discretionary. B) an open market purchase is discretionary monetary policy. C) a legislated reserve-requirement change is discretionary. E) a voted tax cut is discretionary. Fix: Automatic stabilizers (unemployment benefits, progressive taxes) operate on their own; anything requiring a new vote or central-bank decision is discretionary. [Apply]
14. E) a sharp increase in the price of a key imported resource such as oil. A supply shock raises production costs and shifts SRAS left. Distractors: A) cheaper oil lowers costs — SRAS right. B) higher productivity — SRAS right. C) lower nominal wages cut costs — SRAS right. D) more workers — SRAS right. Fix: SRAS shifts left when input costs rise; it shifts right when costs fall or productivity rises. [Apply]
15. B) some of its resources are unemployed or being used inefficiently. An interior point is attainable but wasteful — the graphical picture of unemployment/inefficiency. Distractors: A) growth is an outward shift, not an interior point. C) outside points are unattainable; inside points are reachable. D) full employment is on the curve. E) nothing shifted the curve; only usage changed. Fix: Inside = unemployment/inefficiency; on = full employment; outside = unattainable; a shift is a capacity change. [Understand]
16. D) increase bank reserves and the money supply, putting downward pressure on interest rates. Open-market purchases pay banks with new reserves, expanding lending and money and lowering rates. Distractors: A) buying raises reserves, not lowers them. B) the money supply expands. C) the reserve requirement is unchanged by open-market operations. E) currency in circulation is not reduced. Fix: Central bank buys → reserves and money supply up → rates down (expansionary); sells → the reverse. [Apply]
17. A) unemployed and part of the labor force. Someone without a job who is actively searching meets the definition of unemployed and is in the labor force. Distractors: B) actively searching keeps her in the labor force. C) she is not working at all, so not employed part-time. D) a discouraged worker has stopped searching; she is still looking. E) structural unemployment is a type, not an out-of-labor-force status. Fix: Unemployed = no job + actively looking + available; active search is what keeps a person in the labor force. [Apply]
18. C) an inverse trade-off between inflation and unemployment in the short run. The short-run Phillips curve slopes downward: lower unemployment comes with higher inflation. Distractors: A) the relationship is inverse, not positive. B) they are related in the short run. D) unemployment is at the natural rate only in the long run. E) the vertical curve is the long-run Phillips curve. Fix: Short-run Phillips curve = downward-sloping trade-off; long-run Phillips curve = vertical at the natural rate. [Understand]
19. E) the amount of output produced per worker or per hour worked. Productivity is output per unit of labor input. Distractors: A) the number of workers is labor quantity, not productivity. B) an unemployment rate is not output per worker. C) total output alone ignores the labor input. D) a wage is a payment, not a measure of output. Fix: Productivity is always output per input — divide output by labor hours or workers. [Remember]
20. B) exports and imports of goods and services, plus net income and net transfers. The current account records trade in goods and services along with net income and transfers. Distractors: A) asset purchases and sales belong to the financial/capital account. C) FDI is a financial-account item. D) interest-rate changes are not balance-of-payments entries. E) the budget deficit is a fiscal, not a balance-of-payments, item. Fix: Current account = trade + income + transfers; financial (capital) account = cross-border asset flows. [Understand]
21. E) a recessionary gap, with output below full-employment output. Real GDP short of potential defines a recessionary (contractionary) gap. Distractors: A) an inflationary gap is output above potential. B) long-run equilibrium is output at potential. C) demand-pull inflation occurs above potential. D) the long-run aggregate supply curve is vertical at potential; being below it is not a movement along it. Fix: Below potential = recessionary gap; above potential = inflationary gap; at potential = long-run equilibrium. [Understand]
22. B) lower the nominal interest rate. More money supply with unchanged demand pushes the equilibrium down the money-demand curve — rates fall. Distractors: A) more money lowers, not raises, the rate. C) the money supply shifted, not money demand. D) the rate must change to clear the market. E) a shift in supply changes the equilibrium rate, not just quantity demanded at a fixed rate. Fix: In the money market, more money supply → lower nominal rate; less → higher rate. [Apply]
