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Question 1

Using aggregate supply and demand analysis, discuss how the following will affect the aggregate level of output and the price level in the economy. Use a SRAS curve. You need to determine whether the AD or SRAS curve will shift, in which direction it will shift, and how this will affect aggregate output and the price level.

a. A hurricane that destroys half the supply of goods produced in Florida.

b. An increase in the money supply.

Question 6

If the required reserve ratio is 10% and $1,000 of new bank reserves are created by the Federal Reserve, what is the maximum potential increase in the quantity of money in the economic system (not just the money created by the banking system but the total money supply)? Why might the money supply not increase by the maximum possible amount? Make sure you show your calculations and answer both parts of this question. Use the following equation to answer this question:

Maximum Potential Increase in the Money Supply = (1/r) x Monetary Base, where r is the required reserve ratio.

Question 8

Which of the following is held constant in defining the Law of Demand:

	1.	population
	2.	technology
	3.	price of inputs
	4.	price of related goods

2 points

Question 9

Scalping and black marketing happen because of

	1.	price floor
	2.	price ceiling
	3.	minimum wage
	4.	abundant supply

2 points

Question 10

Say's Law implies

	1.	equilibrium in goods market
	2.	full employment
	3.	1 only
	4.	both 1 and 2

2 points

Question 11

Producer's surplus is

	1.	the triangle above the equilibrium price
	2.	the big triangle between demand price and supply price
	3.	the triangle below the market price
	4.	none of the above

2 points

Question 12

Assume inflation rate is 3% and nominal GDP goes up by 3%. Real GDP growth will be

	1.	higher than nominal GDP
	2.	lower than nominal GDP
	3.	same as nominal GDP
	4.	none of the above

2 points

Question 13

Assume unemployment rate is reported to be 8.2%. A survey conducted by a reputable institution shows nearly one hundred thousand people quit looking for job. The reported unemployment rate of 8.2% is

	1.	accurate
	2.	overstated
	3.	understated
	4.	all of the above depending on how you look at it

2 points

Question 14

Money is used as a unit of account. This means money

	1.	cannot store value for use in the future.
	2.	is used to measure the exchange value and costs of goods, services, assets, and resources.
	3.	has little or no intrinsic value.
	4.	is dependent of the quantity of gold held by the Federal Reserve.

2 points

Question 15

Which of the following is true?

	1.	In addition to the M1 money supply, the M2 money supply measure includes a number of highly liquid savings deposits.
	2.	The M1 money supply is larger than the M2 money supply.
	3.	Currency is the only component of the M1 money supply.
	4.	Outstanding credit card balances are included in the M2 money supply, but not the M1 figures.

2 points

Question 16

Which of the following assets can a commercial bank count as reserves?

	1.	its holding of U.S. Treasury bills.
	2.	its vault cash and deposits with the Fed.
	3.	its outstanding loans.
	4.	the savings accounts of its depositors.

2 points

Question 17

Suppose a bank receives a new deposit of $500. The bank extends a new loan of $400 because it is required to hold the other $100 on reserve. What is the legal required reserve ratio?

	1.	10 percent
	2.	15 percent
	3.	20 percent
	4.	25 percent

2 points

Question 18

The major overall purpose of the Federal Reserve System is to

	1.	keep the discount rate flexible.
	2.	insure the deposits of persons holding funds with banking institutions.
	3.	regulate the money supply, and, thereby, provide a monetary climate that is in the best interest of the economy.
	4.	regulate the levels of excess reserves held by member banking institutions.

2 points

Question 19

If the Fed purchases government securities from the public, the

	1.	money supply will decrease.
	2.	reserves of commercial banks will decrease.
	3.	required reserves ratio will increase.
	4.	money supply will increase

2 points

Question 20

If the Fed decreased the discount rate,

	1.	the earnings of the Fed would increase.
	2.	in incentive of commercial banks to borrow from the Fed would be reduced.
	3.	the prime interest rate would automatically decline.
	4.	commercial banks probably would reduce their excess reserves and be more willing to extend additional loans.

2 points

Question 21

Suppose that during a period of inflation, the Fed reduced its holding of U.S. securities from $600 billion to $580 billion. This indicates that the Fed was

	1.	seeking to reduce the money supply to decrease inflation.
	2.	trying to force Congress to decrease taxes.
	3.	expanding the money supply and stimulating employment.
	4.	expanding the money supply, even though the existing inflation suggested a restrictive policy would be more appropriate.

2 points

Question 22

If the Fed shifts to a more restrictive monetary policy in order to help control inflation, the policy shift will generally

	1.	stimulate aggregate demand and real output as soon as the policy is instituted.
	2.	reduce aggregate demand immediately and quickly bring the inflation under control.
	3.	reduce aggregate demand and help bring inflation under control, but the primary effects may not be felt for several months or quarters.
	4.	lower real interest rates in the short run, but in the long run, the real interest rates will rise.

