econ test 2

Use the rule of 72 to determine how long it takes for real GDP to double if real GDP grows at 3% per year.

24 years

A graph that depicts the relationship between the total quantity of goods and services demanded and the price level is the

Aggregate demand curve

Suppose an economy has private investments of $1,000,000 but experiences depreciation of $1,000,000. This economy will experience zero net investment (gross private domestic investment - depreciation). Which of the following statements best describes this economy?

An economy in this position will experience economic growth less than the growth experienced by a similar economy that has greater investment.

Which of the following statements is true? -Fiat money is backed by gold. -Anything that is widely accepted as a means of payment counts as money. -Inflation encourages people to use money as a store of value. -M3 is the measure of the most liquid components of money.

Anything that is widely accepted as a means of payment counts as money.

Which of the following statements is true? -An aggregate demand curve has a negative slope because as the price level falls, people tend to substitute cheaper goods for the goods they formerly purchased. -As interest rates fall, the quantity of investment demanded tends to increase. -As the price level falls, the real value of wealth tends to fall. -The tendency for interest rates to fall when the price level falls is called the real balances effect.

As interest rates fall, the quantity of investment demanded tends to increase.

If the Bank of San Ansel were to accept a new deposit of $1,000

Its liabilities would increase to $3,000 and its reserves would increase to $2,000.

According to the wealth effect, if the average price level rises, the value of consumers'

Real wealth and consumption spending fall.

Which set of curves will shift to the left in the short run when the number of capital goods available for production falls for an economy? http://images.flatworldknowledge.com/quiz_img/RittMacro/ch7/ch7_q18.jpg

SRAS and LRAS

Which of the following cannot occur when an economy is experiencing economic growth?

a fall in potential output

A curve that relates an economy's total output to the total amount of labor employed, holding all other determinants of output constant, is called

an aggregate production function.

An increase in the exchange rate will decrease ____ and shift the AD curve to the _____.

exports; left

When a member bank borrows reserves from the Fed

it pays an interest rate called the discount rate.

Which of the following can the Fed not do? -regulate member banks -set the federal funds rate -lower the required reserve ratio -sell government bonds

set the federal funds rate

The SRAS curve differs from the LRAS curve because http://images.flatworldknowledge.com/quiz_img/RittMacro/ch7/ch7_q16.jpg

the SRAS curve represents what happens in the short run, while the LRAS curve represents what happens in the long run.

A bank has $100,000 in checkable deposits and $30,000 in reserves. If the required reserve ratio is 10%, what is the amount of excess reserves?

$20,000

If bank's reserves were to increase by $1,000,000, checkable deposits throughout the banking system will increase at most by _____ if the required reserve ratio is 25%.

$4,000,000

Refer to the above Table. If the required reserve ratio is 10% and the market interest rate is 8%, what is Bolton Bank's opportunity cost of holding the excess reserves it is currently holding?

$5.6 million

Which of the following is part of M1? I. time deposits II. cash in your wallet III. checkable deposits IV. savings deposits

II and III

A key danger with fiat money is that

it can be easily increased, which may lead to inflation.

If nominal wages are fixed, an increase in the price level

lowers the real cost of hiring workers.

Which of the following is an example of a barter exchange? -depositing money into a checking account -cashing a paycheck -buying gas with a credit card -trading a cow for a basket of corn

trading a cow for a basket of corn

If the required reserve ratio is 10%, the deposit multiplier is

10

An economy that grows at 6 percent per year, will double in size in about _____ years.

12

If population increases at an average rate of 1% per year and output increases at an average rate of 5% per year, then per capita real GDP will double in

18 years

An economy that grows at 2 percent per year will double in size approximately every _____ years.

