Coverage: Units 1–4 · Lessons 1–8 plus the Financial Sector (Lessons 9–11) When to take it: the spec places this mock after Lesson 8 in the build sequence, but it includes Unit 4 (money, monetary policy, loanable funds). Take it after completing Lesson 11 for a fair score; taking it after Lesson 8 is fine if you treat Unit 4 items (Q46–60) as a diagnostic preview.
| Section | Questions | Time | Weight |
|---|---|---|---|
| I: Multiple choice | 60 (5 choices) | 70 minutes | 66% |
| II: Free response | 1 long + 2 short | 60 minutes | 33% |
Rules: No guessing penalty — answer all 60. Timing is part of the test: ~70 seconds per MC.
Scoring worksheet (end of key): MC 1 pt each (60) + FRQ points × 1.5 (30) → composite out of 90. Calibration (approximate): 66+ ≈ 5 · 53–65 ≈ 4 · 40–52 ≈ 3.
1. B. On the curve, resources are fully used — more of one good requires less of the other. A: the price level isn't on this graph. C: unemployment means inside the curve. D: "zero cost" resources don't exist. E: inward shifts reduce capacity.
Fix: On-curve = tradeoffs only; the slope between points is the opportunity cost.
2. E. The factor market routes the four factor payments from firms to households. A: consumption flows the other way, in the product market. B/D: government flows, not factor payments. C: imports leak abroad.
Fix: Factor market = wages/rent/interest/profit, firms → households.
3. A. Saving exits the spending stream (until re-injected as investment). B: investment is an injection. C: exports are an injection. D: G is an injection. E: consumption is the core stream itself.
Fix: Leakages = S, T, M; injections = I, G, X.
4. D. Better technology expands capacity — the curve itself moves out. A: less unemployment moves the point toward the curve, not the curve. B: movement along. C: price level is irrelevant to the PPC. E: fewer workers shifts it inward.
Fix: Only resources/technology move the PPC; everything else moves the point.
5. C. Opportunity cost = highest-valued forgone alternative: the rail upgrade. A: that's the expenditure. B: never add alternatives. D: not the next-best. E: that's a net-benefit difference.
Fix: One choice, one next-best alternative — that's the cost.
6. D. Tuition buys educational services produced this year. A/E: used goods — no current production. C: transfer payment. B: financial transaction — ownership of paper, no production.
Fix: GDP needs new production of a final good or service this year.
7. A. 700 + 180 + 210 + (90 − 130) = $1,050B; transfers excluded. B: adds transfers. C: adds transfers and ignores the net-export subtraction. D: forgets to net imports. E: subtracts transfers.
Fix: GDP = C + I + G + (X − M); transfers never enter.
8. C. Real GDP strips out price-level changes to isolate production. A: that's per-capita adjustment. B/D/E: not the deflator's job.
Fix: Real = nominal ÷ (deflator/100) — inflation-adjusted output.
9. E. 24 ÷ 1.20 = $20 trillion. A: multiplied. B: ignored the deflator. C: halved. D: invented a different deflator.
Fix: Deflator over 100 → real is less than nominal; divide, don't multiply.
10. B. GDP misses home production, leisure, distribution, and environmental costs. A: intermediate goods are excluded, correctly. C: financial transactions are excluded. D: G is included. E: foreign-owned production inside the borders belongs in GDP.
Fix: GDP = production meter, not welfare meter — know its blind spots.
11. C. Jobless + actively searching = unemployed. A/D: she is searching, so she's in the labor force and not discouraged. B: she has no job. E: underemployment refers to part-time/overqualified workers who are employed.
Fix: The two-box test: no job ✓ + looking ✓ = unemployed.
12. B. Labor force = 100M; 10/100 = 10%. A: divides by population minus wrong group (10/150). C: divides by employed (10/90). D: mixes numbers. E: that's the LFPR.
Fix: Rate = unemployed ÷ labor force; build LF = E + U first.
13. E. Voluntary quit to search = frictional — normal turnover. A: no downturn caused it. B: her skills still match jobs. C: no season involved. D: "hidden" isn't an AP category.
Fix: Between jobs by choice/search = frictional.
14. A. Full employment = natural rate = frictional + structural, cyclical zero. B/C/E: zero unemployment or 100% LFPR is neither required nor possible. D: structural persists at full employment.
Fix: Full employment ≠ zero unemployment; it means zero cyclical.
