AP MACROECONOMICS Test Booklet

Unit 1-Basic Economic Concept

1. Which of the following is an example of a factor of production?

(A) A want
(B) A bank
(C) A bond
(D) Capital
(E) Stock

2. The concept of opportunity cost would no longer be relevant if

(A) poverty in an economy no longer existed
(B) the supply of all resources were unlimited
(C) resources were allocated efficiently
(D) real wages were flexible
(E) all current incomes were invested in technological research

3. Which of the following describes scarcity?

(A) Wants are limited.
(B) Wants exceed resources.
(C) Resources are unlimited.
(D) Resources are fully employed.
(E) Resources are allocated efficiently.

4. The fundamental economic problem is

(A) rising interest rates
(B) the scarcity of resources
(C) unemployment and inflation
(D) the tax burden on households
(E) the unequal distribution of income

5. All societies face a trade-off for every decision for which of the following reasons?
(A) A decision entails zero opportunity cost.
(B) Resources are scarce.
(C) Some resources are always unemployed.
(D) Resources have no alternative uses.
(E) Resources are not allocated efficiently.

6. Scarcity exists because

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(A) human wants exceed the productive capacity of the economy

(B) supplies of land and other natural resources are unlimited
(C) physical capital does not depreciate
(D) population and labor force growth are slowing
(E) innovation causes unemployment

7. Which of the following is the most fundamental issue that economics addresses?
(A) Choice of appropriate technology
(B) Reduction of unemployment
(C) Reduction of budget deficit
(D) Promotion of privatization
(E) Use of scarce resources

8. The diagram below shows the production possibilities curve for an economy that produces only two goods: X and
Y.

The opportunity cost of moving production from point R to point T is

(A) one unit of Good Y
(B) five units of Good Y
(C) six units of Good Y
(D) three units of Good X
(E) seven units of Good X

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Unit 1-Basic Economic Concept

9. Use the graph to answer the question.

The graph above shows the production possibilities curve for a small township that is deciding to build parks and
gymnasiums. Which of the following combinations of parks and gymnasiums is unattainable given the township's
available resources?
(A) 5 parks and 6 gymnasiums
(B) 5 parks and 8 gymnasiums
(C) 10 parks and 6 gymnasiums
(D) 15 parks and 4 gymnasiums
(E) 20 parks and 4 gymnasiums

10. Which of the following would shift a country’s production possibilities curve inward?
(A) A reduction in the country’s inflation rate
(B) A reduction in the country’s real interest rate
(C) A reduction in the size of the country’s labor force
(D) An increase in the typical retirement age in the country
(E) An increase in the country’s cyclical unemployment rate

11. For an economy that is operating inside its production possibilities curve, which of the following is true?
(A) It can increase the production of both goods.
(B) Its population is growing faster than the economy’s ability to increase production.
(C) It is using all available resources efficiently.
(D) It cannot move to a point on the production possibilities curve with available technology.
(E) It lacks the resources to increase production beyond its current output.

12. Which of the following would best explain an inward shift of the production possibilities curve?

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(A) An increase in the labor-force participation rate

(B) An increase in the rate of savings
(C) A decrease in the quantity of inputs required to produce a unit of output
(D) A decrease in the quality of human capital
(E) A decrease in the government’s budget deficit that leads to lower real interest rates

Country A and Country B produce the same two products, hammocks and looms. Country A can produce a maximum of
60 hammocks or 40 looms, while Country B can produce a maximum of 40 hammocks or 20 looms.

a. What is the opportunity cost to produce a loom in terms of hammocks in Country A?

b. Which country, if either, has a comparative advantage in producing looms? Explain.

c. Internationally, if 1 loom is traded for 1.75 hammocks, who will benefit from trading: Country A only, Country
B only, both countries, or neither country?

d. Assume there is international trade.

i. Can a country produce beyond its production possibilities curve (PPC) ?

ii. Can a country consume beyond its PPC?

13. Respond to all parts of the question.

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Unit 1-Basic Economic Concept

In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list
the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answer. A
correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes.

Assume that an economy is at full employment.

a. Explain how an increase in net investment will affect each of the following.

i. Aggregate demand

ii. Capital stock

iii. Long-run aggregate supply

iv. Output

b. Explain how the increase in net investment will affect the country's production possibilities curve shown below.

14. Respond to all parts of the question.

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Unit 1-Basic Economic Concept

In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list
the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A
correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes.

Labor productivity is output per unit of labor. An increase in labor productivity is a source of economic growth.

a. Identify two sources of increase in labor productivity.

b. Assume that a country’s economy is at full employment. Productivity has been rising. Using a correctly labeled
graph of aggregate demand and aggregate supply, show the long-run effect of the growth in productivity on each
of the following.

i. Real output

ii. Price level

c. Assume that the economy produces only two goods, good X and good Y. Using a correctly labeled production
possibility diagram, show the effect of the increase in labor productivity

15. Respond to all parts of the question.

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Unit 1-Basic Economic Concept

In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list
the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A
correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes.

A country’s economy is in a short-run equilibrium with an output level less than the full-employment output level.
Assume an upward-sloping aggregate supply curve.

a. Using a correctly labeled aggregate demand and aggregate supply graph, show the following.

i. Full-employment output, labeled as YF

ii. Equilibrium real output and price level, labeled as YE and PLE, respectively

b. Assume that the country’s government increases domestic military expenditures. On the graph from part (a),
show how the increased military expenditures affect the following in the short run.

i. Aggregate demand

ii. Equilibrium real output and price level, labeled as Y2 and PL2, respectively

c. Using a correctly labeled graph of the short-run Phillips curve, show the effect of the increased military
expenditures in the short run, labeling the initial point as A and the new point as B.

d. Assume that the increased military spending is financed through government borrowing. What will happen to the
real interest rate? Explain.

e. Assume that the economy produces only two goods: military goods and civilian goods. Using a correctly labeled
production possibilities curve, show the effect of the increase in military expenditures from part (b), labeling the
initial point as C and the new point as D.

16. Respond to all parts of the question.

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Unit 1-Basic Economic Concept

In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list
the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A
correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes.

Assume that the economy is operating below the full-employment level of output and that the government’s budget is
balanced.

a. Using a correctly labeled aggregate demand and aggregate supply graph, show how an increase in government
spending will affect each of the following in the short run.

i. Real output

ii. Price level

b. Explain how this increase in government spending will affect each of the following in the short run.

i. Real interest rates

ii. Investment

c. Now assume that instead of increasing government spending, the government decreases corporate-profits taxes.
Using a correctly labeled aggregate demand and aggregate supply graph, show and explain how this decrease in
corporate-profits taxes will affect each of the following.

i. Aggregate demand

ii. Long-run aggregate supply

iii. Real output

iv. Price level

d. Assume that this country produces two goods, X and Y. Draw a correctly labeled production possibilities curve
for this economy. Now show on the graph how this decrease in corporate-profits taxes will affect this economy’s
production possibilities curve.

17. Respond to all parts of the question.

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 Test Booklet

Unit 1-Basic Economic Concept

In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list
the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answer. A
correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes.

Assume that the country of Fischerland produces only consumer goods and capital goods.

a. The graph above shows the production possibilities curve for Fischerland. The production of which of the
following exhibits increasing opportunity costs: consumer goods only, capital goods only, both goods, or neither
good?

b. Redraw the graph given above. Show a point that represents fully employed and efficiently used resources on the
redrawn graph and label it A.

c. Assume there is a recession in Fischerland. On your graph in part (b), label as C a point representing the
recession.

d. Identify a fiscal policy action that the Fischerland government can take to address the recession.

e. Assume instead that no discretionary policy actions are taken. Will short-run aggregate supply increase,
decrease, or remain the same in the long run? Explain.

18. Respond to all parts of the question.

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Unit 1-Basic Economic Concept

In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list
the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answer. A
correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes.

Assume that the country of Rankinland is currently in recession.

A. Assume that Rankinland produces only food and clothing. Draw a correctly labeled production possibilities
curve for Rankinland. Show a point that could represent the current output combination and label it A.