36

What is the initial real GDP and price level? Table 7-1 shows the aggregate demand and short-run aggregate supply curves for an economy. The potential level of output is $7.6 trillion. Price Level AQD AQS 1.0 7.8 4.8 1.2 7.6 5.2 1.4 7.4 5.6 1.6 7.2 6.0 1.8 7 6.4 2.0 6.8 6.8 2.2 6.6 7.0 2.4 6.4 7.2 2.6 6.2 7.4 2.8 6 7.6 3.0 5.8 7.8

6.8

An economy that grows at 10 percent per year will double in size in approximately _____ years.

7.2

The required reserve ratio is 13%. What is the value of the deposit multiplier

7.70

Which of the following is true? -A mortgage on a house represents a liability to the bank that made the loan. -Money creation by banks occurs when banks print new money. -A liability of a bank is an obligation to other parties. -A bank may loan out all of its reserves.

A liability of a bank is an obligation to other parties.

Which of the following statements is true? -An increase in the cost of providing health benefits causes the long-run aggregate supply (LRAS) curve to shift to the right. -Increased spending on existing homes will increase the level of output in the long run. -An increase in nominal wages will help close an inflationary gap. -An increase in government spending causes the short-run aggregate supply (SRAS) curve to shift to the right.

An increase in nominal wages will help close an inflationary gap.

Which of the following statements is false? -The existence of sticky wages may keep an economy from producing at the natural level of employment. -An increase in technology causes the AD curve to shift to the right. -If all labor contracts were eliminated, the economy would likely adjust to the natural level of employment more quickly than it currently does. -An inflationary gap may be closed by a fall in exports.

An increase in technology causes the AD curve to shift to the right.

Which of the following is true? -Economic growth exists if the output of the economy expands for two consecutive quarters. -In modern U.S. history, the growth in potential GDP was greatest during President Reagan's administration. -Economic growth may be exponential. -High levels of economic growth tend to increase social problems like pollution or crime and thus do not improve the quality of life in an economy. View

Economic growth may be exponential.

Economic growth I. is represented by an outward shift of the production possibilities curve. II. is defined in terms of a series of events that increase the economy's ability to produce goods and services. III. refers to a process that increases potential output. IV. occurs when the economy operates on its production possibilities frontier.

I, II, and III

Which of the following is true? -If the Fed buys government bonds, it is attempting to increase the money supply. -The activities of the Fed are funded by income taxes. -The Fed sets the price at which it buys government bonds. -If banks need to borrow money to cover their required reserves, they typically borrow from the Fed.

If the Fed buys government bonds, it is attempting to increase the money supply.

Which of the following statements is true? -If three painters working together can paint 400 square feet of house per hour, the marginal productivity of labor of the third worker is 400 square feet of painting per hour. -An economy that grows at 4 percent per year will double in size in approximately 25 years. -If unemployed workers experience a loss of job skills, a long-term recessionary gap may lead to the LRAS curve shifting left. -An improvement in technologyIn an aggregate demand/aggregate supply framework, economic growth is shown by a shift to the right of the AD curve.

If unemployed workers experience a loss of job skills, a long-term recessionary gap may lead to the LRAS curve shifting left.

Which of the following is not a function of the Federal Reserve System? A) It acts as a central bank. B) It acts as a banker to banks. C) It determines tax levels in conjunction with the U.S. Treasury. D) It sets monetary policy.

It determines tax levels in conjunction with the U.S. Treasury.

What do economists mean by the term "sticky wage"

It refers to a wage that is slow to adjust to its equilibrium level, creating sustained periods of shortage or surplus in the labor market.

Which of the following is true with regard to the labor market? -It will reach equilibrium only if the production function is less than LRAS at full employment. -It will reach equilibrium where the demand and supply curves intersect at the nominal wage at which the economy achieves its natural level of unemployment. -It will reach equilibrium where the demand and supply curves intersect at the real wage at which the economy achieves its natural level of unemployment. -It will reach equilibrium only if the production function is greater than LRAS at full employment.

It will reach equilibrium where the demand and supply curves intersect at the real wage at which the economy achieves its natural level of unemployment.

If the Bank of San Ansel were to issue a new loan in the amount of $500, after all the transactions associated with the loan are cleared, its liabilities would change from $2,000 to

Its liabilities would not change.