15. D. They exit both the unemployed count and the labor force → the ratio falls. A/B: they're no longer counted, and the LF shrinks. C: no such definition. E: employment is untouched.
Fix: Discouraged-worker exits make the rate look better while the market is worse.
16. E. (135 − 125)/125 = 10/125 = 8%. A: uses the 10-point change as percent. B: divides by 135. C: reads the index as a rate. D: arithmetic slip.
Fix: Inflation = ΔCPI ÷ starting CPI.
17. D. Fixed-rate debtors repay in cheaper dollars — borrowers win from surprise inflation. A/C/E: fixed-income receivers and cash holders lose purchasing power. B: the lender's real return shrinks.
Fix: Surprise inflation transfers wealth from lenders/fixed-receivers to borrowers.
18. B. Real ≈ 7 − 3 = 4%. A: added. C: that's expected inflation. D: nominal. E: divided.
Fix: Fisher: real ≈ nominal − expected inflation.
19. C. With V, Y fixed, money growth passes into prices roughly one-for-one. A: Y is held fixed. B: V is held fixed. D: nominal GDP (PY) rises. E: direction reversed.
Fix: MV = PY: excess money growth ends up in P.
20. A. Deflation = the price level actually falls. B: that's disinflation. C: that's stagflation. D: nominal GDP can fall for output reasons. E: money-supply decline is a possible cause, not the definition.
Fix: Disinflation = slower inflation; deflation = negative inflation.
21. A. The interest-rate effect: lower PL → less transactions demand for money → lower rates → more investment. B: micro substitution logic doesn't apply to all goods at once. C: costs are supply-side. D/E: not slope mechanisms.
Fix: AD slope = wealth + interest-rate + exchange-rate effects.
22. C. Higher wealth → more consumption at every PL → AD right. A: price-level changes move along the curve. B: appreciation cuts net exports → left. D/E: both reduce spending → left.
Fix: Route each event through C, I, G, or Xn, then move the curve.
23. D. Policy-driven rate increases cut investment and durable consumption → AD left. A: wealth effect is a slope mechanism, and direction is wrong. B: no price-level change initiated this. C/E: supply curves don't move on borrowing costs like this.
Fix: Rate changes from policy shift AD; only PL-driven rate changes are movement-along.
24. B. More G (right) + depreciation → Xn up (right): same direction. A: taxes up (left) vs. confidence (right). C: foreign incomes down (left) vs. rates down (right). D: I up (right) vs. imports up (left). E: wealth down (left) vs. optimism (right).
Fix: For "both shift the same way," sign each event separately before comparing.
25. E. Sticky wages let higher output prices fatten margins → firms expand. A: wealth effect is AD-side. B: money supply is policy. C: technology is a shifter, not the slope. D: exports explain AD's slope via exchange rates, not SRAS.
Fix: SRAS slopes up because input costs lag output prices.
26. D. A destroyed harvest raises input scarcity/costs → SRAS left (negative supply shock). A/E: spending didn't initiate this. B: no PL-initiated movement. C: capacity fell, if anything.
Fix: Nature and input-price shocks hit SRAS; direction opposite the cost change.
27. B. SRAS left slides up AD: prices up, output down — stagflation's signature. A: demand collapse. C: demand boom. D: positive supply shock. E: no shock at all.
Fix: PL and Y moving in opposite directions = supply-side event.
28. A. Wages are the dominant input price; higher wages raise unit costs at every PL → SRAS left. B: better-paid ≠ cheaper production. C: the income channel isn't the tested mechanism here. D: LRAS ignores nominal wages. E: wages are an input price, not the price level.
Fix: Economy-wide nominal wage changes are the canonical SRAS shifter.
29. E. LRAS stands at potential output — unemployment at the natural rate. A/B: demand doesn't position LRAS. C: structural unemployment never hits zero. D: price stability isn't the anchor.
Fix: LRAS = Yf = natural rate of unemployment, always.
30. C. Right of LRAS = inflationary gap = unusually tight labor market. A: that's left of LRAS. B: requires intersection on LRAS. D: stagflation is a supply shock in motion. E: nothing about falling prices.
Fix: Geometry first: which side of LRAS does AD∩SRAS fall on?
31. E. Slack labor markets eventually cut nominal wages → costs fall → SRAS right → back to Yf. A: AD has no auto-return. B: LRAS doesn't chase demand. C: the natural rate isn't the adjuster. D: the price level falls in this story.