23. A) crowding out. Deficit borrowing raises interest rates and squeezes private investment — the textbook definition. Distractors: B) the multiplier magnifies spending; it is not the rate effect. C) an automatic stabilizer is a budget item that adjusts on its own. D) crowding in is the opposite (a surplus lowering rates). E) the wealth effect concerns price-level effects on consumption. Fix: Deficit → higher r → less private investment = crowding out; the reverse is crowding in. [Understand]
24. D) the entire rise in nominal GDP was caused by higher prices. If real GDP (quantity) is unchanged but nominal GDP rose, only prices increased. Distractors: A) unchanged real GDP means output did not rise. B) productivity gains would raise real GDP. C) population is irrelevant to the nominal-vs-real split. E) unemployment need not have moved. Fix: Nominal GDP = prices × quantities; if real GDP is flat, any nominal rise is pure price change (inflation). [Analyze]
25. C) an increase in the size and skill of the labor force. More or better resources expand capacity, shifting the PPC outward. Distractors: A) lower unemployment moves the economy toward the curve, not the curve itself. B) reactivating idle factories is again a move toward the curve. D) a higher price level doesn't appear on a PPC. E) moving inside-to-on is a point change, not a shift. Fix: Only changes in resources or technology shift the PPC; changes in resource usage move the operating point. [Apply]
26. B) $160 billion. Multiplier = 1/(1 − 0.75) = 4; ΔGDP = 4 × $40B = $160B. Distractors: A) $40B ignores the multiplier. C) $30B misapplies MPC. D) $53B is arithmetic error. E) $10B is unrelated. Fix: Max ΔGDP = spending multiplier × initial spending = [1/(1 − MPC)] × Δspending. [Apply]
27. E) raise the price level while leaving real output unchanged. In the long run money is neutral: more money raises prices, not real output. Distractors: A) unemployment returns to its natural rate long-run. B) real GDP is set by real factors, not money. C) the natural rate is unaffected by money growth. D) long-run nominal rates rise with inflation (Fisher effect), not fall. Fix: Long-run money neutrality: nominal variables (prices) move with the money supply; real output and the natural rate do not. [Understand]
28. A) shift the supply of loanable funds rightward, lowering the real interest rate. More saving at every rate is a rightward supply shift, so r falls. Distractors: B) saving is supply, not demand. C) more saving is a rightward, not leftward, shift. D) no curve in this market is vertical. E) the equilibrium rate must fall. Fix: More saving = supply of loanable funds right = lower real interest rate (and crowding in). [Apply]
29. D) it equips each worker with more tools and machinery, raising future productivity. More capital per worker raises output per worker over time. Distractors: A) capital investment doesn't chiefly target the price level. B) it does not reduce the money supply. C) it sacrifices some current consumption for future capacity. E) it does not directly move the natural rate of unemployment. Fix: Capital deepening (more capital per worker) is a core engine of rising productivity and growth. [Understand]
30. C) increase demand for the country's currency, causing it to appreciate. Foreigners buying more exports must first buy the currency, raising its demand and value. Distractors: A) rising demand appreciates, not depreciates. B) export demand raises currency demand. D) a demand shift changes the exchange rate. E) exchange-rate effects are separate from domestic interest-rate policy here. Fix: More demand for a country's exports → more demand for its currency → appreciation (floating system). [Apply]
31. B) net exports, equal to exports minus imports. GDP = C + I + G + (X − M). Distractors: A) taxes are not a spending category. C) transfers are excluded because they buy no output. D) saving is not spending on output. E) the money supply is not an expenditure component. Fix: Memorize GDP = C + I + G + NX, where NX = exports − imports. [Understand]
32. D) using contractionary policy against the inflation worsens unemployment, while using expansionary policy against the unemployment worsens inflation. A leftward SRAS shift raises prices and unemployment, and demand-side policy can fix only one at a time. Distractors: A) expansionary policy raises inflation further. B) contractionary policy raises unemployment further. C) policy still has effects — just conflicting ones. E) stagflation does not vanish costlessly. Fix: With a supply shock, demand-management policy faces a trade-off: fixing inflation worsens unemployment and vice versa. [Analyze]