Suppose a country's real GDP increases. At the same time, its population also increases. What happens to its standard of living?

Its standard of living could rise if population growth is smaller than output growth.

18. Which of the following statements is true? -An economic contraction in Asia may lead to fewer United States exports being purchased. The fall in exports causes the SRAS curve to shift to the left. -Long-term wage contracts contribute to wage stickiness. -A fall in the nominal wage causes the SRAS curve to shift to the left. -In the short run, a fall in the price level is matched by a proportional fall in nominal wages.

Long-term wage contracts contribute to wage stickiness.

M2 is comprised of

M1 + small-denomination time deposits + savings deposits + retail money market mutual funds.

Freema withdraws $1,000 from her checking account to purchase a $1,000 time-deposit. As a result of her transaction,

M1 decreases and M2 is unaffected.

The use of central bank policies to influence the level of economic activity is called

Monetary policy

Which of the following is not a function of money? -Money serves as a store of value. -Money serves as a medium of exchange. -Money serves as a factor of production. -Money serves as a unit of account

Money serves as a factor of production.

If a change in technology moves the aggregate production function upwards, what happens to the economy's potential output?

Potential output increases.

Which of the following reasons does not explain why wages and prices may be sticky?

The AD curve shifts to the left.

Which of the following statements is false? -The existence of deposit insurance decreases the likelihood of a depositor exploring a bank's business practices. -By making loans a bank creates money. -The Fed must respond to the dictates of the U.S. Congress. -The most important policy tool of the Fed is its ability to buy and sell government bonds.

The Fed must respond to the dictates of the U.S. Congress.

In the federal penitentiary at Lompoc, California, inmates used packages of mackerel to buy items such as haircuts at the prison barber shop and laundry services. What function do these packages of mackerel serve?

They functioned as money.

The economy depicted in the figure above would be in short-run equilibrium at point http://images.flatworldknowledge.com/quiz_img/RittMacro/ch7/ch7_q3.jpg

Y

A financial institution that accepts deposits, makes loans, and offers checking accounts is

a commercial bank.

Which of the following changes will cause the SRAS curve to shift to the left? http://images.flatworldknowledge.com/quiz_img/RittMacro/ch7/ch7_q22.jpg

a decrease in the level of technology

Which of the following is unlikely to increase the level of consumption?

a fall in transfer payments

Which of the following will not cause the aggregate demand (AD) curve to shift to the left?

an improvement in technology

Which of the following changes would account for the movement from AD1 to AD2? http://images.flatworldknowledge.com/quiz_img/RittMacro/ch7/ch7_q9.jpg

an increase in government purchases

Which of the following will not encourage an economy to grow? the introduction of a new computing system an improvement in job skills in the labor force an increase in the depreciation of capital goods an increase in the number of hours worked by the labor force

an increase in the depreciation of capital goods

For the economy depicted, which of the following changes will shift the SRAS curve so that it intersects the other curves at point Z? http://images.flatworldknowledge.com/quiz_img/RittMacro/ch7/ch7_q4.jpg

an increase in the nominal wage

Which of the following will not increase the productivity of labor?

an increase in the size of the labor force

Which of the following changes will not shift the LRAS curve to the left?

an increase in the supply of labor

Starting from a position of full employment, an increase in the nominal wage will in the long run

be offset by an increase in the price level, leaving the real wage and the level of employment unchanged.

Which of the following actions can the Fed take to increase the supply of money? -raise income taxes -sell government bonds -raise the required reserve ratio -cut the discount rate

cut the discount rate

Which of the following is an unlikely outcome of lower prices? increased investment higher real wealth lower interest rates decreased exports

decreased exports

All other things equal, high levels of saving

encourage economic growth by reducing consumption and thereby freeing production for capital formation.

Technological gains tend to reduce the demand for labor because producers substitute technology and capital for labor. T or F

false

Currency in the United States today is

fiat money

Increasing the required reserve ratio runs the risk of

forcing banks to reduce the volume of outstanding loans.

