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 current troubles in the Middle East lead to a large
permanent 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 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. 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
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 sells a convertible car at an auto dealership.
________
Ford buys a machine to put on an assembly line that will put bumpers on
cars.
A person in California grows marijuana in their backyard to sell to their
friends.
You buy a hamburger at the restaurant.
________
________
4. A. Veronica has an income of $10 which she uses only to buy $2 pizzas. So does Wayne.
Veronica also has $16 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. Suppose Veronica had 16 shares of IBM stock in her cookie jar instead of money. The
shares are worth $1 each in part A and then double in price like everything else in part B.
How many pizzas would she buy both before and after the price level increase?
A. ________ B. ________
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
1
$2
3
$4
Twinkies
Q
P
3
$4
5
$6
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.
______ Saving accounts
______ Checking accounts
______ Cash outside bank vaults
______ Gold
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 slopes up at a 45 degree angle?
a. Short-run aggregate supply.
b. Long-run aggregate supply.
c. Both a and b.
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. Wages
d. 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.
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 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 a and c.
11. Which of the following is an example of an intermediate good?
a. A restaurant buying hamburger meat.
b. Fort buying steel.
c. A college buying white board markers.
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. Credit cards are part of:
a. M1 only.
b. M2 only.
c. Both M1 and M2.
d. Neither M1 or M2.
15. An increase 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. 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. Grandma deposits $25 cash into her checking account. The bank always loans out the
maximum legally possible and everyone who borrows money always redeposit it back into their
own checking account. The required reserve ratio is 10%. How much does the money
supply increased?
a. $0.
b. $25.
c. $225.
d. $250.
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 up when an economy goes into the inflationary 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 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. Nancy Pelosi.
b. Janet Yellen.
c. Hillary Clinton.
d. Chris Cristie.
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 with no marketable labor skill is in what category of unemployment?
a. Frictional.
b. Structural.
c. Cyclical.
d. Seasonal.
31. Who is hurt the most when prices rise in the long-run?
a. People holding a lot of cash.
b. People holding only a little cash.
c. People holding no cash.
d. Everyone is hurt the same, it doesn’t matter how much cash you have.
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)