Download A rise in the price of oil imports has resulted in a decrease of short

Economics 2 Unit 2 Test
Class Day/Time:
Name:
Part A. Answer the following questions in the space provided. Each question is worth 4 points except
question 1 which is worth 8 points.
1. Use an aggregate demand and aggregate supply diagram to show what will happen to output, prices,
unemployment and wages in the U.S. economy if there is a large decrease in the price of oil. On your
diagram, mark the starting output as QN, the output at the end of the short run as Q2, and the output at
the end of the long run as Q3. Mark the starting price as P1, the price at the end of the short run as P2,
and the price at the end of the long run as P3. Next to the diagram, write in what direction prices,
output, unemployment and wages are moving for both time periods (for the long run, answer the
direction they are moving as we go from the short run to the long run). Assume we start from a
position of natural real GDP (QN).
2. A. The federal reserve board buys $200 dollars worth of government securities from a bank.
The required reserve ratio is 0.20 and at each step, the bank loans out the legal maximum and
all borrowers redeposit their loan into the bank as a new checking account. What is the
increase in the money supply compared to before the fed buying the securities?
B. The federal reserve board buys $200 dollars worth of government securities from the bank.
The required reserve ratio is 0.20 and at each step, the bank loans out the legal maximum and
the first borrower takes his loan in cash and walks out the door with the cash. What is the
increase in the money supply compared to before the fed buying the securities?
3. Are the following counted in GDP? Write yes if it is counted and no if it is not counted next to
each item.
________
Ford makes a car and sells it.
________
A college textbook company buys paper.
________
Your neighbor watches your kids for an hour for $10 which she reports to the
government.
________
You get two extra weeks vacation this year.
4. A. Veronica has an income of $4 which she uses only to buy $2 pizzas. So does Wayne.
Veronica also has $8 cash in the cookie jar of which she plans to use 50% to buy pizzas.
Wayne has nothing in the cookie jar (except cookies). How many pizzas will each person
buy?
Veronica _____
Wayne ______
B. Now imagine that the situation is the same, but before any pizzas are bought, both the
incomes and the price of pizza doubles. Now how many pizzas will both people buy?
Veronica ______
Wayne______
C. What if Veronica had stock in the cookie jar instead of cash? Would her purchases of pizza
decrease or not? Circle the correct answer.
Buy fewer pizzas when prices rise.
Buy the same amount when prices rise.
5. For the following economy, calculate its nominal and real GDP in years 1 and 2. Assume year 1
is the base year. Clearly label each of your 4 answers.
Year 1
Year 2
Slinkies
Q
P
3
$4
2
$3
Twinkies
Q
P
5
$6
4
$5
6. For the following 4 items write if they are part of M1 only, M2 only, both, or neither in the space
before the item.
______ Cash inside bank vaults.
______ Saving accounts.
______ Credit cards.
______ checking accounts.
Part B. Mark the letter of the best answer on your scantron. Each question is worth 1 point.
1. Wage rates rise when:
a. the current actual unemployment rate is greater than the natural unemployment rate.
b. the current actual unemployment rate is less than the natural unemployment rate.
c. the current actual unemployment rate equals the natural unemployment rate.
d. the relationship between actual unemployment and the natural rate of unemployment has no
effect on wages.
2. Which of the following could be a line that is perfectly vertical (straight up and down)?
a. Short-run aggregate supply.
b. Long-run aggregate supply.
c. Aggregate demand.
d. None of the above.
3. When an economy is in a recession, then the longer the time that wages stay the same or are
“sticky”:
a. the shorter the recession will last.
b. the longer the recession will last.
c. how long wages stay fixed will have no effect on how long a recession lasts.
4. Which of the following always revert back to their natural levels at the end of the long-run?
a. Unemployment.
b. Output.
c. Wages
d. Prices
e. Both a and b.
5. The nominal GDP of a country in year 1 is $10 and in year 2 is $15. Year 1 is the base year and the real
GDP of the country in year 2 is $13. Which of the following is true for the implicit price deflator?
a. It rose from year 1 to year 2.
b. It fell from year 1 to year 2.
c. It stayed the same in both years.
6. The inflationary gap part of the AD/AS diagram is:
a. to the left of QN.
b. to the right of QN.
c. directly at QN.
d. All of the above.
7. Who has the legal power to create money in the United States?
a. The Federal Reserve System.
b. The President.
c. The Congress of the United States.
d. The U.S. Treasury Department.
8. What is the current monetary system of the United States?
a. We are on a gold standard, that is we use paper money that we can turn into the government
for gold whenever we desire.
b. We use fiat money, that is paper money that has value only because we believe it does.
c. We use commodity money that has value because it is a useful item apart from being used
for money.
d. We use salt to trade for goods.
9. If the Federal Reserve Board wants to increase the money supply, they will:
a. Buy government securities.
b. Sell government securities.
c. Print up government securities.
d. Shred government securities.
