Econ Final Study Guide

2. Assume that the reserve requirement is 20 percent. If a bank initially has no excess reserves and $10,000 cash is deposited in the bank, the maximum amount by which this bank may increase its loans is A $2,000 B $8,000 C $10,000 D $20,000 E $50,000

B

Assume that the marginal propensity to consume out of disposable income is 0.8 and that the government taxes all income at a constant rate of 30 percent. If gross income increases by $100, consumption will initially increase by A $44 B $56 C $70 D $80 E $100

B

Which of the following groups of people would benefit from unanticipated inflation? 1. Savers 2. Borrowers 3. Lenders A I only B II only C III only D I and II only E I and III only

B

9. In the long run, if aggregate demand decreases, real gross domestic product (GDP) and the price level will change in which of the following ways? A Real GDP Decrease, Price Level Decrease B Real GDP Decrease, Price Level Increase C Real GDP No Change, Price Level Decrease D Real GDP Increase, Price Level Decrease E Real GDP No Change, Price Level Increase

C

Aggregate demand may be measured by adding A consumption, investment, savings, and imports B savings, government spending, and business inventories C consumption, investment, government spending, and net exports D domestic private expenditures and government spending E domestic expenditures and imports

C

Any point inside a production possibilities curve is A better than points on the production possibilities curve B allocatively efficient but technologically inefficient C associated with inefficient use or unemployment of some resources D associated with movements along the production possibilities curve E associated with constant opportunity costs

C

Reserves=15,000 Securities=70,000 Loan=15,000 Demand Deposits=100,000 A commercial bank is facing the conditions given above. If the reserve requirement is 12 percent and the bank does not sell any of its securities, the maximum amount of additional lending this bank can undertake is A $15,000 B $12,000 C $3,000 D $1,800 E 0

C

Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains. The legal reserve requirement is 10 percent. If Maggie deposits the $100 bill she received as a graduation gift from her grandmother into her checking account, the maximum increase in the total money supply will be A $10 B $100 C $900 D $1,000 E $1,100

C

The purchase of bonds by the Federal Reserve will have the greatest effect on real gross domestic product if which of the following situations exists in the economy? A The required reserve ratio is high, and the interest rate has a large effect on investment spending. B The required reserve ratio is high, and the interest rate has a small effect on investment spending. C The required reserve ratio is low, and the interest rate has a large effect on investment spending. D The required reserve ratio is low, and the marginal propensity to consume is low. E The marginal propensity to consume is high, and the interest rate has a small effect on investment spending.

C

1. Assume that Atlantic National Bank has demand deposits of $100,000 and no excess reserves,and that the reserve requirement is 10 percent.A customer withdraws $5,000 from the bank.To meet the reserve requirement, the bank must increase its reserves by A - 500 B - 1000 C - 2000 D - 4000 E - 4500

E

Assume that the economy is in equilibrium. If aggregate demand increases, nominal interest rates and bond prices will most likely change in which of the following ways? A Nominal Interest Rates Increase, Bond Prices Increase B Nominal Interest Rates Increase, Bond Prices Decrease C Nominal Interest Rates Increase, Bond Prices No Change D Nominal Interest Rates Decrease, Bond Prices Increase E Nominal Interest Rates Decrease, Bond Prices Decrease

B

The intersection of the aggregate supply curve and the aggregate demand curve occurs at the economy's equilibrium level of A real investment and the interest rate B real disposable income and unemployment C real national output and the price level D government expenditures and taxes E imports and exports

C

Which of the following accurately describes the federal funds rate? A The interest rate that banks charge state governments B The interest rate that banks charge other banks for overnight loans C The interest rate that banks pay on long-term savings D The interest rate on personal loans E The interest rate on government bonds

B

3. Assume that the marginal propensity to consume is 0.90. As a result of an increase in the tax rates, the government collects an additional $20 million. What will be the impact on gross domestic product (GDP) ? A GDP will increase by a maximum of $200 million. B GDP will increase by a maximum of $180 million. C GDP will decrease by a maximum of $200 million. D GDP will decrease by a maximum of $180 million. E GDP will decrease by a maximum of $20 million