Fix: Self-correction always works through wages → SRAS.
32. A. Output returns to Yf; the price level settles lower. B/E: output is restored. C: output doesn't exceed original Yf. D: prices fall, not rise, after an AD decline.
Fix: Long-run effect of AD shifts = price level only.
33. C. Productivity gains cut costs now (SRAS) and raise capacity (LRAS). A/D: demand-side. B: temporary input-price changes move SRAS only. E: expectations shift SRAS only.
Fix: Only real, lasting capability changes move LRAS; they carry SRAS along.
34. B. Recessionary gap → expansionary fiscal → raise G. A/D: monetary actions. C/E: contractionary fiscal moves.
Fix: Fiscal = Congress's G and T; expansionary = spend more / tax less.
35. D. 1/(1 − 0.75) = 1/0.25 = 4. A: the MPC itself. B: MPC/MPS. C: 1/0.75. E: decimal error.
Fix: Spending multiplier = 1/MPS.
36. B. 4 × 30 = $120B. A: no multiplication. C: multiplier of 3 (the tax multiplier's magnitude). D: multiplies by the MPC once (30 × 0.75). E: adds the multiplier instead of multiplying.
Fix: ΔGDP = multiplier × ΔG.
37. C. Tax multiplier = −0.75/0.25 = −3; −3 × (−30) = +$90B. A: spending multiplier used. B: no multiplication. D: multiplied by MPC once. E: mixed methods.
Fix: Tax cuts use −MPC/MPS — one notch weaker than spending.
38. E. UI spending rises with layoffs automatically — no new law. A/B/D: discretionary legislation. C: monetary policy.
Fix: Automatic = built into existing law, responds by itself.
39. D. Deficit borrowing bids up the real rate, displacing private I. A: fiscal borrowing doesn't shrink money. B: imports aren't the channel. C: revenue effects aren't crowding out. E: any LRAS effect is long-run and indirect.
Fix: Crowding out: deficit → loanable-funds demand ↑ → r ↑ → I ↓.
40. A. Balanced-budget multiplier = 1: the +G effect (×1/MPS) exceeds the −T effect (×MPC/MPS) by exactly 1, so ΔGDP = ΔG. B: cancellation ignores the multiplier gap. C: spending wins, not taxes. D: overstates. E: it's exactly determinate.
Fix: Equal ΔG and ΔT → ΔGDP = ΔG.
41. A. Medium of exchange = accepted for transactions. B: that's store of value (imperfect under inflation). C: unit of account. D: store of value. E: no backing requirement.
Fix: Three functions — medium of exchange (buy), unit of account (compare), store of value (hold).
42. E. Checking (demand) deposits are M1's core, with currency. A: CDs are M2-class time deposits. B/C: securities are not money. D: commodities are not money.
Fix: M1 = currency in circulation + checkable deposits (+ savings deposits in the current definition); bonds and CDs are not M1.
43. D. Multiplier = 1/0.20 = 5; total deposits = $5,000, of which $4,000 is newly created beyond the initial $1,000. A: single-bank first-round lending is $800. B: that's required reserves. C: $800 is the first loan, not the total. E: single banks can't lend multiples.
Fix: New money = (multiplier × deposit) − initial deposit; the first bank only lends its excess reserves.
44. C. Required reserves = 10% × 500 = $50; lendable excess = $450. A: can't lend reserves it must hold. B/E: system-wide numbers, not single-bank. D: that's the required reserve.
Fix: A single bank lends only its excess reserves; the system multiplies.
45. B. The central bank fixes the quantity of money; it doesn't respond to the interest rate → vertical. A: demand's elasticity doesn't shape supply. C: banks do create money — irrelevant here. D/E: not reasons for verticality.
Fix: Vertical MS = policy-determined quantity; the nominal rate adjusts to it.
46. C. Cash earns nothing; holding it forgoes the nominal rate on bonds/deposits. A: mixes concepts. B: liquidity is the benefit, not the cost. D/E: administrative rates, not the holder's opportunity cost.
Fix: The nominal interest rate is the price of holding money — that's why money demand slopes down in it.
47. D. Open-market purchases inject reserves, expand money, cut rates — expansionary. A/B/C: all contractionary. E: fiscal policy, and contractionary at that.
Fix: Recession-fighting (limited reserves): buy bonds, cut discount rate, cut reserve requirement.
