Q: Suppose nominal GDP is $$20 trillion and real GDP is 16 $$trillion. What is the GDP deflator?

$$GDP\ deflator = \frac{Nominal\ GDP}{Real\ GDP} \times 100 = \frac{20}{16} \times 100 = 125$$

Q: A bank has $10 million in deposits and is required to keep 10% as reserves. If the bank holds exactly the required reserves, what is the maximum amount it can lend out?

$$Maximum\ lending = Deposits \times (1 - Reserve\ Ratio) = 10,000,000 \times (1 - 0.10) = 9,000,000$$

Question 1

Which of the following best explains why the aggregate demand (AD) curve is downward sloping?

Accepted Answer

Because as the price level falls, the real value of household wealth rises, interest rates tend to fall, and net exports increase due to relatively lower domestic prices (wealth, interest-rate, and international-trade effects).

Question 2

Suppose the government increases its purchases by $100 billion. If the marginal propensity to consume (MPC) is 0.8, what is the total change in aggregate demand, assuming no crowding out and using the simple spending multiplier?

Accepted Answer

The total change in aggregate demand is $500 billion.

Question 3

Which of the following would cause the short-run aggregate supply (SRAS) curve to shift to the left?

Accepted Answer

A sudden increase in oil prices (negative supply shock).

Question 4

Why is the long-run aggregate supply (LRAS) curve vertical?

Accepted Answer

Because in the long run, the price level does not affect the quantity of real GDP supplied.

Question 5

A country experiences a negative demand shock. According to the AD-AS model, what is the likely short-run and long-run adjustment process?

Accepted Answer

In the short run, output and prices fall; in the long run, input prices adjust downward, shifting SRAS right until output returns to potential.

Question 6

Which of the following is NOT a function of money?

Accepted Answer

Source of economic growth

Question 7

If the Federal Reserve conducts an open market purchase of government securities, what is the immediate effect on bank reserves and the money supply?

Accepted Answer

Bank reserves increase and the money supply expands.

Question 8

Which of the following best describes the quantity equation in the quantity theory of money?

Accepted Answer

$$PY = MV$$

Question 9

Suppose nominal GDP is $$20 trillion and real GDP is 16 $$trillion. What is the GDP deflator?

Accepted Answer

$$GDP\ deflator = \frac{Nominal\ GDP}{Real\ GDP} 	imes 100 = \frac{20}{16} 	imes 100 = 125$$

Question 10

A bank has $10 million in deposits and is required to keep 10% as reserves. If the bank holds exactly the required reserves, what is the maximum amount it can lend out?

Accepted Answer

$$Maximum\ lending = Deposits 	imes (1 - Reserve\ Ratio) = 10,000,000 	imes (1 - 0.10) = 9,000,000$$

Question 11

If the inflation rate is 4% and the nominal interest rate is 7%, what is the real interest rate?

Accepted Answer

$$Real\ Interest\ Rate = Nominal\ Interest\ Rate - Inflation\ Rate = 7\% - 4\% = 3\%$$

Question 12

Which of the following is a criterion for something to serve as a good medium of exchange?

Accepted Answer

All of the above.

Question 13

Which of the following is included in M2 but NOT in M1?

Accepted Answer

Small-denomination time deposits

Question 14

If the money supply grows at 10% per year and real output grows at 3% per year, what is the predicted inflation rate according to the quantity theory of money?

Accepted Answer

$$Inflation = Growth\ rate\ of\ money\ supply - Growth\ rate\ of\ real\ output = 10\% - 3\% = 7\%$$

Question 15

Which of the following is a main goal of monetary policy as identified by the Federal Reserve?

Accepted Answer

All of the above

Question 16

A country has a working-age population of 200 million, a labor force of 120 million, and 110 million employed workers. What is the unemployment rate?

Accepted Answer

$$Unemployment\ Rate = \frac{Unemployed}{Labor\ Force} 	imes 100 = \frac{10}{120} 	imes 100 \approx 8.33\%$$

Question 17

Which of the following best describes the main difference between commodity money and fiat money?

Accepted Answer

Commodity money has intrinsic value, while fiat money is valuable primarily because the government declares it so.

Question 18

Which of the following is a plausible consequence of a bank run in a fractional reserve banking system?

Accepted Answer

Banks may be unable to meet withdrawal demands, leading to a potential banking panic.

Question 19

Which macroeconomic school of thought emphasizes the importance of monetary policy and stable growth in the money supply to control inflation?

Accepted Answer

Monetarist model

Macroeconomics Exam 2 Study Guide: Aggregate Demand & Supply, Money, and Monetary Policy

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