33. C) shift aggregate demand right, raising both real output and the price level. More consumption and investment increase AD; along an upward-sloping SRAS, output and prices both rise. Distractors: A) more spending shifts AD right, not left. B) these are demand-side changes, not SRAS. D) AD clearly changes. E) LRAS depends on real capacity, not confidence. Fix: Rising C and I shift AD right; short-run result is higher output and a higher price level. [Apply]
34. A) 5. Simple deposit multiplier = 1/reserve ratio = 1/0.20 = 5. Distractors: B) 20 is the percentage, not the multiplier. C) 0.2 is the reserve ratio itself. D) 2 is arithmetic error. E) 10 uses a 10% ratio. Fix: Deposit (money) multiplier = 1 ÷ required reserve ratio; a 20% ratio gives 5. [Apply]
35. E) scarcity — limited resources relative to unlimited wants. Scarcity forces choices, and every choice sacrifices an alternative — the source of opportunity cost. Distractors: A) regulation is not the root of opportunity cost. B) inflation is a separate phenomenon. C) distribution is about who gets output, not why choices cost. D) trade imbalances are macro outcomes, not the origin of scarcity. Fix: Scarcity is the foundational problem; opportunity cost is its direct consequence. [Understand]
36. C) vertical at the natural rate of unemployment. In the long run there is no inflation-unemployment trade-off; unemployment sits at its natural rate whatever the inflation rate. Distractors: A) a permanent trade-off is the discredited long-run view. B) it is not upward-sloping. D) not horizontal. E) it differs from the downward-sloping short-run curve. Fix: Long-run Phillips curve is vertical at the natural rate; only the short-run curve slopes down. [Understand]
37. B) structural unemployment. Her skills no longer match available jobs because technology changed the job mix — structural. Distractors: A) frictional is short-term job search between suitable jobs. C) cyclical is caused by a downturn in the business cycle. D) seasonal is tied to time of year. E) full employment is a state, not a type. Fix: Structural = skills/location mismatch (technology, trade); frictional = normal search; cyclical = recessions. [Apply]
38. D) higher prices and lower output — cost-push inflation. A negative supply shock shifts SRAS left, raising the price level and cutting output. Distractors: A) a supply shock raises, not lowers, prices. B) it raises prices. C) output falls. E) there is a clear effect. Fix: Adverse supply shock → SRAS left → stagflation (prices up, output down). [Apply]
39. A) an increase in real GDP, which raises the volume of transactions. More real transactions require more money, shifting money demand right. Distractors: B) a lower price level reduces money demand. C) lower income reduces money demand. D) a higher nominal rate is a movement along money demand, not a shift. E) a bond sale changes money supply, not demand. Fix: Money demand shifts with real GDP and the price level; the interest rate causes movement along the curve. [Understand]
40. E) still gains from trade by specializing where its opportunity cost is lowest. Absolute advantage in everything doesn't eliminate gains from trade; comparative advantage (relative opportunity cost) still drives specialization. Distractors: A) self-sufficiency forgoes the gains from trade. B) comparative advantage in every good is impossible. C) both parties can gain. D) trade balance is a separate matter. Fix: Gains from trade rest on comparative, not absolute, advantage; even a fully more-productive country benefits from specializing. [Evaluate]
41. D) interest rates rise and some private investment is crowded out. Selling bonds to finance the deficit raises borrowing demand and interest rates, squeezing private investment. Distractors: A) deficit borrowing raises, not lowers, rates. B) rates and investment do change. C) if rates rose, investment falls — but rates rise, not fall, so the pairing is wrong. E) fiscal borrowing does not automatically expand the money supply. Fix: Deficit-financed spending → higher interest rates → crowding out of private investment. [Analyze]