B. Assume that the banking system in Rankinland has limited reserves and the central bank pursues an expansionary
monetary policy.

i. Identify the open-market operation that the central bank would use.

ii. Draw a correctly labeled money market graph and show the short-run effect of the expansionary
monetary policy on the nominal interest rate.

iii. Assuming no change to the price level, what happens to the real interest rate as a result of the
expansionary monetary policy? Explain.

iv. Given your answer to part (b)(iii) regarding the real interest rate, what happens to the real gross
domestic product (GDP) in the short run? Explain.

C. Suppose Rankinland has a current account deficit. Rankinland’s currency is called the bera.

i. What will initially happen to the current account deficit in Rankinland solely due to the change in the
real GDP from part (b)(iv) ? Explain.

ii. What will happen to the international value of the bera solely due to the change in the real GDP from
part (b)(iv) ? Explain.

19. Respond to all parts of the question.

The table shows that Home Nation can produce five autos or one hundred computers using all its available
resources in a year. Foreign Nation can produce five autos or fifty computers using all its available resources in
a year.
Home Nation Annual Production Foreign Nation Annual Production
Possibilities Possibilities
Autos Computers Autos Computers
5 100 5 50

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20. Based on the information provided above, which of the following must be true?
(A) Home Nation has an absolute advantage in the production of computers.
(B) Foreign Nation has an absolute advantage in the production of autos.
(C) Home Nation has a comparative advantage in the production of autos.
(D) Foreign Nation has a comparative advantage in the production of computers.
(E) Neither nation has a comparative advantage.

21. Based on the information provided above, which of the following are mutually beneficial terms of trade at which
both Home and Foreign Nation will be willing to specialize and exchange?
(A) 1 auto for 1 computer
(B) 1 auto for 10 computers
(C) 1 auto for 17 computers
(D) 1 auto for 20 computers
(E) 1 auto for 25 computers

A country is at full employment and produces two types of goods: consumer goods and capital goods.

a. Draw a correctly labeled graph of the production possibilities curve, with consumer goods on the horizontal axis
and capital goods on the vertical axis. Indicate a point on your graph, labeled X, that represents full employment
and a possible combination in which both goods are being produced.

b. Assume there is an increase in the country’s national savings. Draw a correctly labeled graph of the loanable
funds market, showing the change in the real interest rate from the increase in savings.

c. On the same graph from part (a), show another point, labeled Z, that represents full employment and a new
combination of consumer goods and capital goods consistent with the increase in the country’s national savings.

d. Referring to your answer to part (c), will the long-run aggregate supply curve shift to the right, shift to the left, or
remain the same? Explain.

22. Respond to all parts of the question.

23. Suppose countries Alphania and Betania produce electronics and apparel using identical resources. Which of the
following is true if Alphania exports electronics to and imports apparel from Betania within a free-trade system ?

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(A) The opportunity cost of producing electronics is higher in Alphania than in Betania.
Betania has a comparative advantage in producing apparel, and Alphania has a comparative advantage in
(B)
producing electronics.
(C) Alphania must be specializing in apparel, while Betania is specializing in electronics.
(D) Workers in Alphania can produce more apparel per hour than workers in Betania.
(E) Consumers in Betania buy more electronics than consumers in Alphania.

24. If two nations specialize according to their individual comparative advantages and engage in trade, then which of
the following must be true?
(A) Nations would be better off if they were self-sufficient.
(B) If one nation gains from trade with the other nation, then the other nation will lose.
(C) Both nations can consume beyond their individual production possibilities.
(D) Both nations can consume only what they produce.
(E) Both nations will lose from trade.

25. Suppose two countries are each capable of individually producing two given commodities. Instead, each specializes
by producing the commodity for which it has a comparative advantage and then trades with the other country.
Which of the following is most likely to result?
(A) The two countries will become more independent of each other.
(B) Unemployment will increase in one country and decrease in the other.
(C) There will be more efficient production in one country but less efficient production in the other.
(D) Both countries will become better off.
(E) Both countries will be producing their commodity inefficiently.

26. Brazil and Peru produce both coffee and wheat using labor as the only input. The table below shows the labor hours
required to produce a unit of coffee and a unit of wheat in each country.

Based on the information in the table above, which of the following is true?
(A) Peru has a comparative advantage in producing wheat.
(B) Peru has an absolute advantage in producing wheat.
(C) Brazil has an absolute advantage in producing wheat.
(D) Peru has a comparative advantage in producing coffee.
(E) Brazil has a comparative advantage in producing coffee.

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Unit 1-Basic Economic Concept

27. The table below shows the production alternatives of Country A and Country B for producing computers and cars
with equal amounts of resources that are fully and efficiently employed.

Which of the following is true according to the data in the table?

(A) Country A has an absolute and comparative advantage in the production of computers.
(B) Country B has an absolute and comparative advantage in the production of computers.
(C) Country B should import computers and export cars.
(D) Since Country B has an absolute advantage in the production of both goods, it will not trade with Country A.
(E) Neither country can benefit from trade.

28.

The table above indicates the production alternatives of two countries, A and B, which produce computers and steel
using equal amounts of resources. If both countries always produce at full employment, which of the following
statements must be correct?
Mutually advantageous trade can occur between the two countries when 1 unit of steel from Country A is
(A)
exchanged for 2 computers from Country B.
Mutually advantageous trade can occur between the two countries when 2 units of steel from Country B are
(B)
exchanged for 1 computer from Country A.
Country A has an absolute and comparative advantage in the production of computers, and Country B has an
(C)
absolute and comparative advantage in the production of steel.
Country B has an absolute advantage in the production of both commodities, but a comparative advantage in
(D)
the production of steel.
Country A has an absolute advantage in the production of both commodities, but a comparative advantage in
(E)
the production of steel.

29. Assume that Country A exports one bushel of wheat in exchange for 2.5 bushels of corn from Country B. If the
terms of trade are beneficial to both countries, which of the following must be true?

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(A) Country A has an absolute advantage in the production of wheat.

(B) The cost of producing a bushel of wheat in Country A is less than 2.5 bushels of corn.
(C) The cost of producing a bushel of wheat in Country A is greater than 2.5 bushels of corn.
(D) Country A is producing inside its current production possibilities curve.
(E) Country A needs to use more resources to produce wheat than to produce corn.

30. Wally can make 40 units of good X or 30 units of good Y in a day, and Sam can make 20 units of good X or 10
units of good Y in a day. Assuming constant trade-offs between good X and good Y, which of the following is true?
(A) Sam has a comparative advantage in making good X.
(B) Sam has a comparative advantage in making good Y.
(C) Wally has a comparative advantage in making both goods.
(D) Sam has an absolute advantage in making good X.
(E) Sam has an absolute advantage in making good Y.

31. Which of the following best explains why many United States economists support free international trade?
(A) Workers who lose their jobs can collect unemployment compensation.
(B) It is more important to reduce world inflation than to reduce United States unemployment.
(C) Workers are not affected; only businesses suffer.
(D) The long-run gains to consumers and some producers exceed the losses to other producers.
(E) Government can protect United States industries while encouraging free trade.

The diagram above shows two demand curves for video games identified as and .

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32. Which of the following changes will most likely result in a movement from point to point along the demand
curve ?
(A) A decrease in the number of buyers
(B) A decrease in the price of video games
(C) A decrease in the expected future price of video games
(D) An increase in the negative effects of video games on players
(E) An increase in the use of video games for educational purposes

33. Which of the following changes will most likely cause a shift of the demand curve from to as shown in the
diagram?
(A) An increase in consumers’ income, assuming that video games are a normal good
(B) An increase in the price of game consoles, a complementary good
(C) A decrease in the price of mobile games, a substitute good
(D) A decrease in the number of buyers in the market
(E) A decrease in the price of video games

34. Which of the following will cause a movement along the demand curve for chicken, a normal good, resulting in an
increase in the quantity demanded?
(A) An increase in consumers' income
(B) An increase in the price of fish, a substitute good
(C) An increase in the price of barbecue sauce, a complementary good
(D) A decrease in the price of chicken
(E) A decrease in the number of consumers of chicken

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Unit 1-Basic Economic Concept

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must
have all axes and curves clearly labeled and must show directional changes. If the question prompts you to “Calculate,”
you must show how you arrived at your final answer.

Assume gasoline is sold in a competitive market, the equilibrium price is $50 per barrel, and the equilibrium quantity is
1000 barrels.