D

4. Which of the following is true according to the circular flow model? A Firms are suppliers in both the product and factor markets. B Firms are demanders in the product markets and suppliers in the factor markets. C Households are demanders in both the product and factor markets. D Households are demanders in the product markets and suppliers in the factor markets. E The government is a demander in the product market only

D

6. Which of the following will happen if the actual inflation rate is greater than the expected inflation rate? A Lenders of fixed interest rate loans will be better off. B Lenders of variable interest rate loans will be worse off. C Borrowers of fixed interest rate loans will be worse off. D Borrowers of fixed interest rate loans will be better off. E Borrowers of variable interest rate loans will be better off.

D

7. Number of Workers Structurally Unemployed - 3 Million Number of Workers Cyclically unemployed - 4 Million Number of Workers Frictionally Unemployed - 2 million Number of Workers officially Classified as Employed - 91 Million Working-age Population - 150 Million

D

8. The aggregate demand curve assumes that A as the price of a good or service increases, nominal wages decrease B as the domestic price level increases, consumers substitute domestic goods for foreign goods C all prices and total consumer incomes are constant D changes in the price level affect real wealth E nominal interest rates increase as the price level decreases

D

A major advantage of automatic stabilizers in fiscal policy is that they A reduce the public debt B increase the possibility of a balanced budget C stabilize the unemployment rate D go into effect without passage of new legislation E automatically reduce the inflation rate

D

Assume that the reserve requirement for demand deposits is 20 percent, that banks hold no excess reserves, and that the public holds no currency. If the central bank sells $10,000 worth of government securities to commercial banks, the total money supply will A increase by $10,000 B increase by $50,000 C decrease by $10,000 D decrease by $50,000 E not change

D

Bank A - Reserves=1,000 - Loans=4,000 - Demand Deposits=5,000 Bank B - Actual Reserves=100 - Loan=500 - Demand Deposits=600 Bank C - Reserves=10 - Loans=90 - Demand Deposits=100 Based on the balance sheets above for three different banks, which of the following is true, if the reserve requirement is 10 percent? A Bank A has no excess reserves. B Bank B has no excess reserves. C Bank B can increase its loans by $500. D Bank B can increase its loans by $40. E Bank C has excess reserves

D

Brazil and Peru produce both coffee and wheat using labor as the only input. The table below shows the labor hours required to produce a unit of coffee and a unit of wheat in each country. Based on the information in the table above, which of the following is true? Brazil: Hours per Coffee = 12 Hours per Wheat = 4 Peru Hours per Coffee = 6 Hours per Wheat = 4 A Peru has a comparative advantage in producing wheat. B Peru has an absolute advantage in producing wheat. C Brazil has an absolute advantage in producing wheat. D Peru has a comparative advantage in producing coffee. E Brazil has a comparative advantage in producing coffee.

D

If the required reserve ratio is 10 percent, actual reserves are $10 million, and currency in circulation is equal to $20 million, M1 will at most be equal to A $20 million B $30 million C $90 million D $120 million E $150 million

D

Suppose that in an economy with lump-sum taxes and no international trade, autonomous investment spending increases by $2 million. If the marginal propensity to consume is 0.75, equilibrium gross domestic product will change by a maximum of A $0.5 million B $1.5 million C $2.0 million D $8.0 million E $15.0 million

D

10. If a change in aggregate demand results in a recession, the price level and real output will change in which of the following ways in the short run? (look at the vertical column) A Price Level Real Output No change Increase B Price Level Real Output Increase No change C Price Level Real Output Increase Decrease D Price Level Real Output Decrease No change E Price Level Real Output Decrease Decrease

E

Which of the following is a monetary policy that can be used to counteract a recession? A Buying bonds in the open market B Increasing the discount rate C Increasing the required reserve ratio D Lowering tax rates E Increasing government spending