42. E) improvements in the education and job training of the workforce. Human capital is the skills and knowledge embodied in workers. Distractors: A) highways are physical/infrastructure capital. B) money supply is not human capital. C) oil reserves are natural resources. D) robots are physical capital. Fix: Human capital = workers' skills and training; physical capital = tools and structures; keep the two categories distinct. [Understand]
43. B) higher output and a higher price level, opening an inflationary gap. From long-run equilibrium, a rightward AD shift raises output above potential and lifts prices in the short run. Distractors: A) rising AD raises, not lowers, output and prices. C) prices rise. D) output rises. E) the short-run response precedes long-run readjustment. Fix: AD right from long-run equilibrium → short-run boom (output and prices up) = inflationary gap. [Apply]
44. C) $4,000. Money multiplier = 1/0.25 = 4; max new money = 4 × $1,000 = $4,000. Distractors: A) $250 is the required reserve on the injection. B) $1,000 ignores the multiplier. D) $2,500 uses a wrong ratio. E) $10,000 uses a 10% ratio. Fix: Max system money creation = (1/reserve ratio) × new reserves; 25% ratio → multiplier 4. [Apply]
45. A) 5 percent. Inflation = (210 − 200)/200 = 10/200 = 5%. Distractors: B) 10% forgets to divide by the base. C) 2% is arithmetic error. D) 21% misreads the index. E) 105% treats the ratio as the rate. Fix: Inflation rate = (new CPI − old CPI) / old CPI × 100. [Apply]
46. E) cutting income taxes and buying bonds on the open market. A tax cut (expansionary fiscal) plus an open-market purchase (expansionary monetary) both raise AD. Distractors: A) raising taxes and selling bonds are both contractionary. B) cutting spending and raising reserves are contractionary. C) higher discount rate and higher taxes are contractionary. D) selling bonds and cutting transfers are contractionary. Fix: Expansionary = cut taxes, raise spending, buy bonds, lower the discount rate or reserve ratio. [Apply]
47. D) increasing opportunity costs as more of one good is produced. The bowed-out shape means each extra unit of one good costs progressively more of the other, because resources are specialized. Distractors: A) constant costs give a straight-line PPC. B) costs increase, not decrease. C) unemployment is an interior point, not the curve's shape. E) a bowed PPC can still shift outward. Fix: Bowed-out PPC = increasing opportunity costs; a straight-line PPC = constant costs. [Understand]
48. B) an increase in government spending on public projects. Expansionary fiscal policy raises AD to close a recessionary gap. Distractors: A) higher taxes are contractionary. C) selling bonds is contractionary monetary policy. D) a higher reserve requirement is contractionary. E) cutting transfers is contractionary. Fix: To close a recessionary gap, push AD right — spend more or tax less. [Apply]
49. C) buy government securities on the open market. Open-market purchases are the central bank's routine tool to add reserves and expand the money supply. Distractors: A) raising the reserve requirement contracts money. B) raising the discount rate is contractionary. D) selling bonds contracts money. E) tax rates are fiscal policy, not central-bank tools. Fix: To expand money, the central bank buys bonds; open-market operations are its everyday instrument. [Understand]
50. A) money supply up → interest rates down → investment and consumption up → aggregate demand up. This is the standard expansionary monetary transmission chain. Distractors: B) more money lowers rates, not raises them. C) expansionary policy raises the money supply, not lowers it. D) that describes a contractionary/exchange-rate channel, not the core chain. E) tax changes are fiscal policy and don't reduce aggregate supply here. Fix: Expansionary monetary chain: MS↑ → r↓ → I and interest-sensitive C↑ → AD↑. [Analyze]
51. A) 65 percent. Labor force = employed + unemployed = 60M + 5M = 65M; participation rate = 65M/100M = 65%. Distractors: B) 60% counts only the employed. C) 5% is the unemployed share of adults. D) 92% misuses the numbers. E) 8% is near the unemployment rate (5/65 ≈ 7.7%), a different measure. Fix: Participation rate = labor force ÷ working-age population; unemployment rate = unemployed ÷ labor force. [Apply]
52. C) factors of production such as labor and capital. In the factor (resource) market, households supply firms with land, labor, capital, and entrepreneurship. Distractors: A) goods flow the other way, through the product market. B) taxes flow to government, not firms via the factor market. D) transfers flow from government to households. E) imports come from abroad, not from households. Fix: Households sell factors in the factor market and buy goods in the product market. [Understand]