48. B. Bond purchases add reserves → MS shifts right → nominal rate falls along money demand. A/D: demand didn't move. C: the supply curve moved; nothing slides along a vertical line to a new equilibrium by itself. E: no regime change implied.
Fix: OMO moves the vertical MS line; the interest rate is read off money demand.
49. A. With abundant reserves, small OMOs can't move the rate; the Fed steers with administered rates — IORB chief among them. B: reserve-requirement changes are blunt and rarely used (requirement is zero in practice). C/D: not central-bank powers. E: that's monetizing fiscal policy, not the rate tool.
Fix: Ample reserves → administered rates (IORB) set the floor; limited reserves → OMOs move the rate.
50. E. Cheaper borrowing raises investment and durable consumption — the interest-rate channel into AD. A/B: unrelated. C: money doesn't build capacity. D: backwards if anything.
Fix: Monetary transmission: rate ↓ → I (and durable C) ↑ → AD →.
51. B. Savers (private + public surpluses) supply funds for borrowing. A: government spending isn't lending. C: printing is money-market business. D: investment is the demand side. E: irrelevant.
Fix: Loanable funds: savers supply, borrowers demand.
52. D. Loanable funds clears at the real interest rate — inflation-adjusted, long-horizon. A: nominal is the money market's variable. B/C/E: different graphs entirely.
Fix: Money market → nominal rate; loanable funds → real rate. Drill this pairing.
53. A. Deficits mean more government borrowing → demand for funds right → real rate up. B: supply didn't move. C/E: money curves live in another market. D: direction reversed.
Fix: Government borrowing enters loanable funds on the demand side.
54. C. More saving at every rate = supply right → real rate falls → investment rises. A/B: saving isn't demand. D: direction reversed. E: private saving needs no central-bank permission.
Fix: Thrift shifts supply right; cheaper funds crowd in investment.
55. E. Money market: vertical MS, downward MD, nominal rate on the y-axis. A: that's loanable funds. B: no horizontal supply here. C/D: wrong shapes.
Fix: Identify the market by its y-axis and its vertical curve.
56. C. More transactions (higher nominal GDP/price level) require more money at every rate → MD right. A: a rate change moves along MD. B/D: those move supply. E: irrelevant.
Fix: MD shifts with nominal GDP (price level or real output); the rate moves you along it.
57. A. Money multiplier = 1/rr under the stated simplifications. B/C/E: not the formula. D: that's the spending multiplier's cousin — different animal.
Fix: 1/rr for money; 1/MPS for spending — never swap them.
58. E. Currency is the most liquid asset — immediately spendable. A–D: each requires sale or maturity to become spendable.
Fix: Liquidity = closeness to spendable cash.
59. D. The fed funds rate is the interbank overnight reserves rate — the Fed's policy target. A: that's the discount rate. B/C/E: different rates.
Fix: Fed funds = bank-to-bank overnight; discount = Fed-to-bank.
60. B. Cooling = contractionary: drain reserves (sell bonds) and raise IORB to lift rates. A/C: expansionary sets. D/E: fiscal actions (and expansionary).
Fix: Check both the institution (central bank?) and the direction (tighten?) before answering.
The economy of Ostrava is in long-run equilibrium. Then a collapse in business confidence sharply reduces planned investment spending.
(a) Draw a correctly labeled AD–SRAS–LRAS graph showing Ostrava's initial long-run equilibrium (PL₁, Yf) and the effect of the investment collapse. Label the new short-run equilibrium PL₂ and Y₂.
(b) Identify the output gap Ostrava now faces. Is Ostrava's unemployment rate now above, below, or equal to its natural rate? Explain.
(c) Ostrava's MPC is 0.8, and the output gap equals $100 billion of real GDP. (i) Calculate the spending multiplier. (ii) Calculate the minimum increase in government purchases needed to close the gap. Show your work.
(d) Suppose the government instead makes no policy response. Explain the wage mechanism by which the economy would return to long-run equilibrium, and state the effect on the price level relative to PL₂.
(e) If the government finances the spending increase from part (c)(ii) by borrowing, explain how the loanable funds market could partially offset the stimulus. Refer to the real interest rate and a specific component of aggregate demand.
The reserve requirement in the country of Meridia is 25%. Banks lend out all excess reserves, and the public deposits all funds in checking accounts.
(a) Calculate the money multiplier. Show your work.