(a) Using the numerical values above, draw a correctly labeled graph of the gasoline market and show each of the
following.

(i) The equilibrium price

(ii) The equilibrium quantity

(b) At a price of $40 per barrel, will there be a surplus or a shortage in the market? Explain.

(c) Assume new oil wells are discovered. On your graph from part (a), show how this change will affect the equilibrium
price and quantity in the market for gasoline.

(d) Assume instead there is an increase in the price of gasoline-operated automobiles. How will this change affect the
market for gasoline? Explain.

(e) If both changes in part (c) and part (d) occurred simultaneously, what will happen to the equilibrium price and quantity
of gasoline?

35. Respond to all parts of the question.

In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list
the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answer. A
correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes.

Explain how some individuals are helped and others harmed by unanticipated inflation as they participate in each of the
following markets.

a. Credit markets

b. Labor markets

c. Product markets

36. Respond to all parts of the question.

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37. Assume that for consumers, pears and apples are substitutes. It is announced that pesticides used on most apples
may be dangerous to consumers’ health. As a result of this announcement, which of the following market changes is
most likely to occur in the short run in the pear market?

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(A)

(B)

(C)

(D)

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Unit 1-Basic Economic Concept

(E)

38. A leftward shift of the supply curve for computers could be caused by which of the following in the short run?
(A) A decrease in the number of computer manufacturers
(B) A decease in taxes on computer manufacturers
(C) A decrease in the price of computers
(D) A decrease in the price of components used to assemble computers
(E) An increase in the price of mobile devices, a substitute good

39. If the wage rate of workers producing a good decreases, then which of the following will most likely occur?
(A) The demand curve will shift to the right.
(B) The supply of the good will increase.
(C) The quantity supplied of the good will decrease.
(D) Demand for the good will increase
(E) Quantity demanded for the good will decrease.

40. Which of the following describes the law of supply?

(A) An increase in the price of a good will decrease the quantity demanded.
(B) The price of a good will increase if production input costs increase.
(C) An increase in taxes will decrease the supply of a good.
(D) An increase in the number of sellers will increase the supply of a good.
(E) An increase in the price of a good will increase the quantity supplied.

41. Which of the following changes would result in an indeterminate change in the equilibrium price in a competitive
market?
(A) An increase in demand and a decrease in supply
(B) An increase in demand and an increase in supply
(C) A decrease in demand and an increase in supply
(D) A decrease in demand with no change in supply
(E) A decrease in supply with no change in demand

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42. Assume that the market for bottled water is in equilibrium. If both the supply of and the demand for bottled water
decrease, what will be the effect on equilibrium price and quantity?

Price Quantity
(A)

Decrease Decrease

Price Quantity
(B)

Decrease Increase

Price Quantity
(C)

Increase Decrease

Price Quantity
(D)

Increase Indeterminate

Price Quantity
(E)

Indeterminate Decrease

43. In the coffee market, which of the following changes will increase the price and decrease the quantity of coffee?

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Unit 1-Basic Economic Concept

Supply Demand
(A)
Increase Increase

Supply Demand
(B)
Increase Decrease

Supply Demand
(C)
Decrease Increase

Supply Demand
(D)
No change Increase

Supply Demand
(E)
Decrease No change

44. A simultaneous increase in both the demand for and the supply of a good in a market will lead to which of the
following changes in the equilibrium price and quantity of the good?

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Price Quantity
(A)
Increase Increase

Price Quantity
(B)
Indeterminate Decrease

Price Quantity
(C)
Indeterminate Increase

Price Quantity
(D)
Increase Indeterminate

Price Quantity
(E)
Decrease Increase

45. If there is a decrease in the price of the coffee beans used to make brewed coffee, how will this affect the
equilibrium price and quantity of brewed coffee?
(A) Equilibrium price will decrease and equilibrium quantity will increase
(B) Equilibrium price will decrease and equilibrium quantity will not change
(C) Equilibrium price will decrease and equilibrium quantity will decrease
(D) Equilibrium price will increase and equilibrium quantity will decrease
(E) Equilibrium price will increase and equilibrium quantity will not change

46. If labor costs rise in the automobile industry, which of the following will happen to car prices and the quantity of
cars sold?

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Unit 1-Basic Economic Concept

Price Quantity Sold

(A)
Decrease Decrease

Price Quantity Sold

(B)
Decrease Increase

Price Quantity Sold

(C)
Increase Decrease

Price Quantity Sold

(D)
Increase Increase

Price Quantity Sold

(E)
Increase Not change

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Unit 1-Basic Economic Concept

47.

The table above shows the quantity demanded and quantity supplied for bushels of wheat at various prices. Which
of the following combinations is the equilibrium price and quantity for wheat?

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Unit 1-Basic Economic Concept

Price Bushels of Wheat

(A)
$2.00 10,000

Price Bushels of Wheat

(B)
$1.75 15,000

Price Bushels of Wheat

(C)
$1.50 20,000

Price Bushels of Wheat

(D)
$1.25 30,000

Price Bushels of Wheat

(E)
$0.75 5,000

48. Which of the following will occur in a competitive market when the price of a good is less than the equilibrium
price?
(A) Price will decrease to eliminate the surplus and restore equilibrium.
(B) Price will decrease to eliminate the shortage and restore equilibrium.
(C) Price will increase to eliminate the surplus and restore equilibrium.
(D) Price will increase to eliminate the shortage and restore equilibrium.
(E) Price will remain constant, because supply will increase to eliminate the shortage.

49. If one-fourth of a nation’s wheat crop is destroyed by a flood in a given season, then the price of wheat and the
quantity sold will change in the short run in which of the following ways?

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Unit 1-Basic Economic Concept

Price Quantity Sold

(A)
Decrease No change

Price Quantity Sold

(B)
Decrease Increase

Price Quantity Sold

(C)
Increase Decrease

Price Quantity Sold

(D)
Increase Increase

Price Quantity Sold

(E)
No change Increase

Page 26 of 75 AP Macroeconomics
 Test Booklet

Unit 1-Basic Economic Concept

In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list
the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A
correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes.

Suppose that Mexico decreases its tariff rates on all of its imports of automobiles from abroad.

a. Will each of the following groups benefit from the decrease in the tariff rate?

i. Mexican consumers

ii. Mexican automobile manufacturers. Explain.

b. How would the decrease in the tariff rates affect each of the following in Mexico?

i. Current account balance. Explain.

ii. Capital account balance

c. Given the change in Mexico’s current account in part (b)(i), what will happen to the aggregate demand in
Mexico?

50. Respond to all parts of the question.

In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list
the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A
correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes.

Country X and Country Y are trading partners, and both produce furnaces and solar panels. The countries can produce the
following amounts using equal amounts of resources.

• Country X: 6 furnaces or 8 solar panels

• Country Y: 6 furnaces or 12 solar panels

a. Which country has an absolute advantage in producing solar panels?

b. Calculate the opportunity cost of a furnace in Country Y.

c. Which country has the comparative advantage in producing furnaces? Explain.

d. If the terms of trade were that 2 furnaces are exchanged for 1 solar panel, should Country X produce solar panels
domestically or import solar panels from Country Y?

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51. Respond to all parts of the question.

The following table shows the number of donuts or cupcakes that John and Erica can each produce in one day.

a. Who has the absolute advantage in producing donuts? Explain.

b. Who has the comparative advantage in producing donuts? Explain.

c. Assume that John and Erica decide to specialize according to their comparative advantages and that one cupcake
is exchanged for four donuts.

i. Indicate whether or not specialization and trade are beneficial to John.

ii. Indicate whether or not specialization and trade are beneficial to Erica.

d. Assume that Erica discovers a new cupcake production technique that will increase her daily production of
cupcakes only. Using donuts on the horizontal axis, draw a correctly labeled production possibilities curve for
Erica, before and after the technology change in cupcake production.

52. Respond to all parts of the question.

Page 28 of 75 AP Macroeconomics
 Test Booklet

Unit 1-Basic Economic Concept

In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list
the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A
correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes.