2 points

Question 23

Persistently expansionary monetary policy that stimulates aggregate demand and leads to inflation will

	1.	lead to higher rates of real output in the long run.
	2.	fail to increase real output once decision makers fully anticipate inflation.
	3.	lead to lower nominal interest rates once decision makers fully anticipate the inflation.
	4.	permanently reduce the rate of unemployment below its natural rate.

2 points

Question 24

The index of leading indicators is a (n)

	1.	alphabetical listing of the most popular indicators in the economy for a given month.
	2.	composite index of indicators that provides information on the future direction of the economy.
	3.	measure of the level of aggregate output.
	4.	composite index designed to measure inflation.

2 points

Question 25

If the economy was sliding into a recession, an activist would call for

	1.	a tax decrease.
	2.	restrictive monetary policy.
	3.	a reduction in the size of the Federal deficit.
	4.	a reduction in government expenditures.

2 points

Question 26

Suppose the MPC of Banana Republic is .9 and the country is in recession. The government wishes to get out of the recession through a massive expenditure program. If the recessionary gap is 900 million Euros, how much will the government need to spend?

	1.	900 million Euros
	2.	100 million Euros
	3.	200 million Euros
	4.	90 million Euros

2 points

Question 27

Which equation is correct?

	1.	MPC + APC = 1
	2.	MPC+APS =1
	3.	MPC+MPS=2
	4.	MPC = 1 -MPS

2 points

Question 28

The size of the money multiplier may not be equal to its theoretical value because

	1.	of calculation errors
	2.	of Fed's reluctance to increase money supply
	3.	not entire part of the loans are deposited
	4.	the reserve ratio is high

2 points

Question 29

Suppose the Fed assumed the economy would get out of recession in 18 months, and starts buying securities to ease the transition of the economy. After 18 months, inflation rate goes up from 3 per cent to 7 per cent. This is an example of

	1.	cost-push inflation
	2.	demand-pull inflation
	3.	counter-cyclical monetary policy
	4.	all of the above

2 points

Question 30

The paradox of thrift implies that

	1.	the average savings rate of 6% of Americans is too low
	2.	the average savings rate of 6% of Americans is too high
	3.	while high rate of savings by some citizens is good, higher rate of savings by Americans may reduce aggregate demand
	4.	Americans should not save at a higher rate than citizens of countries with whom we have high volumes of trade

2 points

Question 31

Suppose during a recessionary period, Apple Republic created a government-sponsored works program worth 150 million dollar and collected the entire 150 million dollar through new taxes. The MPS of Apple Republic is .2. GDP of Apple Republic will go up by

	1.	750 million dollars
	2.	600 million dollars
	3.	zero dollars
	4.	150 million dollars

2 points

Question 32

The balanced budget multiplier is

	1.	equal to the size of the budget
	2.	equal to the tax multiplier plus 1
	3.	equal to the tax multiplier minus 1
	4.	none of the above

2 points

Question 33

Economic growth is important because expansion in the output of goods and services

	1.	necessarily creates more jobs (more work for people)
	2.	makes it possible for individuals to consume more and achieve higher living standards.
	3.	leads to an increase in the general level of prices.
	4.	generates additional tax revenues for the government.

2 points

Question 34

GDP = C+ I+ G is a model of

	1.	closed economy equilibrium
	2.	private economy equilibrium
	3.	open economy equilibrium
	4.	no growth equilibrium

2 points

Question 35

Which of the following is most likely to be a major source of growth in per capita GDP?

	1.	a high investment/GDP ratio
	2.	a high rate of inflation
	3.	rapid population growth
	4.	rapid growth in the money supply

2 points

Question 36

The value of money varies:

	1.	Inversely with the price level.
	2.	Directly with the volume of employment.
	3.	Directly with the price level.
	4.	Directly with the interest rate.

2 points

Question 37

Compared with fiscal policy, monetary policy is:

	1.	quicker and easier to implement.
	2.	slower and more cumbersome to implement
	3.	more dependent on Congressional action.
	4.	More likely to produce an offsetting net export effect.

2 points

Question 38

Critics of economic growth:

	1.	contend that growth and industrialization reduce pollution.
	2.	argue that economic growth does not resolve socioeconomic problems such as income inequality.
	3.	point out that growth results in greater economic security for workers.
	4.	say that its benefits acrue nearly exclusively to white males.

2 points

Question 39

We sell more merchandize goods to India than India sells to us

	1.	our balance of payment with India is positive
	2.	India's balance of payment with us is positive
	3.	our balance of trade with India is positive
	4.	both 1 and 3

2 points

Question 40

An example of non-tariff barrier includes

	1.	A specific tax on imported Mexican strawberries
	2.	A limit on the import of Mexican strawberries
	3.	ban on Mexican strawberries due to health concerns
	4.	all of the above

2 points

Question 41

The economist who introduced the theory of comparative advantage is

	1.	Adam Smith
	2.	J. B. Say
	3.	J. M. Keynes
	4.	David Ricardo

2 points

Question 42

Dumping is

	1.	selling below internationally accepted price
	2.	selling below cost
	3.	selling without tariff
	4.	selling in a market when there is a quota