53. D) its exports become cheaper abroad and rise, while its imports become more expensive and fall. A weaker currency makes domestic goods cheaper for foreigners and foreign goods dearer at home. Distractors: A) depreciation makes exports cheaper abroad. B) imports become more expensive. C) exports rise, not fall. E) the trade balance tends to improve. Fix: Depreciation → exports cheaper (rise), imports dearer (fall) → net exports tend to rise. [Apply]
54. B) the first round of a spending increase enters aggregate demand in full, while part of a tax cut is saved rather than spent. Government purchases are spent entirely on the first round; a tax cut's first round is only the MPC fraction, so its multiplier is smaller. Distractors: A) tax cuts do have a multiplier, just a smaller one. C) tax cuts raise AD. D) the spending multiplier is larger than the tax multiplier. E) government purchases clearly affect real GDP. Fix: Spending multiplier = 1/MPS; tax multiplier = −MPC/MPS (smaller in magnitude) because part of a tax cut leaks into saving. [Analyze]
55. E) sell bonds, raising interest rates and reducing aggregate demand. Contractionary monetary policy cools an inflationary gap. Distractors: A) buying bonds and lowering the discount rate are expansionary. B) a lower reserve requirement is expansionary. C) more government spending is expansionary. D) cutting taxes is expansionary. Fix: To close an inflationary gap, contract — sell bonds, raise rates, shift AD left. [Apply]
56. B) 4 percent. Real rate ≈ nominal rate − expected inflation = 7% − 3% = 4%. Distractors: A) 10% adds instead of subtracts. C) 21% multiplies. D) 3% is the inflation rate. E) 2.3% is unrelated. Fix: Fisher relation: real interest rate ≈ nominal rate − expected inflation. [Apply]
57. A) increase, allowing both countries to consume beyond their own production possibilities curves. Specialization by comparative advantage raises total output; trade lets each consume outside its own PPC. Distractors: B) output rises, not falls. C) both countries gain, not just the absolute-advantage one. D) output is not unchanged. E) identical opportunity costs would eliminate the basis for gains. Fix: Trade based on comparative advantage expands combined output and lets each country consume beyond its PPC. [Understand]
58. C) $20 trillion. Real GDP = nominal GDP ÷ (deflator/100) = 22 ÷ 1.10 = $20 trillion. Distractors: A) $24.2T multiplies instead of divides. B) $11T halves incorrectly. D) $22T ignores the deflator. E) $2T is arithmetic error. Fix: Real GDP = nominal GDP ÷ (GDP deflator ÷ 100). [Apply]
59. E) increase disposable income and consumption, shifting aggregate demand to the right. Lower taxes leave households more to spend, raising consumption and AD. Distractors: A) a tax cut raises disposable income. B) it works mainly through demand, not directly through supply. C) it raises, not reduces, consumption. D) it does affect real GDP. Fix: Tax cut → higher disposable income → more consumption → AD right (expansionary fiscal policy). [Apply]
60. D) an inflationary gap, which puts upward pressure on the price level. Output above potential is an inflationary (expansionary) gap. Distractors: A) a recessionary gap is below potential. B) long-run equilibrium is at potential. C) structural unemployment is a labor-market type, unrelated to being above potential. E) a point inside the PPC is underproduction, the opposite. Fix: Above potential = inflationary gap; below = recessionary gap; at = long-run equilibrium. [Understand]
61. C) increases the money supply, because checkable deposits are counted as money. A new loan credited to a checking account creates new deposit money. Distractors: A) the money supply does change. B) lending increases, not decreases, money. D) it creates a deposit, not new currency. E) required reserves are a fraction of deposits, never above total deposits. Fix: Bank lending creates checkable-deposit money; that is how the banking system expands the money supply. [Understand]
62. A) technological progress that improves how inputs are combined into output. Better technology raises output per worker directly and persistently. Distractors: B) a higher price level is inflation, not productivity. C) higher unemployment lowers output. D) transfers redistribute without raising productivity. E) currency depreciation affects trade, not output per worker. Fix: Technological progress and capital deepening are the durable drivers of higher output per worker. [Understand]