The table above gives the production alternatives of two nations that are producing cloth and food, using equal amounts of
resources.

a. i. Calculate the opportunity cost of producing a unit of cloth in Newland.

ii. Calculate the opportunity cost of producing a unit of food in Beeland.

b. i. Which nation has the comparative advantage in cloth production?

ii. Which nation has the comparative advantage in food production?

c. Now assume that the productivity of Beeland’s workers triples for each good.

i. Which country has a comparative advantage in food production?

ii. Explain how you determined your answer.

53. Respond to all parts of the question.

AP Macroeconomics Page 29 of 75
 Test Booklet

Unit 1-Basic Economic Concept

In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list
the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A
correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes.

The diagram above shows the production possibilities curves for two countries: Artland and Rayland. Using equal
amounts of resources, Artland can produce 600 hats or 300 bicycles, whereas Rayland can produce 1,200 hats or 300
bicycles.

a. Calculate the opportunity cost of a bicycle in Artland.

b. If the two countries specialize and trade, which country will import bicycles? Explain.

c. If the terms of trade are 5 hats for 1 bicycle, would trade be advantageous for each of the following?

i. Artland

ii. Rayland

d. If productivity in Artland triples, which country has the comparative advantage in the production of hats?

54. Respond to all parts of the question.

Page 30 of 75 AP Macroeconomics
 Test Booklet

Unit 1-Basic Economic Concept

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must
have all axes and curves clearly labeled and must show directional changes. If the question prompts you to “Calculate,”
you must show how you arrived at your final answer.

The table below shows the number of bushels of grapes or bushels of tomatoes that France and Italy can produce in one
day using the same amount of resources.

Bushels of Grapes Bushels of Tomatoes

France 100 25
Italy 100 50

(a) Does France, Italy, or neither nation have a comparative advantage in producing grapes? Explain.

(b) Assume France and Italy decide to specialize and trade according to their comparative advantages, and 20 bushels of
grapes are exchanged for 8 bushels of tomatoes. Are specialization and trade under these terms beneficial to both France
and Italy? Explain.

(c) Suppose the productivity of labor in the production of grapes and tomatoes in France doubles. Assuming France
experiences constant opportunity cost in the production of the two products, draw a correctly labeled graph of France’s
production possibilities curve, with grapes on the horizontal axis and tomatoes on the vertical axis. Plot the numerical
values on the graph and show the effect of doubling labor productivity.

(d) Will the doubling of labor productivity in France change France’s absolute advantage, change its comparative
advantage, or change neither? Explain.

55. Respond to all parts of the question.

AP Macroeconomics Page 31 of 75
 Test Booklet

Unit 1-Basic Economic Concept

In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list
the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A
correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes.

Using equal amounts of resources, the countries of Ashna and Luna can each produce any combination of food and
machines described by their production possibilities curves above.

a. Which country has an absolute advantage in the production of machines? Explain.

b. Which country has an absolute advantage in the production of food? Explain.

c. Which country has a comparative advantage in the production of machines? Explain.

d. With trade between these two countries, which country will import food? Explain.

e. Give an example of terms of trade acceptable to both countries.

56. Respond to all parts of the question.

Page 32 of 75 AP Macroeconomics
 Test Booklet

Unit 1-Basic Economic Concept

In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list
the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A
correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes.

Assume that two countries, Atlantis and Xanadu, have equal amounts of resources. Atlantis can produce 30 cars or 10
tractors or any combination, as shown by the line MN in the figure above. Xanadu can produce 20 cars or 40 tractors or
any combination, as shown by the line PQ in the figure above.

a. Which country has an absolute advantage in the production of tractors? Explain how you determined your
answer.

b. Which country has a comparative advantage in the production of cars? Using the concept of opportunity cost,
explain how you determined your answer.

c. If the two countries specialize and trade with each other, which country will import cars? Explain why.

d. If the terms of trade are such that one car can be exchanged for one tractor, explain how Atlantis will benefit
from such trade.

57. Respond to all parts of the question.

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Unit 1-Basic Economic Concept

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must
have all axes and curves clearly labeled and must show directional changes. If the question prompts you to "Calculate,"
you must show how you arrived at your final answer.

Sweden and Norway use equal quantities of resources to produce food and capital goods. The table below shows the
maximum possible production of food OR capital goods for each country.

Country Food Capital Goods

Sweden 50 100
Norway 30 120

(a) Draw a correctly labeled graph of the production possibilities curve for Sweden. Place food on the horizontal axis and
capital goods on the vertical axis. Plot the relevant numerical values on the graph.

(b) On your graph in part (a), indicate the following.

(i) A point that represents an efficient level of production, labeled E

(ii) A point that represents an inefficient level of production, labeled I

(iii) A point that represents an unattainable level of production, labeled U

(c) Assume Sweden moves from producing 20 units of food and 60 units of capital goods to producing 30 units of food
and 40 units of capital goods. What will happen to economic growth in Sweden in the future?

(d) Which country has the comparative advantage in the production of capital goods? Explain.

(e) Based on the table above, identify a specific number of units of capital goods that could be traded for 10 units of food
and be mutually beneficial.

58. Respond to all parts of the question.

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 Test Booklet

Unit 1-Basic Economic Concept

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram
must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to
“Calculate,” you must show how you arrived at your final answer.

Brazil and Argentina are trading partners. Both countries have the same amount of resources and can produce beef and/or
coffee. The table below shows the maximum number of units of beef or coffee that can be produced by each country.
Assume constant opportunity costs in both countries.

Beef Coffee
Brazil
Argentina

(a) Assume that prior to trade, Brazil is producing units of beef and unit of coffee. What can you conclude about the
use of resources in Brazil? Explain using the production possibilities curve model.

(b) Which country has the comparative advantage in the production of beef? Explain using numbers.

(c) Now assume each country specializes in the production of the good in which it has a comparative advantage, and the
terms of trade are units of beef for unit of coffee. Will Argentina gain from trade? Explain.

(d) Suppose the maximum production of coffee in Argentina increases. How will this affect Argentina’s opportunity cost
of producing beef? Explain.

(e) Assume Argentina’s civilian working-age population is million, the labor force participation rate in Argentina is
, and the unemployment rate is . Calculate the number of employed people in Argentina. Show your work.

59. Respond to all parts of the question.

AP Macroeconomics Page 35 of 75
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Unit 1-Basic Economic Concept

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must
have all axes and curves clearly labeled and must show directional changes. If the question prompts you to
“Calculate,” you must show how you arrived at your final answer.

Canada and Belgium are trading partners. Both countries have the same amount of resources and can produce carrots
and/or beets. The table below shows the maximum number of units of carrots or beets that can be produced by each
country. Assume constant opportunity costs in both countries.

Carrots Beets
Canada
Belgium

(a) Assume that prior to trade, Canada is producing units of carrots and units of beets. What can you conclude about
the use of resources in Canada? Explain using the production possibilities curve model.

(b) Which country has the comparative advantage in the production of beets? Explain using numbers.

(c) Now assume each country specializes in the production of the good in which it has a comparative advantage, and the
terms of trade are unit of carrots for units of beets. Will Canada gain from trade? Explain.

(d) Suppose the maximum production of carrots in Canada decreases. How will this affect Canada’s opportunity cost of
producing beets? Explain.

(e) Assume Canada’s civilian working-age population is million, the labor force participation rate in Canada is ,
and the unemployment rate is . Calculate the number of employed people in Canada. Show your work.

60. Respond to all parts of the question.

Page 36 of 75 AP Macroeconomics
 Test Booklet

Unit 1-Basic Economic Concept

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram
must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to
“Calculate,” you must show how you arrived at your final answer.

China and Russia are trading partners. Both countries have the same amount of resources and can produce bulldozers and/
or trucks. The production possibilities curves below show the combination of bulldozers and trucks that each country can
produce.

(a) Assume that prior to trade, Russia is producing units of bulldozers and units of trucks. What can you conclude
about the use of resources in Russia? Explain using the production possibilities curve model.

(b) Which country has the comparative advantage in the production of bulldozers? Explain using numbers.

(c) Now assume each country specializes in the production of the good in which it has a comparative advantage, and the
terms of trade are units of bulldozers for unit of trucks. Will Russia gain from trade? Explain.

(d) Assume Russia and China are able to double the production of bulldozers. Which country now has the absolute
advantage in the production of bulldozers? Explain using numbers.

