Download A Rise In The Price Of Oil Imports Has

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 aggregate demand. 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 0.25 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. What is the increase if instead of the fed buying $200 worth of government securities,
grandma puts $200 cash in her checking account. Still assume an r of 25% and the bank
always loans the max and that all borrowers redeposit their loan as a new checking account.
3. Are the following counted in GDP? Write yes if it is counted and no if it is not counted next to
each item.
________
A bakery buys flour to make cookies.
________
Ford buys a delivery vehicle to take the cars from their factory to the
dealerships.
________
A person in California grows marijuana in his backyard which he sells to he
schoolmates.
________
A spouse stays home full time and takes care of the kids.
4. A. Rory has an income of $8 which she uses to only by $2 pizzas. So does Steve. Rory also has
$12 cash in the cookie jar of which she plans to use 25% to buy pizzas. Steve has nothing in
the Cookie jar (except cookies). How many pizzas will each person buy?
Rory _____
Steve ______
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?
Rory ______
Steve______
C. Suppose Steve has 1 share of IBM stock in the cookie jar which he is going to sell and use
the proceeds to buy pizza. Now all prices double, what will happen to the amount of
Steve’s pizza purchases. Circle the correct answer.
increase
decrease
stay the same
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
2
$3
1
$6
Twinkies
Q
P
4
$5
2
$8
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.
______ Gold
______ Checking accounts
______ Cash outside bank vaults
______ Saving 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 sloping up at a 45 degree angle?
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 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. Prices.
b. Wages.
c. Unemployment.
d. All of the above.
e. Both b and c.
5. Which of the following is true?
a. The economy is always at the intersection of the aggregate demand curve and the short-run
aggregate supply curve.
b. The economy is always at the intersection of the aggregate demand curve and the long-run
aggregate supply curve.
c. Both of the above.
d. Neither of the above.
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.
7. Who has the legal power to create money in the United States?
a. You.
b. The President.
c. The Congress of the United States.
d. The Federal Reserve System.
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 increase the money supply, they will:
a. raise the required reserve ratio.
b. lower the required reserve ratio.
c. raise the discount rate.
d. both b and c.
11. Which of the following is an example of an intermediate good?
a. The government buying an aircraft carrier.
b. The government making social security payments.
c. Ford Auto Company buying steel.
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. Which of the following is a consumption good?
a. The new car you bought because your old one broke down.
b. the oven bought by a restaurant to cook their food.
c. The blank newsprint paper bought by a newspaper company.
d. The big new assembly line machine bought by Ford Auto Company.
15. A decrease in the price of oil causes:
a. aggregate demand to increase.
b. aggregate demand to decrease.
c. short run aggregate supply to increase.
d. short run aggregate supply to decrease.
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 the recessionary 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 rise.
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. According to the circular flow diagram, what is an expense or cost to one person is always:
a. income to someone else.
b. wasted money.
c. spent on consumption goods.
d. money that leaves the American economy forever.
21. The fed buys $100 worth of government securities out of which the bank loans out the
maximum legally possible and the first person who borrows the money keeps all the cash and
walks out the door with it. The required reserve ratio is 50%. How much has the money
supply increased?
a. $0.
b. $50.
c. $100.
d. $150.
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. Prices for which of the of the following goods are included in the implicit price deflator
measure of prices, but not the CPI?
a. C.
b. I.
c. G.
d. both b and c.
24. What goes down when an economy goes into a recession 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?
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. Barack Obama.
b. Janet Yellen.
c. Hillary Clinton.
d. John Boehner.
29. While average federal reserve board members have a 14 year term, the chairman of the fed’s
term is:
a. 2 years.
b. 4 years.
c. 8 years.
d. still 14 years.
30. A person without a marketable labor skill who does not have a job is considered to be in what
category of unemployment?
a. Frictional.
b. Structural.
c. Cyclical.
d. Seasonal.
31. A country’s RGDP rose from $20 to $24 from year 1 to year 2. At the same time, their NGDP rose
from $20 to $22. Measured by the implicit price deflator, prices in this country:
a. rose.
b. fell.
c. stayed the same.
d. there is not enough information to tell.
32. Suppose a resident of Bellingham, Washington, U.S.A owns and operates a watch repair shop
across the Canadian–U.S. border in Victoria, British Columbia, Canada. The value of watch
repair services produced at the shop would be counted:
a. in both the U.S.A.’s GDP and GNP.
b. the U.S.A.’s GDP but Canada’s GNP.
c. the U.S.A.’s GNP, but Canada’s GDP.
d. in both Canada’s GDP and GNP.
(Note: GDP stands for Gross Domestic Product and GNP stands for Gross National Product)