E***

Assume that the economy is at full-employment equilibrium in the diagram shown above. Which of the following would lead to stagflation? A leftward shift of the short-run aggregate supply curve only B A rightward shift of the short-run aggregate supply curve only C A leftward shift of the aggregate demand curve only D A rightward shift of the aggregate demand curve only E A rightward shift in both the short-run aggregate supply curve and the aggregate demand curve

A

Automatic stabilizers can do which of the following? A Offset the destabilizing influence of changes in tax revenues B Aid the economy to move away from the full-employment output level C Allow policymakers to formulate a set of rules flexible and comprehensive enough to eliminate discretionary actions D Cause tax revenues to decrease when gross domestic product (GDP) decreases and to increase when GDP increases E Allow policymakers to prescribe public works programs during inflationary periods because expenditures for unemployment and welfare have correspondingly decreased

A

If aggregate demand is growing faster than long-run aggregate supply, the Federal Reserve is most likely to A sell securities on the open market B increase bond prices C increase income taxes D decrease the discount rate E decrease the required reserve ratio

A

If the central bank buys government bonds from individuals on the open market and banks do not loan out any excess reserves created by the open market purchase, which of the following will happen? A The money supply will increase. B The money supply will remain unchanged. C Loans to the private sector will increase. D Demand deposits will decrease. E The level of actual reserves will decrease.

A

If the interest rate on short-term government bonds declined as a result of open market operations by a central bank, the central bank must have A purchased government bonds B sold government bonds to commercial banks C decreased the amount of currency in circulation D increased the supply of bonds E increased the discount rate on loans to commercial banks

A

On the graph above, stagflation will be caused by a A leftward shift in the short-run aggregate supply curve only B rightward shift in the short-run aggregate supply curve only C leftward shift in the aggregate demand curve only D rightward shift in the aggregate demand curve only E rightward shift in both the short-run aggregate supply and aggregate demand curves

A

The economy of a country is currently in equilibrium at point A in the diagram above. If the government does nothing and wages are flexible, which of the following will most likely occur in the long run? (The intersection of AS and AD is within the LRAS) A Falling wages will shift the aggregate demand curve to the right, producing full employment. B Rising wages will shift the aggregate demand curve to the right, producing full employment. C The economy will remain at point A. D Rising wages will shift the aggregate supply curve to the right, producing full employment. E Falling wages will shift the aggregate supply curve to the right, producing full employment.

A

(N high on LRAS, M beyond LRAS on SRAS1, Q within LRAS on SRAS2, R low on LRAS) According to the graph above and starting with equilibrium point R, which of the following shifts identifies the short-run and the long-run impact of a demand-pull inflation? A Short Run Long Run R to N M to N B Short Run Long Run R to M R to N C Short Run Long Run R to Q Q to N D Short Run Long Run R to M R to Q E Short Run Long Run R to N N to Q

B

(Price Level vs GDP graph, AD1 is to the right of AD2) The graph above shows two aggregate demand curves, AD1 and AD2 , and an aggregate supply curve, AS. The shift in the aggregate demand curve from AD1 to AD2 could be caused by A a decrease in taxes B a decrease in the money supply C an increase in government spending D an increase in consumption spending E an increase in the price level

B

5. Under which of the following circumstances would increasing the money supply be most effective in increasing real gross domestic product? A Interest Rates High, Employment Full, Business Optimism High B Interest Rates High, Employment Less than Full, Business Optimism High C Interest Rates Low, Employment Full, Business Optimism High D Interest Rates Low, Employment Full, Business Optimism Low E Interest Rates Low, Employment Less than Full, Business Optimism Low

B

A bank has $800 million in demand deposits and $100 million in reserves. If the reserve requirement is 10 percent, the bank's excess reserves equal A $10 million B $20 million C $80 million D $100 million E $200 million

B

A commercial bank's ability to create money depends on which of the following? A The existence of a central bank B A fractional reserve banking system C Gold or silver reserves backing up the currency D A large national debt E The existence of both checking accounts and savings accounts