(e) Assume China’s civilian working-age population is million, the labor force participation rate in China is ,
and the unemployment rate is . Calculate the number of unemployed people in China. Show your work.

61. Respond to all parts of the question.

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Unit 1-Basic Economic Concept

Countries face trade-offs between producing consumer goods and producing capital goods.

a. Country X takes one hour to produce a unit of consumer goods and two hours to produce a unit of capital goods.
Country Y takes two hours to produce a unit of consumer goods and four hours to produce a unit of capital
goods. Which country has a comparative advantage in the production of consumer goods? Explain.

The following table shows labor-market data for Country X.

b. Calculate the unemployment rate in Country X. Show your work.

c. Calculate the labor force participation rate in Country X. Show your work.

d. Draw a correctly labeled graph of the production possibilities curve for Country X, with consumer goods on the
horizontal axis and capital goods on the vertical axis. Indicate a point on your graph, labeled Z, that reflects the
current level of unemployment.

The text box should be used for notes only and not your final response.

62. Respond to all parts of the question.

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 Test Booklet

Unit 1-Basic Economic Concept

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram
must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to
“Calculate,” you must show how you arrived at your final answer.

Chile and Ecuador are trading partners. Both countries have the same amount of resources and can produce fish and/or
melons. The table below shows the maximum number of units of fish or melons that can be produced by each country.
Assume constant opportunity costs in both countries.

Fish Melons
Chile
Ecuador

(a) Assume that prior to trade, Ecuador is producing units of fish and units of melons. What can you conclude about
the use of resources in Ecuador? Explain using the production possibilities curve model.

(b) Which country has the comparative advantage in the production of fish? Explain using numbers.

(c) Now assume each country specializes in the production of the good in which it has a comparative advantage, and the
terms of trade are units of fish for unit of melons. Will Ecuador gain from trade? Explain.

(d) Suppose the maximum production of melons in Ecuador decreases. How will this affect Ecuador’s opportunity cost of
producing fish? Explain.

(e) Assume Chile’s civilian working-age population is million, the labor force participation rate in Chile is , and
the unemployment rate is . Calculate the number of employed people in Chile. Show your work.

63. Respond to all parts of the question.

AP Macroeconomics Page 39 of 75
 Test Booklet

Unit 1-Basic Economic Concept

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram
must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to
“Calculate,” you must show how you arrived at your final answer.

Italy and France are trading partners. Both countries have the same amount of resources and can produce perfume and/or
shoes. The production pos sibilities curves below show the combination of perfume and shoes that each country can
produce.

(a) Assume that prior to trade, Italy is producing units of perfume and units of shoes. What can you conclude about
the use of resources in Italy? Explain using the production possibilities curve model.

(b) Which country has the comparative advantage in the production of perfume? Explain using numbers.

(c) Now assume each country specializes in the production of the good in which it has a comparative advantage, and the
terms of trade are units of perfume for unit of shoes. Will France gain from trade? Explain.

(d) Assume France and Italy are able to triple the production of shoes. Which country now has the absolute advantage in
the production of shoes? Explain using numbers.

(e) Assume France’s civilian working-age population is million, the labor force participation rate in France is ,
and the unemployment rate is . Calculate the number of unemployed people in France. Show your work.

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Unit 1-Basic Economic Concept

64. Respond to all parts of the question.

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram
must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to
“Calculate,” you must show how you arrived at your final answer.

Japan and Malaysia are trading partners. Both countries have the same amount of resources and can produce cars and/or
electronics. The production possibilities curves below show the combination of cars and electronics that each country can
produce.

(a) Assume that prior to trade, Malaysia is producing units of cars and units of electronics. What can you conclude
about the use of resources in Malaysia? Explain using the production possibilities curve model.

(b) Which country has the comparative advantage in the production of electronics? Explain using numbers.

(c) Now assume each country specializes in the production of the good in which it has a comparative advantage, and the
terms of trade are units of electronics for unit of cars. Are these terms of trade mutually beneficial? Explain.

(d) Assume Malaysia and Japan are able to double the production of cars. Which country now has the absolute advantage
in the production of cars? Explain using numbers.

(e) Assume Japan’s civilian working-age population is million, the labor force participation rate in Japan is , and
the unemployment rate is . Calculate the number of unemployed people in Japan. Show your work.

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Unit 1-Basic Economic Concept

65. Respond to all parts of the question.

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram
must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to
“Calculate,” you must show how you arrived at your final answer.

Mexico and Panama are trading partners. Both countries have the same amount of resources and can produce tangerines
and/or bananas. The table below shows the maximum number of units of tangerines or bananas that can be produced by
each country. Assume constant opportunity costs in both countries.

Tangerines Bananas
Mexico
Panama

(a) Assume that prior to trade, Panama is producing units of tangerines and unit of bananas. What can you conclude
about the use of resources in Panama? Explain using the production possibilities curve model.

(b) Which country has the comparative advantage in the production of tangerines? Explain using numbers.

(c) Now assume each country specializes in the production of the good in which it has a comparative advantage, and the
terms of trade are units of tangerines for unit of bananas. Will Mexico gain from trade? Explain.

(d) Suppose the maximum production of tangerines in Panama increases. How will this affect Panama’s opportunity cost
of producing bananas? Explain.

(e) Assume Panama’s civilian working-age population is million, the labor force participation rate in Panama is ,
and the unemployment rate is . Calculate the number of employed people in Panama. Show your work.

66. Respond to all parts of the question.

Page 42 of 75 AP Macroeconomics
 Test Booklet

Unit 1-Basic Economic Concept

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram
must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to
“Calculate,” you must show how you arrived at your final answer.

Poland and Germany are trading partners. Both countries have the same amount of resources and can produce potatoes
and/or lumber. The table below shows the maximum number of units of potatoes or lumber that can be produced by each
country. Assume constant opportunity costs in both countries.

Potatoes Lumber
Poland
Germany

(a) Assume that prior to trade, Germany is producing units of potatoes and units of lumber. What can you conclude
about the use of resources in Germany? Explain using the production possibilities curve model.

(b) Which country has the comparative advantage in the production of lumber? Explain using numbers.

(c) Now assume each country specializes in the production of the good in which it has a comparative advantage, and the
terms of trade are unit of potatoes for units of lumber. Are these mutually beneficial terms of trade? Explain.

(d) Suppose the maximum production of potatoes in Poland increases. How will this affect Poland’s opportunity cost of
producing lumber? Explain.

(e) Assume Germany’s civilian working-age population is million, the labor force participation rate in Germany is
, and the unemployment rate is . Calculate the number of employed people in Germany. Show your work.

67. Respond to all parts of the question.

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68.

The graph above shows the production possibilities curve for Factory X and Factory Y. If Factory X uses the same
amount of resources to produce skateboards and bikes as Factory Y uses, which of the following is true?
(A) Factory X has an absolute advantage in producing bikes.
(B) Factory X has an absolute advantage in producing skateboards.
(C) Factory X has a comparative advantage in producing skateboards.
(D) Factory Y has a comparative advantage in producing skateboards.
(E) Factory Y has an absolute advantage in producing skateboards.

The table shows the maximum quantity of cars or motorcycles that can be produced by two countries, X and Y, using
equal amounts of resources.

Cars Motorcycles
Country X
Country Y

69. Based on the data in the table, which of the following is true?
(A) Country X has a comparative advantage in producing cars.
(B) Country Y has a comparative advantage in producing cars.
(C) Country X has an absolute advantage in producing cars.
(D) Country X has an absolute advantage in producing motorcycles.
(E) Country Y has a comparative advantage in producing motorcycles.

70. Based on the data in the table, which of the following will happen if Country X and Country Y agree to specialize
and trade based on their comparative advantage?

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(A) Country X will export cars, and both countries will gain from trade if car is exchanged for motorcycles.
Country X will export motorcycles, and both countries will gain from trade if car is exchanged for
(B)
motorcycles.
(C) Country Y will export cars, and both countries will gain from trade if car is exchanged for motorcycles.
Country Y will export motorcycles, and both countries will gain from trade if car is exchanged for
(D)
motorcycles.
Country Y will export motorcycles, and both countries will gain from trade if car is exchanged for
(E)
motorcycles.

