Q: Suppose a country’s potential real GDP grows at 5% per year. Using the rule of 70, how many years will it take for potential output to double?

$$ \frac{70}{5} = 14 \text{ years} $$

Question 1

A bank has deposits of $$500,000 and reserves of 75$$,000. If the required reserve ratio is 10%, what are the bank's excess reserves?

Accepted Answer

$25,000

Question 2

Suppose the Federal Reserve purchases $20,000 worth of government bonds from a bank. What is the immediate effect on the bank's balance sheet?

Accepted Answer

Reserves increase by $$20,000 and bonds decrease by 20$$,000

Question 3

If the required reserve ratio is 10% and a bank has $25,000 in excess reserves, what is the maximum potential increase in the money supply for the entire banking system?

Accepted Answer

$250,000

Question 4

Which of the following fiscal policies would be most appropriate if the economy is operating above potential output and experiencing inflationary pressures?

Accepted Answer

Decrease government spending or increase taxes (contractionary fiscal policy)

Question 5

Suppose a country’s potential real GDP grows at 5% per year. Using the rule of 70, how many years will it take for potential output to double?

Accepted Answer

$$ \frac{70}{5} = 14 	ext{ years} $$

Question 6

If the Federal Reserve wants to decrease aggregate demand to combat inflation, which policy should it pursue?

Accepted Answer

Sell government bonds in the open market

Question 7

Which of the following is NOT a component of gross private domestic investment?

Accepted Answer

The purchase of stock in a corporation

Question 8

If households decide to save more at every income level, all else equal, what is the likely effect on aggregate demand?

Accepted Answer

Aggregate demand shifts to the left

Question 9

Which of the following best describes the functions of money?

Accepted Answer

A store of value, a unit of account, and a medium of exchange

Question 10

If the Fed wants to stimulate aggregate demand, which open market operation should it conduct and what is the expected effect on bond prices and interest rates?

Accepted Answer

Purchase bonds, raising bond prices and lowering interest rates

Question 11

Which of the following is an example of an automatic stabilizer?

Accepted Answer

Unemployment insurance payments that increase during a recession

Question 12

Suppose the cost of raw materials falls across the economy. Using the aggregate demand–aggregate supply model, what is the likely short-run effect?

Accepted Answer

Aggregate supply shifts right; price level decreases; real GDP increases

Question 13

Which of the following best explains why a $$10 billion increase in government purchases has a larger impact on aggregate demand than a 10 $$billion increase in transfer payments?

Accepted Answer

Households save part of an increase in income from transfers, but all government purchases are direct spending

Question 14

If the Fed sells bonds in the open market, what is the expected effect on bond prices and interest rates?

Accepted Answer

Bond prices fall and interest rates rise

Question 15

Which of the following is an example of investment in human capital?

Accepted Answer

Enrolling in a course to improve your computer skills

Question 16

If the economy is at potential output and foreign economies slow dramatically, what is the likely effect on the U.S. economy and what fiscal policy is recommended?

Accepted Answer

Net exports decrease, shifting aggregate demand left; expansionary fiscal policy is recommended

Question 17

Which of the following is a liability for a bank?

Accepted Answer

Checkable deposits

Question 18

If the required reserve ratio is $$10\%$$ and a bank has $500,000 in deposits, what are the required reserves?

Accepted Answer

$$ 0.10 	imes 500,000 = 50,000 $$

Question 19

Which of the following is NOT a source of aggregate demand?

Accepted Answer

Wage increases

Question 20

If the Fed wants to achieve a specific federal funds rate, what must it do?

Accepted Answer

Adjust the money supply to achieve the target rate

Principles of Macroeconomics Exam #2 Review – Guided Study Notes

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