(b) Rhea deposits $2,000 in currency into her checking account at First Bank of Meridia. (i) Calculate the amount First Bank must hold as required reserves from this deposit. (ii) Calculate the maximum amount First Bank can lend from this deposit.
(c) Calculate the maximum change in total checkable deposits in Meridia's banking system resulting from Rhea's deposit (including the deposit itself).
(d) Did Rhea's initial $2,000 deposit by itself change the money supply at the moment of deposit? Explain.
The table shows the market basket for the nation of Quill (base year: Year 1).
| Item | Quantity | Year 1 price | Year 2 price |
|---|---|---|---|
| Bread | 20 | $2.00 | $2.50 |
| Fuel | 10 | $4.00 | $4.50 |
(a) Calculate the cost of the market basket in Year 1 and Year 2. Show your work.
(b) Calculate the CPI for Year 2. Show your work.
(c) Calculate the inflation rate between Year 1 and Year 2.
(d) Quill's workers received a 5% nominal wage increase between Year 1 and Year 2. Determine whether their real wages rose, fell, or stayed constant. Explain.
1. B. On the curve, resources are fully used — more of one good requires less of the other. A: the price level isn't on this graph. C: unemployment means inside the curve. D: "zero cost" resources don't exist. E: inward shifts reduce capacity. Fix: On-curve = tradeoffs only; the slope between points is the opportunity cost.
2. E. The factor market routes the four factor payments from firms to households. A: consumption flows the other way, in the product market. B/D: government flows, not factor payments. C: imports leak abroad. Fix: Factor market = wages/rent/interest/profit, firms → households.
3. A. Saving exits the spending stream (until re-injected as investment). B: investment is an injection. C: exports are an injection. D: G is an injection. E: consumption is the core stream itself. Fix: Leakages = S, T, M; injections = I, G, X.
4. D. Better technology expands capacity — the curve itself moves out. A: less unemployment moves the point toward the curve, not the curve. B: movement along. C: price level is irrelevant to the PPC. E: fewer workers shifts it inward. Fix: Only resources/technology move the PPC; everything else moves the point.
5. C. Opportunity cost = highest-valued forgone alternative: the rail upgrade. A: that's the expenditure. B: never add alternatives. D: not the next-best. E: that's a net-benefit difference. Fix: One choice, one next-best alternative — that's the cost.
6. D. Tuition buys educational services produced this year. A/E: used goods — no current production. C: transfer payment. B: financial transaction — ownership of paper, no production. Fix: GDP needs new production of a final good or service this year.
7. A. 700 + 180 + 210 + (90 − 130) = $1,050B; transfers excluded. B: adds transfers. C: adds transfers and ignores the net-export subtraction. D: forgets to net imports. E: subtracts transfers. Fix: GDP = C + I + G + (X − M); transfers never enter.
8. C. Real GDP strips out price-level changes to isolate production. A: that's per-capita adjustment. B/D/E: not the deflator's job. Fix: Real = nominal ÷ (deflator/100) — inflation-adjusted output.
9. E. 24 ÷ 1.20 = $20 trillion. A: multiplied. B: ignored the deflator. C: halved. D: invented a different deflator. Fix: Deflator over 100 → real is less than nominal; divide, don't multiply.
10. B. GDP misses home production, leisure, distribution, and environmental costs. A: intermediate goods are excluded, correctly. C: financial transactions are excluded. D: G is included. E: foreign-owned production inside the borders belongs in GDP. Fix: GDP = production meter, not welfare meter — know its blind spots.
11. C. Jobless + actively searching = unemployed. A/D: she is searching, so she's in the labor force and not discouraged. B: she has no job. E: underemployment refers to part-time/overqualified workers who are employed. Fix: The two-box test: no job ✓ + looking ✓ = unemployed.
12. B. Labor force = 100M; 10/100 = 10%. A: divides by population minus wrong group (10/150). C: divides by employed (10/90). D: mixes numbers. E: that's the LFPR. Fix: Rate = unemployed ÷ labor force; build LF = E + U first.
13. E. Voluntary quit to search = frictional — normal turnover. A: no downturn caused it. B: her skills still match jobs. C: no season involved. D: "hidden" isn't an AP category. Fix: Between jobs by choice/search = frictional.
14. A. Full employment = natural rate = frictional + structural, cyclical zero. B/C/E: zero unemployment or 100% LFPR is neither required nor possible. D: structural persists at full employment. Fix: Full employment ≠ zero unemployment; it means zero cyclical.