71. Country A can produce either 2 tons of cocoa or 4 cars with 10 units of labor. Country B can produce either 5 tons
of cocoa or 25 cars with 10 units of labor. Based on this information, which of the following is true?
Country A has an absolute advantage in the production of cocoa, while Country B has a comparative
(A)
advantage in the production of cocoa.
Country A has a comparative advantage in the production of cocoa, while Country B has a comparative
(B)
advantage in the production of cars.
Country A has an absolute advantage in the production of cocoa, while Country B has a comparative
(C)
advantage in the production of cars.
(D) Country A has a comparative disadvantage in the production of both goods.
(E) Neither country has a comparative advantage in the production of either good.

72. Comparative advantage implies that

(A) no country should specialize completely in the production of any one good
(B) every country should try to export more than it imports
(C) developing countries should import raw materials and export manufactured goods
(D) two countries should benefit from trade unless both have equal opportunity costs in every good
(E) countries should impose tariffs to protect their domestic industries

73.
Motorcycles Automobiles
Country X OR
Country Y OR

The table above shows the quantity of motorcycles and automobiles produced by two countries that use the same
amount of resources. Which of the following is true?
(A) Country X has an absolute and comparative advantage in the production of motorcycles.
(B) Country X has an absolute and comparative advantage in the production of both goods.
(C) Neither country has a comparative advantage in the production of motorcycles.
(D) Country Y has an absolute and comparative advantage in the production of automobiles.
(E) Country Y has an absolute and comparative advantage in the production of motorcycles.

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74.

The data above indicates labor-hours needed to produce a single unit of each of two commodities in each of two
countries. If labor is the only factor used to produce the commodities, which of the following statements must be
correct?

I. Country A has an absolute advantage in the production of both commodities, but a comparative advantage
in the production of wheat.

II. Country B has an absolute advantage in the production of both commodities, but a comparative advantage
in the production of fish.

III. Mutually advantageous trade can occur between the two countries when 2.5 units of fish are exchanged for
1 unit of wheat.
(A) I only
(B) II only
(C) III only
(D) I and III only
(E) II and III only

75. If two nations specialize according to the law of comparative advantage and then trade with each other, which of the
following would be true?
(A) A smaller number of goods would be available in each trading nation.
(B) Total world production of goods would decrease.
(C) Everyone within each nation would be better off.
(D) Each nation would increase its consumption possibilities.
(E) One nation would gain at the expense of the other nation.

76. As nations specialize in production and trade in international markets, they can expect which of the following
domestic improvements?

I. Allocation of domestic resources

II. Standard of living

III. Self-sufficiency

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(A) I only
(B) II only
(C) III only
(D) I and II only
(E) I, II, and III

77. Which of the following would be most likely to occur if the United States placed high tariffs on imported goods?
(A) Workers in the United States would have more jobs in the long run.
(B) Income in the United States would be redistributed from the rich to the poor.
(C) The United States standard of living would increase.
(D) The United States economy would become less efficient.
(E) United States exports would increase.

78. The table below indicates the number of labor hours required in Countries X and Y to produce one unit of food or
one unit of clothing.

Given this information, which of the following statements is correct?

(A) X has a comparative advantage in the production of both food and clothing.
(B) Y has a comparative advantage in the production of both food and clothing.
X has a comparative advantage in food production, whereas Y has a comparative advantage in clothing
(C)
production.
Y has a comparative advantage in food production, whereas X has a comparative advantage in clothing
(D)
production.
(E) Neither country has a comparative advantage in the production of either good.

79. The main benefit of free trade between two countries is that
(A) income distribution in each country will become more equitable
(B) employment in each country will increase
(C) migration from one country to the other will increase
(D) each country can consume beyond its constraints of resources and productivity
(E) each country will become more self-sufficient

80. Mary Jane is a lawyer who can earn $150 per hour in her law practice. She is also an excellent carpenter who can
build cabinets three times as fast as the best carpenter, whose hourly wage is $20 per hour. Which of the following
is a correct economic statement?

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Mary Jane has a comparative advantage in law so she should specialize in law and hire a carpenter to make
(A)
her cabinets.
Mary Jane has an absolute and comparative advantage in both law and carpentry, so she should make her
(B)
own cabinets while continuing to practice law.
Mary Jane is three times faster than any carpenter so she should give up her law practice to become a
(C)
carpenter.
(D) When carpenters work for lawyers, they should charge $150 per hour instead of $20 per hour.
Because Mary Jane is an excellent carpenter, when the best carpenter works for Mary Jane, he can only
(E)
charge one third as much, or $6.67 per hour.

81. Nations A and B produce only chairs and bicycles. If each laborer in Nation A can produce twice as many chairs as
each laborer in Nation B, then which of the following is necessarily true?
(A) Nation A has a comparative advantage in chairs.
(B) Nation A has a comparative advantage in bicycles.
(C) Nation A has an absolute advantage in chairs.
(D) Nation B has an absolute advantage in bicycles.
(E) Nation A should specialize in producing chairs.

The diagram below shows the production alternatives of two countries, Alpha and Beta, producing two goods, grain and
steel, using all of their available resources.

82. The theory of comparative advantage implies that Alpha would find it advantageous to

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(A) export grain and import steel

(B) export steel and import grain
(C) export both grain and steel and import nothing
(D) import both grain and steel and export nothing
(E) trade 1 ton of grain for 0.5 ton of steel

83. At what real exchange ratio, also referred to as the terms of trade, between grain (G) and steel (S) would both Alpha
and Beta find it mutually advantageous to specialize and trade?
(A) 1G = 3.0S
(B) 1G = 1.5S
(C) 1G = 1.0S
(D) 1G = 0.5S
There is no real exchange ratio that would enable both countries to benefit, since Alpha has an absolute
(E)
advantage in both goods.

84. Before specialization and trade, the domestic opportunity cost of producing 1 ton of grain in Alpha and in Beta is
which of the following?

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Alpha Beta
(A)
1 ton of steel 1 ton of steel

Alpha Beta
(B)
1 ton of steel 2 tons of steel

Alpha Beta
(C)
2 tons of steel 1 ton of steel

Alpha Beta
(D)
1 ton of steel 0.5 ton of steel

Alpha Beta
(E)
0.33 ton of steel 1.5 tons of steel

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Unit 1-Basic Economic Concept

85.

Using equal amounts of labor hours, Country X and Country Y can each produce the number of watches and radios
shown in the production possibilities curves above. Based on the information, which of the following is true?
Country X has an absolute advantage in the production of both watches and radios and a comparative
(A)
advantage in the production of watches.
Country Y has an absolute advantage in the production of both watches and radios and a comparative
(B)
advantage in the production of radios.
(C) Countries X and Y can engage in a mutually advantageous trade by exchanging 1 watch for 1 radio.
(D) Country Y is willing to give up 2 watches in exchange for 1 radio from Country X.
(E) Country X is willing to give up 2 radios in exchange for 1 watch from Country Y.

86. Sam and Bill run a leaf raking and lawn mowing business. In one day, Sam can rake 3 lawns or mow 5 lawns
whereas Bill can rake 2 lawns or mow 6 lawns. Which of the following correctly describes Sam’s and Bill’s
absolute and comparative advantages?
(A) Sam has a comparative advantage in raking and an absolute advantage in mowing.
(B) Sam has a comparative advantage in mowing and an absolute advantage in raking.
(C) Sam has a comparative advantage in mowing and an absolute advantage in mowing.
(D) Bill has a comparative advantage in mowing and an absolute advantage in mowing.
(E) Bill has a comparative advantage in raking and an absolute advantage in mowing.

87. If the production technology of a good improves and at the same time the number of consumers willing and able to
buy the good in the market increases, which of the following will definitely occur?
(A) Equilibrium price will increase.
(B) Equilibrium price will decrease.
(C) Equilibrium quantity will increase.
(D) Equilibrium quantity will decrease.
(E) Equilibrium quantity will remain the same.

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88. How will an increase in demand and a simultaneous decrease in supply affect the equilibrium price and quantity of a
good in a market?

Price Quantity

(A)
Increase Increase

Price Quantity
(B)
Increase Indeterminate

Price Quantity
(C)
Decrease Increase

Price Quantity

(D)
Decrease Indeterminate

Price Quantity
(E)
Indeterminate Indeterminate

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89.