63. E) a debit (capital outflow) in the financial (capital) account. Buying a foreign asset sends funds abroad — a financial-account debit. Distractors: A/B) buying a bond is not trade in goods/services. C) it is a purchase, not a transfer. D) it is not a current-account entry at all. Fix: Cross-border purchases of financial assets are recorded in the financial (capital) account; buying a foreign asset is an outflow. [Apply]
64. D) shift upward, so each unemployment rate is now paired with higher inflation. Higher expected inflation raises actual inflation at every unemployment rate — the short-run curve shifts up. Distractors: A) higher expectations shift it up, not down. B) it does not become horizontal. C) only the long-run curve is vertical. E) expectations do move the curve. Fix: Rising inflation expectations shift the short-run Phillips curve upward (worse trade-off). [Analyze]
65. B) a discouraged worker who is not in the labor force. Wanting a job but not searching removes a person from the labor force and the unemployment count. Distractors: A) not searching means not counted as unemployed. C) frictional unemployment requires active search. D) he is not working. E) "structurally employed" is not a category. Fix: No active search → not in the labor force; discouraged workers are excluded from the unemployment rate. [Understand]
66. D) net exports. Net exports (X − M) is one of the four components of aggregate demand (C + I + G + NX). Distractors: A) the reserve requirement is a monetary tool. B) the natural rate of unemployment is a labor-market concept. C) the money multiplier is a banking concept. E) the GDP deflator is a price index. Fix: AD components are C, I, G, and net exports — nothing about reserves, multipliers, or price indices. [Remember]
67. C) increase money demand and raise the nominal interest rate. More real GDP means more transactions, shifting money demand right and raising the rate. Distractors: A) higher GDP raises, not lowers, money demand. B) real GDP does not shift the money supply. D) money demand changes. E) the money supply is vertical (set by the central bank), not upward-sloping. Fix: Higher real GDP → money demand right → higher nominal interest rate (money supply fixed). [Apply]
68. A) time lags in recognizing a problem and enacting legislation can cause the policy to take effect at the wrong time. Recognition, legislative, and implementation lags can make fiscal policy mistimed. Distractors: B) fiscal policy does affect AD. C) fiscal policy is set by the legislature, not the central bank. D) it does not work instantly — that is the very problem. E) it clearly affects the budget. Fix: Fiscal policy's key weakness is lags; by the time it acts, conditions may have changed. [Understand]
69. B) business investment spending on new equipment. Investment is an injection into the circular flow. Distractors: A) saving is a leakage. C) taxes are a leakage. D) imports are a leakage. E) idle cash is neither spent nor injected. Fix: Injections = I, G, X; leakages = S, T, M. Investment spending is an injection. [Apply]
70. E) nominal wages and other input prices will fall, shifting short-run aggregate supply right and returning output to potential. With a recessionary gap, high unemployment eventually lowers wages/prices, shifting SRAS right until output returns to potential. Distractors: A) prices fall, not rise, easing the gap. B) AD does not shift on its own here. C) LRAS is set by real capacity and does not shift left. D) the gap self-corrects rather than persisting forever. Fix: Long-run self-correction of a recessionary gap works through falling input prices shifting SRAS right. [Analyze]
71. E) real GDP per capita. Adjusting for both prices and population, real GDP per capita best tracks material living standards over time. Distractors: A) nominal GDP mixes in inflation. B) population alone measures nothing about output. C) the money supply is not a living-standard measure. D) the unemployment rate captures only labor-market slack. Fix: Living standards over time = real GDP per capita (inflation- and population-adjusted). [Understand]
72. B) attract foreign financial capital, increasing demand for the currency and causing it to appreciate. Higher real returns draw in foreign capital, raising demand for the currency. Distractors: A) higher rates increase, not decrease, currency demand. C) the currency appreciates, not depreciates. D) capital flows do move the exchange rate. E) the exchange rate does respond. Fix: Higher domestic real rates → capital inflows → currency demand up → appreciation. [Analyze]
