Economics 2Unit 2 Test Class Day/Time:Name:
Part A. Answer the following questions in the space provided. Each question is worth 4 points.
- Use an aggregate demand and aggregate supply diagram to show what will happen to output, prices, unemployment and wages in the U.S. economy in the short-run if there is an increase in the price of oil. On your diagram, mark the starting output as Q1, the output at the end of the short run as Q2, the starting price as P1, and the price at the end of the short run as P2, Next to the diagram, write in what direction prices, output, unemployment and wages are moving.
- Using a table similar to the one used in class, show the effect of an $800 decrease in investment spending in the Keynesian system. Show the effect on investment, consumption, and GDP for each of three rounds and what the total effect will be on each after all potential rounds are completed. Assume the marginal propensity to consume (MPC) is 3/4 or 0.75 Illustrate the effect of the first 2 rounds and the total effect after all the rounds are completed on an AD/AS diagram with a flat SRAS curve. Be sure to write the amount of the change for each line shift on your diagram and the amount of the total change. Assume there is no crowding out.
- Using a table similar to the one used in class, show the effect of a $900 decrease in government spending in the Keynesian system if there is complete crowding out. Show the effect on government, investment, consumption, and GDP for each of three rounds and what the total effect will be on each after all potential rounds are completed. Assume the marginal propensity to consume (MPC) is 2/3 or 0.677 Illustrate the effect of the first 2 rounds and the total effect after all the rounds are completed on an AD/AS diagram with a flat SRAS curve. Be sure to write the amount of the change for each line shift on your diagram and the amount of the total change.
4. A. Veronica has an income of $6 which she uses only tobuy $1 pizzas. So does Wayne.
Veronicaalso has $8 cash in the cookie jar of which she plans to use 25% 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 8 shares IBM stock in the cookie jar rather than cash, and each share
was worth one dollar which then increased to two dollars when prices doubled. Would her
pizza purchases change or not when all prices doubled?
YesNo
5. a. Here is Fred’s basket of purchases in 2015: Pizzas – 20, Beer – 40, Gas – 60. The prices of
these three things in 2015 are: Pizzas – $10, Beer – $3, and Gas – $6 In 2016, the prices
change to Pizzas – $12, Beer – $2, and Gas – $5. How much does Fred spend on his
purchases in each year?
2015 ______
2016 ______
b. Now create an index of prices for the two years with 2015 being the base year.
2015 ______
2016 ______
c. What was the inflation rate from 2015 to 2016?
6. a. The government of the state of Caltopia recently conducted a survey of 1,500 people. They
found 975 of the people had jobs, 450 did not have jobs and had not looked for jobs recently,
and 75 did not have jobs and had looked for jobs recently. What is the estimated
unemployment rate for Caltopia in percent out to two decimals.? Show your work.
b. Draw a “typical” short-run aggregate supply curve. Be sure to mark the position of natural
RGDP (QN) on your diagram and to take your line to the left and to the right of natural
RGDP. Be sure to label the two axis. (Hint: consider the amount of unused resources
available for increasing output at the various places on the diagram).
7. Answer whether the following statement is true, false, or uncertain, and explain why. If the
government increases spending and does not raise taxes, then aggregate demand will increase.
8. Answer whether the following statement is true, false, or uncertain, and explain why. The fall in
housing prices caused economic problems for people who were not involved in the construction
and sale of houses.
Part B. Mark the letter of the best answer on your scantron. Each question is worth 1 point.
1. What does crowding out do to long-term growth?
a. Raises it.
b. Lowers it.
c. Does not affect it.
2. What is the short-run aggregate supply curve?
a. a curve showing the relationship between the GDP deflator and real GDP over the period
of time in which wages are fixed.
b. a curve showing the relationship between the GDP deflator and real GDP over the period
of time in which wages are variable.
c. a curve showing the relationship between the GDP deflator and real GDP over the period
of time in which all prices are fixed.
d. a curve showing the relationship between the GDP deflator and real GDP over the period
of time in which output is fixed.
3. According to the Laffer curve, raising tax rates does what to tax revenue?
a. Always raises revenue.
b. Raises revenue when rates are low, but lowers revenue when rates are high.
c. Lowers revenue when rates are low, but raises revenue when rates are high.
d. Always lowers revenue.
4. Which of the following is true?
a. The national debt is based on the cumulative government deficits plus interest.
b. The national debt is getting close to World War II figures as a percentage of GDP.
c. The higher the interest rate, the faster the national debt rises.
d. All of the above.
5. The inflationary gap part of the AD/AS diagram is:
- to the left of QN.
- to the right of QN.
- directly at QN.
d. all of the above.
6. What is stagflation?
a. A period of very high inflation.
b. A period of very high unemployment.
c. A period where inflation and unemployment are both high at the same time.
d. A period of time where inflation and unemployment are both low at the same time.
7. What is expansionary fiscal policy?
a. Increasing both government spending and taxes.
b. Decreasing both government spending and taxes.
c. Increasing government spending and cutting taxes.
d. Decreasing government spending and raising taxes.
