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 increase 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 output,
prices, 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 $100 dollars worth of government securities from a bank.
The required reserve ratio is 0.40 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 if the first borrower takes his loan in cash and does not redeposit any of it into the
bank. What is the increase in the money supply?
3. A. Domestic GDP is commonly broken up into what 3 parts? Write the answer in the form
of GDP = ? + ? + ?. Use the actual words rather than just the common 1 word abbreviations.
B. Give an example of a typical good from one of the categories. Be sure to state what
category you think it is in.
4. A. Mary has an income of $12 which she uses to only by $1 pizzas. So does Nan. Mary also has
$8 cash in the cookie jar of which she plans to use half to buy pizzas. Nan has nothing in the
Cookie jar (except cookies). How many pizzas will each person buy?
Mary _____
Nan ______
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?
Mary ______
Nan______
C. So who had the biggest drop in pizza purchases, the person with the least cash or the
most cash? Circle the answer.
Least
Most
Same for both
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
$1
4
$2
Twinkies
Q
P
5
$4
3
$3
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
______ Credit cards
______ Cash inside bank vaults
______ Savings 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 is a line that is straight up and down (perfectly vertical)?
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 shorter 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. Output.
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 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. Which of the following best describes the current U.S. monetary system?
a. We have paper money backed by government held gold.
b. We have coins made from valuable metals.
c. We use the barter system in which people trade goods for goods.
d. We have paper money based on the government's legal authority to create money.
8. What is it that gives paper currency its value?
a. It is backed by gold.
b. It is so useful an item.
c. The knowledge that all societies in history have used paper currency.
d. That people believe it has value.
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. 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 counted in GDP?
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 an intermediate 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. An increase in AD causes (in the short run):
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 in both M1 and M2?
a. Bank reserves.
b. Credit cards.
c. Saving accounts.
d. Checking accounts.
17. If we are in the 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 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. Which of the following is not counted in America’s GDP numbers?
a. Government transfer payments.
b. Business investment spening.
c. A lawyer paying a maid to clean his penthouse apartment every month.
d. All of the above.
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. What is liquidity?
a. The ease with which an asset can earn interest.
b. The ease with which an asset can be stored.
c. The ease with which an asset can be tracked.
d. The ease with which an asset can be spent.
24. What goes up when an economy goes into a recession?
a. output.
b. unemployment.
c. interest rates.
d. wages.
25. What happens when there is a surplus in the labor market?
a. wages rise.
b. wages fall.
c. wages stay the same.
26. If we are in a recessionary 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. The federal reserve chairman is picked by:
a. the voters.
b. the presidents of the 3 largest banks.
c. the American Economist Association.
d. the President of the United States.
30. A person with the marketable labor skill of accounting is laid off because the business he worked
for went bankrupt when a competitor was more successful. What category of unemployment does
he belong in until he finds a new job?
a. Frictional.
b. Structural.
c. Cyclical.
d. Seasonal.
31. What is the difference between the consumer price index and the implicit price deflator?
a. The consumer price index only measures changes in consumer prices, while the implicit price
deflator also includes prices of things purchased by the government and businesses.
b. The implicit price deflator only measures changes in consumer prices, while the consumer price
index also includes prices of things purchased by the government and businesses.
c. There is no difference, they both measure the exact same thing.
d. CPI measures changes in prices, and the implicit price deflator measures changes in quantity.
32. Which of the following is true?
a. Nominal GDP measures an average of price and quantity changes, but real GDP
measures only quantity changes.
b. Both nominal and real GDP measure an average of price and quantity changes.
c. Nominal GDP measures only quantity changes, but real GDP measures an average of
price and quantity changes.
d. Both nominal and real GDP measure only quantity changes.
33. What is a country’s per capita GDP?
a. Its total GDP.
b. Its total GDP divided by its population.
c. Its growth rate in GDP.
d. The GDP of its capital city.
34. How did the textbook describe economists who favor a nonintervention approach to
government macroeconomics policy making?
a. They believe “prices are sufficiently sticky that the economy’s own adjustment to its
potential will be a slow process—and a painful one.”
b. They believe “For an economy with a recessionary gap, unacceptably high levels of
unemployment will persist for too long a time.”
c. They believe “it is far preferable to use stabilization policy to shift the aggregate demand
curve in an effort to shorten the time the economy is subject to a gap.”
d. They believe “policies to change real GDP may not affect the economy for months or even
years. By the time the impact of the stabilization policy occurs, the state of the economy
might have changed.”