Which of the following will increase the aggregate quantity of output supplied?

increase in the price level

"Real GDP was $13.4 billion in 2011 but $13.6 billion in 2012. All of the change in output between 2011 and 2012 should count as part of economic growth." The above statement

is incorrect because economic growth measures increases in potential not real GDP.

The rule of 72

is useful because economic growth is often an exponential relationship.

Suppose that government spending on defense rises by $50 billion. What happens to the aggregate demand curve if the multiplier is equal to 2?

it shifts right more than $50 billion at each price level

In the short run, an economy

may produce more or less than its potential level of output.

If consumption increases by $100 billion, the AD curve will shift to the right by

more than $100 billion if the multiplier is greater than 1.

An increase in the supply of labor

moves the economy to the right along its production function, increasing the level of output.

An increase in the amount individuals are allowed to charge on their credit cards—in other words, an increase in their credit limit, not the amount that they actually charge—will increase

none of the measures of the money supply.

Which set of curves will shift to the right in the short run when imports fall in an economy? http://images.flatworldknowledge.com/quiz_img/RittMacro/ch7/ch7_q17.jpg

only AD

The deposit multiplier

overestimates by how much checkable deposits will increase following an initial deposit to a bank.

Which of the following definitions applies to economic growth?

process through which an economy achieves an outward shift in its production possibilities curve; it is the process in which the economy's potential output is increased

Which of the following changes will not cause the SRAS curve to shift?

producing more clothing within the United States

Anything that serves as a unit of account

provides a common measure by which to value different goods and services.

Which of the following describes the store of value function of money?

putting away $50 each month into your savings account

Suppose the United States were to begin producing fewer capital goods. This would tend to

reduce the rate of growth in the long run.

Which of the following is not a function of the Fed? -acts as a regulator of banks -sets fiscal policy -sets monetary policy -acts as banker to the central government View

sets fiscal policy

Lower taxes on capital goods are expected to

shift the AD curve to the right

Which of the following prevents the economy from always producing at its potential level of real GDP?

sticky prices and wages

Which of the following changes will most likely encourage economic growth?

tax breaks to encourage business research

An improvement in technology

tends to shift the production function up and increase the demand for labor.

Economic growth arises when

the LRAS curve shifts right.

Which of the following definitions applies to bank reserves? -a bank deposit whose ownership can be transferred with a check -the rate of interest banks charge to borrow reserves in the federal funds market -assets minus liabilities -the cash that a bank has in its vault plus deposits the bank maintains with the Federal Reserve

the cash that a bank has in its vault plus deposits the bank maintains with the Federal Reserve

It is unlikely that the value of commodity money will fall to zero because

the commodity that makes up commodity money is valued for uses other than just as money.

When a bank receives new deposits, it can make new loans up to the amount of

the excess reserves generated by the deposits

Which of the following is not a member of the Federal Open Market Committee (FOMC)? -the vice president of the United States -the members of the Board of Governors of the Fed -the president of the New York Federal Reserve Bank -five rotating presidents of the regional Federal Reserve Banks

the vice president of the United States

Exponential economic growth can be depicted by shifts in the LRAS curve to the right in which the successive increases are larger and larger. T or F

true

Long-run aggregate supply corresponds to the level of potential output. T or F

true

Public policy to eliminate a recessionary gap could involve an increase in taxes. T or F

true

Which of the following factors does not account for the deposit multiplier overstating the amount deposits will change when reserves change? -people holding cash -use of credit cards -loan proceeds not being spent -banks holding excess reserves

use of credit cards

"At lower price levels the quantity of investment demanded tends to be higher. Because the level of investment is higher, the aggregate demand curve shifts to the right." This statement is incorrect because

while investment does tend to increase at lower price levels, this increase is captured as a movement down along the aggregate demand curve and serves to partially explain why the AD curve is downward sloping.