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 the government shutdown lead to a decrease in
aggregate demand. On your diagram, mark the starting output as Yp and Y1, the output at the end of
the short run as Y2, and the output at the end of the long run as Y3. 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 (Yp).
2. A. The federal reserve board buys $100 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 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. Steve has an income of $20 which he uses to only by $1 pizzas. So does Tim. Steve has
$6 cash in the cookie jar which he also plans to use to buy pizza. Tim has nothing in the
Cookie jar (except cookies). How many pizzas will each person buy
Steve _____
Tim ______
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?
Steve ______
Tim______
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. The interest rate rises at the local bank. How does this affect the amount of currency you want to
have in your wallet or the cookie jar, and why? Answer that you will want to carry more, less, or
the same amount of money, and explain why?
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 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 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. 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 inflationary gap part of the AD/AS diagram is:
a. to the left of QN or YP.
b. to the right of QN or YP.
c. directly at QN or YP.
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 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 counted in GDP?
a. Money spent on government transfer payments.
b. Money spent on investment goods.
c. Money spent on intermediate goods.
d. All of the above.
12. According to the concept of the multiplier, of the government shutdown dropped people’s
income by 1 million dollars, then the actual drop in aggregate demand will be:
a. equal to 1 million dollars.
b. greater than 1 million dollars.
c. less than 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 ketchup bought by a restaurant to put on the hamburgers they sell.
c. The money the government spends to build a new road.
d. The big new assembly line machine bought by Ford Auto Company.
15. On the supply and demand diagram for money, if interest rates are on vertical axis, then:
a. the demand curve slopes down and the supply curve slopes up.
b. the demand curve is straight up and down and the supply curve slopes up.
c. the demand curve slopes down and the supply curve is straight up and down.
d. the demand curve slopes up and the supply curve slopes down.
16. On the supply and demand diagram for bonds, if interest rates are on vertical axis, then:
a. the demand curve slopes down and the supply curve slopes up.
b. the demand curve is straight up and down and the supply curve slopes up.
c. the demand curve slopes down and the supply curve is straight up and down.
d. the demand curve slopes up and the supply curve slopes down.
17. If the fed increases the money supply, this will likely make interest rates:
a. rise.
b. fall.
c. stay the same.
18. Ceteris paribus, when interest rates fall, this causes aggregate demand to:
a. increase.
b. decrease.
c. stay the same.
19. A rise in the price of oil 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.
20. Which of the following is money under M1?
a. gold.
b. credit cards.
c. saving accounts.
d. none of the above.
21. Which of the following is money under M2?
a. gold.
b. credit cards.
c. saving accounts.
d. none of the above.
22. If we are starting at a position of natural RGDP, then an increase in AD will, at the end of the
long-run, cause:
a. prices to rise and output to stay the same.
b. output to rise and prices to stay the same.
c. both prices and output to rise.
d. both prices and output to stay the same.
23. 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.
24. 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.
25. 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.
26. The phrase “underground economy” refers to:
a. America’s mining industry.
b. American taking time off of work but still getting paid.
c. Things being produced for sale, but not being reported to the government.
d. All of the above.
27. Which of the following is not counted in America’s GDP numbers?
a. Leisure time.
b. The bads we produce, like pollution, along with our goods.
c. Cooking and cleaning services provided by family members for no money.
d. All of the above.
28. 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.
29. 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.
30. What goes up when an economy goes into a recession?
a. output.
b. unemployment.
c. interest rates.
d. wages.
31. What happens when there is a shortage in the labor market?
a. wages rise.
b. wages fall.
c. wages stay the same.
32. 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.
33. If employers have to pay more for employee health insurance, then:
a. AD will move right.
b. AD will move left.
c. SRAS will move right.
d. SRAS will move left.
34. 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.
35. How long is the term of the federal reserve chairman?
a. 1 year.
b. 2 years.
c. 4 years.
d. 14 years.
36. 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.