15. D. They exit both the unemployed count and the labor force → the ratio falls. A/B: they're no longer counted, and the LF shrinks. C: no such definition. E: employment is untouched. Fix: Discouraged-worker exits make the rate look better while the market is worse.
16. E. (135 − 125)/125 = 10/125 = 8%. A: uses the 10-point change as percent. B: divides by 135. C: reads the index as a rate. D: arithmetic slip. Fix: Inflation = ΔCPI ÷ starting CPI.
17. D. Fixed-rate debtors repay in cheaper dollars — borrowers win from surprise inflation. A/C/E: fixed-income receivers and cash holders lose purchasing power. B: the lender's real return shrinks. Fix: Surprise inflation transfers wealth from lenders/fixed-receivers to borrowers.
18. B. Real ≈ 7 − 3 = 4%. A: added. C: that's expected inflation. D: nominal. E: divided. Fix: Fisher: real ≈ nominal − expected inflation.
19. C. With V, Y fixed, money growth passes into prices roughly one-for-one. A: Y is held fixed. B: V is held fixed. D: nominal GDP (PY) rises. E: direction reversed. Fix: MV = PY: excess money growth ends up in P.
20. A. Deflation = the price level actually falls. B: that's disinflation. C: that's stagflation. D: nominal GDP can fall for output reasons. E: money-supply decline is a possible cause, not the definition. Fix: Disinflation = slower inflation; deflation = negative inflation.
21. A. The interest-rate effect: lower PL → less transactions demand for money → lower rates → more investment. B: micro substitution logic doesn't apply to all goods at once. C: costs are supply-side. D/E: not slope mechanisms. Fix: AD slope = wealth + interest-rate + exchange-rate effects.
22. C. Higher wealth → more consumption at every PL → AD right. A: price-level changes move along the curve. B: appreciation cuts net exports → left. D/E: both reduce spending → left. Fix: Route each event through C, I, G, or Xn, then move the curve.
23. D. Policy-driven rate increases cut investment and durable consumption → AD left. A: wealth effect is a slope mechanism, and direction is wrong. B: no price-level change initiated this. C/E: supply curves don't move on borrowing costs like this. Fix: Rate changes from policy shift AD; only PL-driven rate changes are movement-along.
24. B. More G (right) + depreciation → Xn up (right): same direction. A: taxes up (left) vs. confidence (right). C: foreign incomes down (left) vs. rates down (right). D: I up (right) vs. imports up (left). E: wealth down (left) vs. optimism (right). Fix: For "both shift the same way," sign each event separately before comparing.
25. E. Sticky wages let higher output prices fatten margins → firms expand. A: wealth effect is AD-side. B: money supply is policy. C: technology is a shifter, not the slope. D: exports explain AD's slope via exchange rates, not SRAS. Fix: SRAS slopes up because input costs lag output prices.
26. D. A destroyed harvest raises input scarcity/costs → SRAS left (negative supply shock). A/E: spending didn't initiate this. B: no PL-initiated movement. C: capacity fell, if anything. Fix: Nature and input-price shocks hit SRAS; direction opposite the cost change.
27. B. SRAS left slides up AD: prices up, output down — stagflation's signature. A: demand collapse. C: demand boom. D: positive supply shock. E: no shock at all. Fix: PL and Y moving in opposite directions = supply-side event.
28. A. Wages are the dominant input price; higher wages raise unit costs at every PL → SRAS left. B: better-paid ≠ cheaper production. C: the income channel isn't the tested mechanism here. D: LRAS ignores nominal wages. E: wages are an input price, not the price level. Fix: Economy-wide nominal wage changes are the canonical SRAS shifter.
29. E. LRAS stands at potential output — unemployment at the natural rate. A/B: demand doesn't position LRAS. C: structural unemployment never hits zero. D: price stability isn't the anchor. Fix: LRAS = Yf = natural rate of unemployment, always.
30. C. Right of LRAS = inflationary gap = unusually tight labor market. A: that's left of LRAS. B: requires intersection on LRAS. D: stagflation is a supply shock in motion. E: nothing about falling prices. Fix: Geometry first: which side of LRAS does AD∩SRAS fall on?
31. E. Slack labor markets eventually cut nominal wages → costs fall → SRAS right → back to Yf. A: AD has no auto-return. B: LRAS doesn't chase demand. C: the natural rate isn't the adjuster. D: the price level falls in this story. Fix: Self-correction always works through wages → SRAS.