The graph above shows the demand for and supply of a good. If the market price is P1, then
(A) there is a shortage, and the price will rise
(B) there is a shortage, and the price will fall
(C) there is a surplus, and the price will rise
(D) there is a surplus, and the price will fall
(E) demand will decrease and supply will increase

90.

In the competitive market represented by the graph provided, which of the following is true at a price of ?
(A) There is a surplus of units.
(B) There is a surplus of units.
(C) There is a shortage of units.
(D) There is a shortage of units.
(E) The quantity sold equals units.

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The supply (S) and demand (D) for a good are shown in the diagram above.

91. At a price of in the diagram above, which of the following is true?

The existing surplus in the market will cause upward pressure on prices until equilibrium is reached at 75
(A)
units.
The existing surplus in the market will cause downward pressure on prices until equilibrium is reached at 60
(B)
units.
The existing shortage in the market will cause upward pressure on prices until equilibrium is reached at 30
(C)
units.
The existing shortage in the market will cause upward pressure on prices until equilibrium is reached at 60
(D)
units.
The existing shortage in the market will cause downward pressure on prices until equilibrium is reached at 45
(E)
units.

92. At a price of in the diagram above which of the following will happen in the market?
(A) There will be a surplus of 30 units and 90 units will be exchanged.
(B) There will be a surplus of 90 units and 30 units will be exchanged.
(C) There will be a surplus of 60 units and 30 units will be exchanged.
(D) There will be a shortage of 90 units and 30 units will be exchanged.
(E) There will be a shortage of 30 units and 90 units will be exchanged.

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93. Which of the following changes in the supply of and the demand for a good will definitely result in a decrease in
both the equilibrium price and quantity of the good?

Supply Demand
(A)
Increase Increase

Supply Demand
(B)
Increase No change

Supply Demand
(C)
No change Decrease

Supply Demand

(D)
Decrease Increase

Supply Demand
(E)
Decrease Decrease

94. To protect high-cost domestic producers, a country imposes a tariff on an imported commodity, Y. Which of the
following is most likely to occur in the short run?

I. A decrease in domestic production of Y

II. An increase in domestic production of Y

III. An increase in foreign output of Y

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(A) I only
(B) II only
(C) III only
(D) I and III only
(E) II and III only

95. Any point inside a production possibilities curve is

(A) better than points on the production possibilities curve
(B) allocatively efficient but technologically inefficient
(C) associated with inefficient use or unemployment of some resources
(D) associated with movements along the production possibilities curve
(E) associated with constant opportunity costs

96.

On the basis of the diagram above showing an economy's production possibilities curve for two goods, which of the
following statements must be true?

I. The opportunity cost of moving from point P to point R is 10 units of Y.

II. The opportunity cost of moving from point R to point P is 8 units of X.

III. The opportunity cost of moving from point Q to point R is 0 units of Y.

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(A) I only
(B) III only
(C) I and II only
(D) II and III only
(E) I, II, and III

97. If a certain combination of goods or services lies outside the production possibilities curve of an economy, which of
the following is true?
(A) Effective trade barriers have reduced foreign imports into the economy.
(B) New technology is being used in production.
(C) Resources are not available to achieve that combination of goods or services.
(D) Resources are not being used efficiently to achieve that combination of goods or services.
(E) Resources are being used at a more rapid rate than they were in the past.

98. A production possibilities curve that is concave to the origin (bowed out) implies that as more of a good is
produced, the opportunity cost
(A) remains constant
(B) decreases
(C) decreases at first and then increases
(D) increases
(E) increases at first and then decreases

99. Which of the following concepts can be illustrated using the production possibilities curve?

I. Choice

II. Scarcity

III. Price level

IV. Opportunity cost

(A) II only
(B) I and III only
(C) III and IV only
(D) I, II, and IV only
(E) II, III, and IV only

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100.
Production Point Shirts Chairs
A 20 0
B 16 1
C 12 2
D 8 3
E 4 4
F 0 5

The table shows the production possibilities for Country X in producing shirts and chairs when it uses all its
available resources. The opportunity cost of producing one additional chair is
(A) zero
(B) constant
(C) increasing
(D) decreasing
(E) indeterminate

101. Assume an economy produces two goods, capital goods and consumer goods. If the production of capital goods
increases in the current period, which of the following will occur for the current and future production possibilities
curve for consumer goods and capital goods?
(A) A movement along the current and a leftward shift of the future
(B) A movement along the current and a rightward shift of the future
(C) A rightward shift of the current and a leftward shift of the future
(D) A rightward shift of the current and a rightward shift of the future
(E) A movement along the current with no shift of the future

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Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram
must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to
“Calculate,” you must show how you arrived at your final answer.

Tomburg and Perria are trading partners. Both countries have the same amount of resources and can produce butter and/or
wheat. The production possibilities curves below show the combination of butter and wheat that each country can
produce.

(a) Assume that prior to trade, Tomburg is producing units of butter and units of wheat. What can you conclude
about the use of resources in Tomburg? Explain using the production possibilities curve model.

(b) Which country has the comparative advantage in the production of butter? Explain using numbers.

(c) Now assume each country specializes in the production of the good in which it has a comparative advantage, and the
terms of trade are units of butter for unit of wheat. Are these terms of trade mutually beneficial? Explain.

(d) Assume Perria and Tomburg are able to increase their production of butter by . Which country now has the
absolute advantage in the production of butter? Explain using numbers.

(e) Assume Tomburg’s civilian working-age population is million, the labor force participation rate in Tomburg is
, and the unemployment rate is . Calculate the number of unemployed people in Tomburg. Show your work.

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102. Respond to all parts of the question.

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Unit 1-Basic Economic Concept

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must
have all axes and curves clearly labeled and must show directional changes. If the question prompts you to
“Calculate,” you must show how you arrived at your final answer.

Zingerla and Springland are trading partners. Both countries have the same amount of resources and can produce oranges
and/or lemons. The production possibilities curves below show the combination of oranges and lemons that each country
can produce.

(a) Assume that prior to trade, Zingerla is producing units of oranges and units of lemons. What can you conclude
about the use of resources in Zingerla? Explain using the production possibilities curve model.

(b) Which country has the comparative advantage in the production of lemons? Explain using numbers.

(c) Now assume each country specializes in the production of the good in which it has a comparative advantage, and the
terms of trade are units of lemons for unit of oranges. Will Zingerla gain from trade? Explain.

(d) Assume Springland and Zingerla are able to quadruple the production of oranges. Which country now has the absolute
advantage in the production of oranges? Explain using numbers.

(e) Assume Springland’s civilian working-age population is million, the labor force participation rate in Springland is
, and the unemployment rate is . Calculate the number of unemployed people in Springland. Show your work.

103. Respond to all parts of the question.

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Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must
have all axes and curves clearly labeled and must show directional changes. If the question prompts you to “Calculate,”
you must show how you arrived at your final answer.

The following table shows employment data for Country 's working-age population.

Cyclically unemployed
Frictionally unemployed
Structurally unemployed
Employed
Not in the labor force

(a) Calculate the unemployment rate for Country . Show your work.

(b) Calculate the labor force participation rate for Country . Show your work.

(c) Is Country currently producing at its potential real output? Explain.

(d) Assuming constant opportunity costs, draw a correctly labeled graph of country ’s , showing consumer goods
on the horizontal axis and capital goods on the vertical axis. Label a point on the graph that reflects the current level of
unemployment.

104. Respond to all parts of the question.

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Unit 1-Basic Economic Concept

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram
must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to
“Calculate,” you must show how you arrived at your final answer.

The data below are from the economies of Banton and Menna.

Banton Menna

Nominal Nominal
Year Population Year Population
Deflator Deflator

(a) Calculate each of the following for Year . Show your work.
(i) Real per capita for Banton
(ii) Real per capita for Menna

(b) If Banton and Menna have the same velocity of money in Year , which economy must have the higher money supply
in Year ? Explain.

(c) Calculate each of the following in Year . Show your work.

(i) The inflation rate in Banton
(ii) The inflation rate in Menna

(d) Based on your answer to part (c), if the nominal interest rate is the same for both economies in Year , which economy
experiences the higher real interest rate in Year ? Explain.