8. Because of the substitute effect, an inflation rate measured using a fixed basket of goods will be:
a. higher than actual inflation.
b. lower than actual inflation.
c. equal to actual inflation.
9. Which of the following a reason that people buy more U.S. made goods when U.S. prices fall?
a. The international price effect.
b. The investment effect.
c. The barter effect.
10. What goes downwhen an economy goes into the recessionary gap in the short-run?
a. output.
b. unemployment.
c. wages.
d. none of the above.
11. Why is the long-run AS curve vertical (straight up and down).
a. Because as prices and wages rise, consumers keep buying the same amount.
b. Because prices are rising faster than cost of production, so businesses are producing more.
c. Because prices are rising faster than cost of production, so businesses are not producing
more.
d. Because prices are not rising faster than cost of production, so businesses are not producing
more.
12. The higher real GDP is, the:
a. lower unemployment is.
b. higher unemployment is.
c. unemployment is not affected.
13. Crowding out makes interest rates go:
a. higher.
b. lower.
c. stay the same.
14. When there is unexpected inflation, who are likely to be losers?
a. Cash holders.
b. Savers into saving accounts at banks.
c. Borrowers.
d. Both a and b.
15. What is frictional unemployment?
a. Unemployment that occurs as workers move between jobs.
b. Unemployment that occurs because individuals lack skills valued by employers.
c. Unemployment closely tied to the business cycle, like higher unemployment during a
recession.
d. All of the above.
16. What is the long-run in macroeconomics?
a. The period of time in which output can change.
b. The period of time in which wages can change.
c. The period of time in which the consumer price index can change.
d. The period of time in which unemployment can change.
17. If the prices of government goods and private investment goods are rising faster than consumer good,
Then:
a. inflation will be higher measured by the GDP deflator rather than the consumer price index.
b. inflation will be lower measured by the GDP deflator rather than the consumer price index.
c. inflation will be the same measured by the GDP deflator rather than the consumer price index.
18. If businesses have very full inventory warehouses rather than nearly empty ones,, then the time to go
from one round in the Keynesian table to the next round will be:
a. faster.
b. slower.
c. not effected.
19. Expected lower inflation will cause interest rates to:
a. fall.
b. rise.
c. stay the same.
20. What is the real rate of interest?
a. the inflation rate minus the nominal interest rate.
b. the nominal interest rate plus the inflation rate.
c. the nominal interest rate minus the inflation rate.
d. the nominal interest rate times the inflation rate.
21. Keynesians would propose contractionary fiscal policy:
a. if the economy is in a recessionary gap.
b. if the economy is in an inflationary gap.
c. as a stabilizing measure if the economy is in long-run equlibrium.
22. Which of the following combinations constitutes contractionary fiscal policy?
a. Increasing government spending and cutting taxes.
b. Cutting government spending and cutting taxes.
c. Increasing government spending and increasing taxes.
d. Cutting government spending and increasing taxes.
23. If the MPC is 0.6, then a $200 increase in government spending financed by borrowing (with
causes GDP to rise by how much?
a. $0
b. $120
c. $200
d. $333.33
e. $500
24. According to the Phillip’s Curve, as inflation goes higher, unemployment:
a. also goes higher.
b. goes lower.
c. stays the same.
25. If the SRAS curve is a line straight up (vertical), then increasing AD causes:
- prices to rise, but not output.
- output to rise, but not prices.
- both output and prices to rise.
- neither output nor prices to rise.
26. Which group of people is likely to be a winner during an unexpected inflation?
a. People holding cash.
b. Savers into a bank saving account.
c. Borrowers.
d. None of the above.
27. Western life expectancy and GDP per capita began to rise significantly around:
a. 1550.
b. 1820.
c. 1950.
d. 2010.
28. Natural Real GDP is:
a. the amount of output that is really being produced in the country.
b. the amount of ouput that would be produced if we did not have machines, in other
words the output that would be “naturally” produced.
c. the amount of output that would be produced at the natural rate of unemployment.
d. the amount of output that would be produced if the government did not intervene in the
economy.
29. After congress passed the Keynesian stimulus package early in his first term as President, actual
unemployment during his first term was:
a. lower than what he predicted it would be if his stimulus package was passed.
b. higher than what he predicted it would be if his stimulus package was passed.
c. just about equal to what he predicted it would be if his stimulus package was passed.
d. trick question – no stimulus package was passed early in his first term.
30. It seems common that when businesses wish to cut labor costs they:
a. primarily cut the number of workers but keep the wage the same.
b. primarily lower the wage but keep the number of workers the same.
c. cut both wages and the number of workers substantially.
d. all of the above are about equally likely.
31. Why might a business prefer to lay-off workers to cutting wages?
a. Workers may reduce work effort if their wages are cut.
b. If the workers keep working as hard as ever in either case, there will be less of a drop in
output with a drop in number of workers.
c. Firms know that by refusing to cut wages, they are helping the recession to end faster.
d. Both b and c.
32. In the long-run, when prices rise, what happens to real profits?
a. They stay the same.
b. They rise, so businesses make more products.
c. They fall, so businesses make less products.
d. Sometimes they go up, sometimes they go down.