32. A. Output returns to Yf; the price level settles lower. B/E: output is restored. C: output doesn't exceed original Yf. D: prices fall, not rise, after an AD decline. Fix: Long-run effect of AD shifts = price level only.
33. C. Productivity gains cut costs now (SRAS) and raise capacity (LRAS). A/D: demand-side. B: temporary input-price changes move SRAS only. E: expectations shift SRAS only. Fix: Only real, lasting capability changes move LRAS; they carry SRAS along.
34. B. Recessionary gap → expansionary fiscal → raise G. A/D: monetary actions. C/E: contractionary fiscal moves. Fix: Fiscal = Congress's G and T; expansionary = spend more / tax less.
35. D. 1/(1 − 0.75) = 1/0.25 = 4. A: the MPC itself. B: MPC/MPS. C: 1/0.75. E: decimal error. Fix: Spending multiplier = 1/MPS.
36. B. 4 × 30 = $120B. A: no multiplication. C: multiplier of 3 (the tax multiplier's magnitude). D: multiplies by the MPC once (30 × 0.75). E: adds the multiplier instead of multiplying. Fix: ΔGDP = multiplier × ΔG.
37. C. Tax multiplier = −0.75/0.25 = −3; −3 × (−30) = +$90B. A: spending multiplier used. B: no multiplication. D: multiplied by MPC once. E: mixed methods. Fix: Tax cuts use −MPC/MPS — one notch weaker than spending.
38. E. UI spending rises with layoffs automatically — no new law. A/B/D: discretionary legislation. C: monetary policy. Fix: Automatic = built into existing law, responds by itself.
39. D. Deficit borrowing bids up the real rate, displacing private I. A: fiscal borrowing doesn't shrink money. B: imports aren't the channel. C: revenue effects aren't crowding out. E: any LRAS effect is long-run and indirect. Fix: Crowding out: deficit → loanable-funds demand ↑ → r ↑ → I ↓.
40. A. Balanced-budget multiplier = 1: the +G effect (×1/MPS) exceeds the −T effect (×MPC/MPS) by exactly 1, so ΔGDP = ΔG. B: cancellation ignores the multiplier gap. C: spending wins, not taxes. D: overstates. E: it's exactly determinate. Fix: Equal ΔG and ΔT → ΔGDP = ΔG.
41. A. Medium of exchange = accepted for transactions. B: that's store of value (imperfect under inflation). C: unit of account. D: store of value. E: no backing requirement. Fix: Three functions — medium of exchange (buy), unit of account (compare), store of value (hold).
42. E. Checking (demand) deposits are M1's core, with currency. A: CDs are M2-class time deposits. B/C: securities are not money. D: commodities are not money. Fix: M1 = currency in circulation + checkable deposits (+ savings deposits in the current definition); bonds and CDs are not M1.
43. D. Multiplier = 1/0.20 = 5; total deposits = $5,000, of which $4,000 is newly created beyond the initial $1,000. A: single-bank first-round lending is $800. B: that's required reserves. C: $800 is the first loan, not the total. E: single banks can't lend multiples. Fix: New money = (multiplier × deposit) − initial deposit; the first bank only lends its excess reserves.
44. C. Required reserves = 10% × 500 = $50; lendable excess = $450. A: can't lend reserves it must hold. B/E: system-wide numbers, not single-bank. D: that's the required reserve. Fix: A single bank lends only its excess reserves; the system multiplies.
45. B. The central bank fixes the quantity of money; it doesn't respond to the interest rate → vertical. A: demand's elasticity doesn't shape supply. C: banks do create money — irrelevant here. D/E: not reasons for verticality. Fix: Vertical MS = policy-determined quantity; the nominal rate adjusts to it.
46. C. Cash earns nothing; holding it forgoes the nominal rate on bonds/deposits. A: mixes concepts. B: liquidity is the benefit, not the cost. D/E: administrative rates, not the holder's opportunity cost. Fix: The nominal interest rate is the price of holding money — that's why money demand slopes down in it.
47. D. Open-market purchases inject reserves, expand money, cut rates — expansionary. A/B/C: all contractionary. E: fiscal policy, and contractionary at that. Fix: Recession-fighting (limited reserves): buy bonds, cut discount rate, cut reserve requirement.
48. B. Bond purchases add reserves → MS shifts right → nominal rate falls along money demand. A/D: demand didn't move. C: the supply curve moved; nothing slides along a vertical line to a new equilibrium by itself. E: no regime change implied. Fix: OMO moves the vertical MS line; the interest rate is read off money demand.