(e) Assume that in Year Menna is operating inside its production possibilities curve and that Menna’s production
possibilities curve remains unchanged from Year to Year . As a result of the change in real from Year to Year
, does Menna’s economy move closer to or farther away from its production possibilities curve? Explain using numbers
for real and state what will happen to cyclical unemployment in the short run.

105. Respond to all parts of the question.

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Unit 1-Basic Economic Concept

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram
must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to
“Calculate,” you must show how you arrived at your final answer.

The data below are from the economies of Bonvampton and Karbandia.

Bonvampton Karbandia

Nominal Nominal
Year Population Year Population
Deflator Deflator

(a) Calculate each of the following for Year . Show your work.
(i) Real per capita for Bonvampton
(ii) Real per capita for Karbandia

(b) If Bonvampton and Karbandia have the same velocity of money in Year , which economy must have the higher
money supply in Year ? Explain.

(c) Calculate each of the following in Year . Show your work.

(i) The inflation rate in Bonvampton
(ii) The inflation rate in Karbandia

(d) Based on your answer to part (c), if the nominal interest rate is the same for both economies in Year , which economy
experiences the higher real interest rate in Year ? Explain.

(e) Assume that in Year Karbandia is operating inside its production possibilities curve and that Karbandia’s production
possibilities curve remains unchanged from Year to Year . As a result of the change in real from Year to Year
, does Karbandia’s economy move closer to or farther away from its production possibilities curve? Explain using
numbers for real and state what will happen to cyclical unemployment in the short run.

106. Respond to all parts of the question.

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Unit 1-Basic Economic Concept

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram
must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to
“Calculate,” you must show how you arrived at your final answer.

The data below are from the economies of Ishgandar and Nonburmia.

Ishgandar Nonburmia

Nominal Nominal

Year Population Year Population

Deflator Deflator

(a) Calculate each of the following for Year . Show your work.
(i) Real per capita for Ishgandar
(ii) Real per capita for Nonburmia

(b) If Ishgandar and Nonburmia have the same velocity of money in Year , which economy must have the higher money
supply in Year ? Explain.

(c) Calculate each of the following in Year . Show your work.

(i) The inflation rate in Ishgandar
(ii) The inflation rate in Nonburmia

(d) Based on your answer to part (c), if the nominal interest rate is the same for both economies in Year , which economy
experiences the higher real interest rate in Year ? Explain.

(e) Assume that in Year Nonburmia is operating inside its production possibilities curve and that Nonburmia’s
production possibilities curve remains unchanged from Year to Year . As a result of the change in real from
Year to Year , does Nonburmia’s economy move closer to or farther away from its production possibilities curve?
Explain using numbers for real and state what will happen to cyclical unemployment in the short run.

107. Respond to all parts of the question.

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Unit 1-Basic Economic Concept

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must
have all axes and curves clearly labeled and must show directional changes. If the question prompts you to
“Calculate,” you must show how you arrived at your final answer.

The data below are from the economies of Ockend and Greyton.

Ockend Greyton

Nominal Nominal

Year Population Year Population

Deflator Deflator

(a) Calculate each of the following for Year . Show your work.
(i) Real per capita for Ockend
(ii) Real per capita for Greyton

(b) If Ockend and Greyton have the same velocity of money in Year , which economy must have the higher money
supply in Year ? Explain.

(c) Calculate each of the following in Year . Show your work.

(i) The inflation rate in Ockend
(ii) The inflation rate in Greyton

(d) Based on your answer to part (c), if the nominal interest rate is the same for both economies in Year , which economy
experiences the higher real interest rate in Year ? Explain.

(e) Assume that in Year Ockend is operating inside its production possibilities curve and that Ockend’s production
possibilities curve remains unchanged from Year to Year . As a result of the change in real from Year to Year
, does Ockend’s economy move closer to or farther away from its production possibilities curve? Explain using numbers
for real and state what will happen to cyclical unemployment in the short run.

108. Respond to all parts of the question.

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109.

Which of the following would cause the production possibilities curve shown above to shift outward?
(A) Reopening steel plants that had been closed
(B) Rehiring laid-off steelworkers
(C) Using machinery for missile production instead of steel production
(D) Using machinery for steel production instead of missile production
(E) Developing a more efficient steelmaking process

110. Which of the following is always true of an economy operating on its production possibilities frontier?
(A) Its resources are fully employed.
(B) It is allocatively efficient.
(C) It cannot trade with other nations because it is the most efficient producer of tradeable goods.
(D) It will necessarily operate on the same frontier the following year.
(E) It must be a command economy.

111. An economy is operating at a point inside its production possibilities curve ( ). Which of the following will
most likely cause the economy to move toward the current in the short run?
(A) A decrease in government spending
(B) A decrease in inflation
(C) An increase in human capital
(D) An increase in employment
(E) An increase in imports

112. If producing each additional unit of good X required giving up ever-increasing amounts of good Y, the production
possibilities curve between X and Y would be
(A) bowed outward
(B) bowed inward
(C) a straight line
(D) horizontal
(E) upward sloping

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The diagram above shows the production possibilities curve for the production of peaches and apples in Fruitland.

113. The production possibilities curve illustrates which of the following relationships?
(A) The production of peaches decreases as apple production decreases.
(B) The production of peaches increases as apple production increases.
(C) The opportunity cost of peach production decreases as apple production decreases.
(D) Fruitland cannot produce a combination of 5 units of peaches and 10 units of apples.
(E) Fruitland can produce only the combinations of peaches and apples illustrated by points and .

114. Between points and on the , the opportunity cost of one unit of peaches is which of the following?
(A) 2 units of apples
(B) 1 unit of apples
(C) 2 units of peaches
(D) 1 unit of peaches
(E) 10 units of apples

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115.

The graph above shows the production possibilities curves (PPC) for an economy. The concept of opportunity cost
is best represented by which of the following?
(A) A shift from PPC1 to PPC2
(B) A movement from point A to point D
(C) A movement from point B to point C
(D) A movement from point C to point E
(E) A movement from point D to point B

116. When an economy producing two goods is operating efficiently and at full employment, increasing the production
of one good will result in
(A) an inward shift of the production possibilities curve
(B) an outward shift of the production possibilities curve
(C) a decrease in the amount of the other good that can be produced
(D) an increase in the costs of both goods
(E) an increase in the amount of resources available

117. The opportunity cost of an activity is

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(A) the amount of time spent on the activity

(B) the value of the benefit received from performing the activity
(C) the value of the forgone benefit of the next best alternative
(D) zero if the activity offered no benefits
(E) the sum of benefits from all the sacrificed alternatives

118. Machines are produced using capital and labor. Grain is produced using land and labor. Which of the following
production possibilities curve graphs shows the effect of an increase in the amount of labor available?

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(A)

(B)

(C)

(D)

(E)

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119. The diagram below shows a linear production possibilities curve for a country.

If the economy is currently producing 10 units of good A and 90 units of good B, the opportunity cost of increasing
the production of good A from 10 units to 20 units is how many units of good B?
(A) 0.5
(B) 1
(C) 5
(D) 10
(E) 20

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Refer to the following graph of a country's production possibilities curve.

120. The best combination of belts and coats for this economy to produce is
(A) 95 belts and 1 coat
(B) 85 belts and 2 coats
(C) 70 belts and 3 coats
(D) 40 belts and 4 coats
(E) indeterminate with the available information

121. If two coats are currently being produced, the opportunity cost of producing the third coat is
(A) 85 belts
(B) 75 belts
(C) 40 belts
(D) 15 belts
(E) 10 belts

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122.

The diagram above shows the production possibilities curve for an economy that produces only consumption and
capital goods. All of the following statements about this economy are true EXCEPT:
(A) Producing at point Z results in the underutilization of resources.
(B) The combination represented by point Y is unattainable, given the scarcity of resources.
(C) Resources are fully utilized at points W and X.
(D) Producing at point X will result in greater economic growth than will producing at point W.
(E) Point X represents the most efficient combination of the two goods that can be produced by this economy.

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123.

The diagram above shows three production possibilities curves (PPCs). If the current PPC is PPC1, which of the
following changes indicates a recession?
(A) Movement from point X to point Y
(B) Movement from point Y to point X
(C) Movement from point Y to point Z
(D) Shift from PPC1 to PPC0
(E) Movement from point Z to point X

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