10. If the Federal Reserve Board wants to decrease the money supply, they will:
a. raise the required reserve ratio.
b. lower the required reserve ratio.
c. lower the discount rate.
d. both b and c.
11. Which of the following is an example of an intermediate good?
a. A person on a diet buying slimfast.
b. A restaurant buying hamburger meat.
c. An amateur astronomer buying a telescope.
d. All of the above.
12. According to the concept of the multiplier, if the government shutdown dropped people’s
income by 1 million dollars, then the actual drop in aggregate demand will be:
a. greater than 1 million dollars.
b. less than 1 million dollars.
c. equal to 1 million dollars.
13. Because of fractional reserve banking, the amount of money in the United States is:
a. larger than the amount of currency printed up by the government.
b. smaller than the amount of currency printed up by the government.
c. equal to the amount of currency printed up by the government.
14. Gold is part of:
a. M1 only.
b. M2 only.
c. Both M1 and M2.
d. Neither M1 or M2.
15. A decrease in aggregate demand causes which of the following in the short-run?
a. output and prices both increase.
b. output and prices both decrease.
c. output rises and prices fall.
d. output falls and prices rise..
16. Which of the following is the equation showing what GDP will be?
a. A + B + C.
b. M1 + M2 + Bank Reserves.
c. Saving accounts + Checking accounts + Cash outside banks.
d. C + I + G.
17. If we are in an inflationary gap, then in the long-run:
a. prices will rise and output fall.
b. output will rise and prices will fall.
c. both prices and output will rise.
d. both prices and output will fall.
18. A run on the bank is:
a. The rush to get to the bank before closing time on Friday.
b. When the bank falls below the required reserve ratio.
c. When the bank has more checking accounts than savings accounts.
d. Many people trying to get their money out of the bank at once because they fear it will fail.
19. What is F.D.I.C. (federal deposit insurance corporation)?
a. The central bank of the United States.
b. A group that guarantees depositors at a bank will get their deposits back even if the bank
goes bankrupt.
c. The people who decide what the money supply of the United States should be.
d. The statisticians who determine what the dollar value of GDP is every year.
20. If American businesses lay off workers because of an increase in health costs per worker, then
it is likely that:
a. U.S. aggregate demand increases.
b. U.S. aggregate demand decreases.
c. U.S. aggregate short-run supply increases.
d. U.S. aggregate short-run supply decreases.
21. Grandma deposits $40 cash into her checking account. The bank loans out the most they
legally can to all the borrowers, and every borrower puts the money back into the bank in the
form of a checking account. The required reserve ratio is 25%. How much does the money
supply increased?
a. $0.
b. $10.
c. $30.
d. $120.
e. $160.
22. Open market operations refers to the federal reserve system:
a. buying and selling government bonds.
b. buying and selling used shoes.
c. raising and lowering the discount rate.
d. raising and lowering the required reserve ratio.
23. The discount rate is:
a. the interest rate the fed charges banks to borrow from the fed.
b. the amount of bank reserves the fed requires banks to hold based on their checking account
liabilities.
c. the interest rate the fed pays banks who have funds on deposit at the fed.
d. the reduced interest rate that banks charge their best customers.
24. What goes down when an economy goes into the recessionary gap in the short-run?
a. output.
b. unemployment.
c. wages.
d. both a and c.
25. What happens when there is a shortage in the labor market in the long-run?
a. wages rise.
b. wages fall.
c. wages stay the same.
26. If we are in an inflationary gap, the government most likely will want to:
a. increase aggregate demand.
b. decrease aggregate demand.
c. hold aggregate demand constant.
d. not care what aggregate demand does.
27. Which of the following is true for the aggregate supply/aggregate demand model we used in
much of this unit?
a. Wage increases increased AD since workers bought more.
b. Wage increase decreased AD since bosses bought less.
c. Wage increases did not change AD since workers spending more and the bosses spending
less cancelled each other out.
28. Who is the current Chair of the Federal Reserve Board?
a. Nancy Pelosi.
b. Janet Yellen.
c. Hillary Clinton.
d. Jeb Bush.
29. What is true about the point on the AD/AS graph where AD intersects LRAS?
a. The economy is always at that point.
b. The economy is usually at that point.
c. The economy is usually not at that point.
d. The economy is never at that point.
30. A person who never learned a marketable labor skill is in which type of unemployment?
a. Frictional.
b. Structural.
c. Cyclical.
d. Seasonal.
31. Why is the LRAS curve a vertical line straight up?
a. Because at higher prices, people don’t want to buy more goods.
b. Because when sales prices of products rise but the cost of producing them does not rise at all, then
businesses don’t want to make more of the good.
c. Because when sales prices of products rise and the cost of making them rises also, but not as much
as the sales price, then businesses don’t want to make more of the good.
d. Because when sales prices of products rise and the cost of making them rises as much as the sales
price, then businesses don’t want to make more of the good.
32. In the short-run:
a. wages stay the same while sales prices can change.
b. wages and sales prices both stay the same.
c. wages change and sales prices stay the same.
d. wages and sales prices both can change.