49. A. With abundant reserves, small OMOs can't move the rate; the Fed steers with administered rates — IORB chief among them. B: reserve-requirement changes are blunt and rarely used (requirement is zero in practice). C/D: not central-bank powers. E: that's monetizing fiscal policy, not the rate tool. Fix: Ample reserves → administered rates (IORB) set the floor; limited reserves → OMOs move the rate.
50. E. Cheaper borrowing raises investment and durable consumption — the interest-rate channel into AD. A/B: unrelated. C: money doesn't build capacity. D: backwards if anything. Fix: Monetary transmission: rate ↓ → I (and durable C) ↑ → AD →.
51. B. Savers (private + public surpluses) supply funds for borrowing. A: government spending isn't lending. C: printing is money-market business. D: investment is the demand side. E: irrelevant. Fix: Loanable funds: savers supply, borrowers demand.
52. D. Loanable funds clears at the real interest rate — inflation-adjusted, long-horizon. A: nominal is the money market's variable. B/C/E: different graphs entirely. Fix: Money market → nominal rate; loanable funds → real rate. Drill this pairing.
53. A. Deficits mean more government borrowing → demand for funds right → real rate up. B: supply didn't move. C/E: money curves live in another market. D: direction reversed. Fix: Government borrowing enters loanable funds on the demand side.
54. C. More saving at every rate = supply right → real rate falls → investment rises. A/B: saving isn't demand. D: direction reversed. E: private saving needs no central-bank permission. Fix: Thrift shifts supply right; cheaper funds crowd in investment.
55. E. Money market: vertical MS, downward MD, nominal rate on the y-axis. A: that's loanable funds. B: no horizontal supply here. C/D: wrong shapes. Fix: Identify the market by its y-axis and its vertical curve.
56. C. More transactions (higher nominal GDP/price level) require more money at every rate → MD right. A: a rate change moves along MD. B/D: those move supply. E: irrelevant. Fix: MD shifts with nominal GDP (price level or real output); the rate moves you along it.
57. A. Money multiplier = 1/rr under the stated simplifications. B/C/E: not the formula. D: that's the spending multiplier's cousin — different animal. Fix: 1/rr for money; 1/MPS for spending — never swap them.
58. E. Currency is the most liquid asset — immediately spendable. A–D: each requires sale or maturity to become spendable. Fix: Liquidity = closeness to spendable cash.
59. D. The fed funds rate is the interbank overnight reserves rate — the Fed's policy target. A: that's the discount rate. B/C/E: different rates. Fix: Fed funds = bank-to-bank overnight; discount = Fed-to-bank.
60. B. Cooling = contractionary: drain reserves (sell bonds) and raise IORB to lift rates. A/C: expansionary sets. D/E: fiscal actions (and expansionary). Fix: Check both the institution (central bank?) and the direction (tighten?) before answering.
| Component | Raw | × | Points |
|---|---|---|---|
| Section I (out of 60) | ___ | 1.0 | ___ |
| FRQ 1 (out of 10) | ___ | 1.5 | ___ |
| FRQ 2 (out of 5) | ___ | 1.5 | ___ |
| FRQ 3 (out of 5) | ___ | 1.5 | ___ |
| Composite (out of 90) | ___ |
Calibration (approximate): 66+ ≈ 5 · 53–65 ≈ 4 · 40–52 ≈ 3 · 30–39 ≈ 2.
| Missed | Review |
|---|---|
| 1–5 | L1 (scarcity, PPC, circular flow) |
| 6–10 | L2 (GDP) |
| 11–15 | L3 (unemployment) |
| 16–20 | L4 (inflation) |
| 21–24 | L5 (aggregate demand) |
| 25–28 | L6 (SRAS) |
| 29–33 | L7 (LRAS, gaps, self-correction) |
| 34–40 | L8 (fiscal policy, multipliers) |
| 41–50 | L9–L10 (money, banking, monetary policy) |
| 51–54 | L11 (loanable funds) |
| 55–60 | L9–L11 (financial-sector graphs and rates) |
Post-mock ritual: classify every miss (concept gap / misread / arithmetic), redo it cold, then redraw the underlying graph from memory. If Q46–60 went badly and you haven't reached Lessons 9–11 yet, that's expected — retest that block after Lesson 11.
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.