B

Assume that Jane's marginal propensity to consume equals 0.8, and that in 2004 Jane spent $36,000 from her disposable income of $40,000. If her disposable income in 2005 increased to $50,000, her consumption spending increased by A $4,000 B $8,000 C $9,000 D $10,000 E $14,000

B

If the government increases expenditures on goods and services and increases taxation by the same amount, which of the following will occur? A Aggregate demand will be unchanged. B Aggregate demand will increase. C Interest rates will decrease. D The money supply will decrease. E The money supply will increase

B

If two nations specialize according to their individual comparative advantages and engage in trade, then which of the following must be true? A Nations would be better off if they were self-sufficient. B If one nation gains from trade with the other nation, then the other nation will lose. C Both nations can consume beyond their individual production possibilities. D Both nations can consume only what they produce. E Both nations will lose from trade.

C

Suppose two countries are each capable of individually producing two given commodities. Instead, each specializes by producing the commodity for which it has a comparative advantage and then trades with the other country. Which of the following is most likely to result? A The two countries will become more independent of each other. B Unemployment will increase in one country and decrease in the other. C There will be more efficient production in one country but less efficient production in the other. D Both countries will become better off. E Both countries will be producing their commodity inefficiently.

D

Which of the following will most likely occur if a government adopts an annually balanced budget rule that requires the government to eliminate any deficits or surpluses? A Unemployment will be eliminated and prices will be stable. B The national debt will increase. C Business cycles will become more stable. D The automatic stabilizing effect of fiscal policy will be eliminated. E The government will be forced to spend less when there are surpluses.

D

(Price Level vs GDP graph, negative slope AD positive slope SRAS, these intersect to the right of the Vertical LRAS) According to the graph above, which of the following is true about the long-run equilibrium of the economy depicted A The economy is in long-run equilibrium. B The aggregate demand curve will shift to the left to restore long-run equilibrium. C The long-run aggregate supply curve will shift to the right to restore long-run equilibrium. D Without a fiscal policy stimulus, the economy will remain in a recession. E As wages increase, the short-run aggregate supply curve will shift to the left to restore long-run equilibrium

E

(Price Level vs GDP graph, nevative slope AD positive slope SRAS) According to the graph above, an increase in aggregate supply will most likely cause income and employment to change in which of the following ways? A Income Decrease, Employment Decrease B Income Decrease, Employment Increase C Income no Change, Employment Increase D Income Increase, Employment Decrease E Income Increase, Employment Increase

E

An aggregate supply curve may be horizontal over some range because within that range A a higher price level leads to higher interest rates, which reduce the money supply and consumer spending B changes in the aggregate price level do not induce substitution C output cannot be increased unless prices and interest rates increase D rigid prices prevent employment from fluctuating E resources are underemployed and an increase in demand will be satisfied without any pressure on the price level

E

Commercial banks can create money by A transferring depositors' accounts at the Federal Reserve for conversion to cash B buying Treasury bills from the Federal Reserve C sending vault cash to the Federal Reserve D maintaining a 100 percent reserve requirement E lending excess reserves to customers

E

Faced with a large federal budget deficit, the government decides to decrease expenditures and tax revenues by the same amount. This action will affect output and interest rates in which of the following ways? A Output Increase, Interest Rates Increase B Output Increase, Interest Rates Decrease C Output No Change, Interest Rates Decrease D Output Decrease, Interest Rates Increase E Output Decrease, Interest Rates Decrease

E

If the reserve requirement is 10 percent and the central bank sells $10,000 in government bonds on the open market, the money supply will A increase by a maximum of $9,000 B increase by a maximum of $90,000 C decrease by a maximum of $9,000 D decrease by a maximum of $10,000 E decrease by a maximum of $100,000

E

The graph above shows the macroeconomic conditions of Wattsonia. Many economists estimate that the natural rate of unemployment is 6 percent. If this is true and the current rate of unemployment is 5.1 percent, in what range of real gross domestic product is the economy currently producing? (Y2 is the LRAS, Y1 is within the LRAS) A Less than Y1 B At Y1 C At Y2 D Greater than Y1 and less than Y2 E Greater than Y2

E