73. A) the central bank sells government bonds to reduce the money supply. Selling bonds drains reserves and contracts money — contractionary. Distractors: B) a tax cut is expansionary. C) a lower discount rate is expansionary. D) more government spending is expansionary. E) a lower reserve requirement is expansionary. Fix: Contractionary = sell bonds, raise the discount rate or reserve ratio, cut spending, raise taxes. [Apply]
74. C) benefit borrowers, who repay loans in dollars worth less than the dollars they borrowed. Unexpected inflation erodes the real value of fixed-dollar debt, helping borrowers at lenders' expense. Distractors: A) lenders are hurt, not helped. B) fixed-income recipients lose purchasing power. D) the real value of debt falls. E) inflation erodes the purchasing power of cash. Fix: Unexpected inflation transfers wealth from lenders (and fixed-income holders) to borrowers. [Analyze]
75. D) keep just a fraction of deposits as reserves and lend out the rest, which enables the banking system to create money. Fractional-reserve banking is the basis of money creation. Distractors: A) 100% reserves would be full-reserve banking. B) banks do make loans. C) they lend deposit money, not treasury-printed currency. E) banks can and do run short of reserves. Fix: Fractional reserves + lending = the mechanism through which banks create money. [Understand]
76. A) 4. Spending multiplier = 1/MPS = 1/0.25 = 4. Distractors: B) 0.25 is the MPS. C) 1.33 misapplies the formula. D) 2.5 is arithmetic error. E) 0.75 is the MPC. Fix: Spending multiplier = 1/MPS = 1/(1 − MPC); with MPS 0.25 it is 4. [Apply]
77. E) lead to continually accelerating inflation, while unemployment returns to its natural rate in the long run. Pushing unemployment below the natural rate keeps raising expected and actual inflation without a lasting unemployment gain. Distractors: A) there is a real cost — accelerating inflation. B) inflation rises, not falls. C) inflation does change. D) the natural rate is not lowered by this policy. Fix: Trying to hold unemployment below the natural rate yields accelerating inflation, not a permanent job gain. [Evaluate]
78. B) risen by about 2 percent. Real GDP per-capita growth ≈ real GDP growth − population growth = 3% − 1% = 2%. Distractors: A) the sign is positive, not negative. C) growth exceeds population growth, so per capita rises. D) 4% adds instead of subtracts. E) −3% ignores the calculation. Fix: Per-capita growth ≈ output growth − population growth. [Apply]
79. D) run an offsetting financial (capital) account surplus, attracting a net inflow of foreign capital. The balance of payments nets to zero, so a current-account deficit is matched by a financial-account surplus (capital inflow). Distractors: A) the accounts offset, not match in the same direction. B) the offset is definitional, not coincidental. C) a deficit need not mean rapid inflation. E) it does not require a fixed exchange rate. Fix: Current-account deficit ↔ financial-account surplus; the two accounts sum to (approximately) zero. [Analyze]
80. C) incorrect — in the long run, faster money growth raises only the inflation rate, while unemployment returns to its natural rate. Money is long-run neutral; sustained money growth produces inflation, not a permanently lower unemployment rate. Distractors: A) more money does not permanently create jobs. B) it is not correct in the long run. D) printing money raises AD, not lowers it — but still can't cut unemployment permanently. E) the long-run Phillips curve is vertical, not downward-sloping. Fix: Long-run money neutrality: chronic money growth buys inflation, not a permanently lower natural rate of unemployment. [Evaluate]
Count your number of correct answers (raw score, 0–80) and read across to an approximate CLEP scaled score (20–80). The ACE-recommended credit threshold is a scaled score of 50, which corresponds to roughly half of the 80 questions correct.
| Raw score (correct out of 80) | Approx. scaled score (20–80) |
|---|---|
| 0–3 | 20 |
| 4–7 | 22 |
| 8–11 | 25 |
| 12–15 | 28 |
| 16–19 | 31 |
| 20–23 | 34 |
| 24–27 | 37 |
| 28–31 | 40 |
| 32–35 | 43 |
| 36–39 | 47 |
| 40–43 | 50 ← ACE credit-granting score (~50% correct) |
| 44–47 | 53 |
| 48–51 | 56 |
| 52–55 | 59 |
| 56–59 | 62 |
| 60–63 | 65 |
| 64–67 | 68 |
| 68–71 | 71 |
| 72–75 | 75 |
| 76–78 | 78 |
| 79–80 | 80 |
Disclaimer: CLEP's exact raw-to-scaled conversion is proprietary and is equated across forms, so this table is an approximation for self-assessment only, not an official predicted score.
Your running multiple-choice score appears in the bar below. Self-score the free-response section with the rubrics in the answer key, then use the diagnostic table to target review.