Download Econ 2 UT2 F16 - Bakersfield College

Economics 2 Unit 2 Test
Class Day/Time:
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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 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 Fed creates $200 in bank reserves. The required reserve ratio is 10%. The bank loans
out the legal maximum and the first person to get a loan takes it as cash and walks out the
door with the money. What is the increase in the money supply?
B. Grandma puts $200 cash into her checking account. The required reserve ratio is 10%. The
bank always loans out the legal maximum they can and everyone who borrows money puts it
all back into the bank in their checking account. What is the increase in the money supply?
3. Are the following counted in GDP? Write yes if it is counted and no if it is not counted next to
each item.
________
The dollar harm done by the pollution damage a car does in its lifetime.
________
What you pay for your haircut.
________
The cloth you buy to make umbrellas for your online umbrella selling business.
________
The price of purchased college economic textbooks.
4. A. Veronica has an income of $6 which she uses only to buy $1 pizzas. So does Wayne.
Veronica also has $8 cash in the cookie jar of which she plans to use 25% 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. Who cuts back their purchases the most when prices rise?
People with more money
People with less money
Amount of money doesn’t matter
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
4
$5
Twinkies
Q
P
6
$7
8
$9
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.
______ Gold.
______ checking accounts.
Part B. Mark the letter of the best answer on your scantron. Each question is worth 1 point.
1. Wage rates fall 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 sloped up at 45 degrees?
a. Long-run aggregate supply.
b. Aggregate demand.
c. Short-run aggregate supply.
3. When an economy is in a recession, then the shorter 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 revert back to their natural levels at the end of the long-run?
a. Unemployment.
b. Output
c. Prices
d. Both a and b.
5. The nominal GDP of a country in year 1 is $20 and in year 2 is $25. Year 1 is the base year and the real
GDP of the country in year 2 is $23. 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 recessionary 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. 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 decrease 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. lower the required reserve ratio.
b. raise the discount rate.
c. buy government securities.
d. none of the above.
11. The real GDP is higher in year 2 than year 1. This is because:
a. quantity produced is definitely higher.
b. prices are definitely higher.
c. it could be either quantity or prices or higher.
d. actually, prices and quantity could both be lower and RGDP still rise.
12. According to the concept of the multiplier, if a 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. Credit cards are part of:
a. M1 only.
b. M2 only.
c. Both M1 and M2.
d. Neither M1 or M2.
15. Cash outside of bank vaults is part of:
a. M1 only.
b. M2 only.
c. both M1 and M2.
d. Neither M1 nor M2.
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 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 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. Which of the following a reason that people buy more U.S. made goods when U.S. prices fall?
a. The wealth effect.
b. The interest rate effect.
c. The international trade effect.
d. All of the above.
21. Grandma deposits $40 cash into her checking account. The bank loans out the most they
legally can to all the borrowers, and the first borrower takes the loan in cash and goes out to
the street with the cash in his wallet. The required reserve ratio is 25%. How much does the
money supply increase?
a. $0.
b. $10.
c. $40.
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 inflationary gap in the short-run?
a. output.
b. unemployment.
c. wages.
d. none of the above.
25. What happens when there is a surplus in the labor market in the long-run?
a. wages rise.
b. wages fall.
c. wages stay the same.
26. In the short-run, when prices rise:
a. cost of production goes up as much as the sales price of the item.
b. cost of production goes up, but less than the sales price of the item.
c. cost of production does not go up, while the sales price of the item does.
d. trick question – in the short-run, prices can not rise.
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, because the President is also automatically head of the fed.
b. Hillary Clinton
c. Janet Yellen.
d. Donald Trump.
29. What is true in our modal about the point on the AD/AS graph where AD intersects SRAS?
a. The economy is always at that point.
b. The economy is never at that point.
c. The economy is occasionally at that point.
d. Trick question – the two lines never intersect.
30. A person who was laid off because of a recession is in what type of unemployment?
a. Frictional.
b. Structural.
c. Cyclical.
d. Seasonal.
31. In the long-run, when prices rise:
a. cost of production goes up as much as the sales price of the item.
b. cost of production goes up, but less than the sales price of the item.
c. cost of production does not go up, while the sales price of the item does.
d. cost of production goes up, while the sales price stays the same.
32. In the short-run, when prices rise, what happens to real profits?
a. They stay the same.
b. They rise, so businesses make more products.
c. They fall, so businesses make less products.
d. Sometimes they go up, sometimes they go down.