Question 1

Suppose the required reserve ratio (RRR) is 12.5%. If a customer deposits $800 into a bank, what is the maximum total increase in the money supply that the banking system can generate, assuming all excess reserves are loaned out and redeposited?

Accepted Answer

$6,400

Question 2

Which of the following best explains why the Long-Run Aggregate Supply (LRAS) curve is vertical?

Accepted Answer

Because in the long run, output is determined by resources and technology, not by the price level.

Question 3

A central bank wants to combat high inflation. Which combination of monetary policy tools would be most effective?

Accepted Answer

Sell government bonds, raise the discount rate, and increase the reserve requirement.

Question 4

If the velocity of money ($$V) is $$constant, real output ($$Q) is $$growing at 2% per year, and the central bank increases the money supply ($$M) by 7$$% per year, what is the expected inflation rate according to the Quantity Theory of Money?

Accepted Answer

5%

Question 5

Which of the following scenarios best illustrates the concept of 'crowding out'?

Accepted Answer

Government increases borrowing, raising interest rates and reducing private investment.

Question 6

A country can produce either 10 units of wheat or 20 units of cloth with the same resources. Another country can produce either 5 units of wheat or 15 units of cloth. Which country has the comparative advantage in cloth, and why?

Accepted Answer

The second country, because it has a lower opportunity cost for cloth.

Question 7

If the Federal Reserve buys $500 million in government bonds from the public and the required reserve ratio is 20%, what is the maximum possible increase in the money supply?

Accepted Answer

$$2.5 	ext{ billion}$$

Question 8

Which of the following is NOT a component of M1?

Accepted Answer

Small time deposits

Question 9

During a period of stagflation, which of the following is most likely to occur?

Accepted Answer

High inflation and high unemployment

Question 10

If the government increases spending by $100 million and the marginal propensity to consume (MPC) is 0.8, what is the total change in GDP according to the simple government spending multiplier?

Accepted Answer

$$500 	ext{ million}$$

Question 11

Which of the following best describes the short-run Phillips Curve?

Accepted Answer

It shows an inverse relationship between inflation and unemployment.

Question 12

A country experiences a trade deficit. Which of the following must be true?

Accepted Answer

Imports exceed exports, so $$M \u003e X.$$

Question 13

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

Accepted Answer

An increase in oil prices

Question 14

If the central bank wants to stimulate the economy during a recession, which action is most appropriate?

Accepted Answer

Lower the target for the federal funds rate

Question 15

According to the Rule of 70, how many years will it take for real GDP to double if the annual growth rate is 3.5%?

Accepted Answer

20 years

Question 16

Which of the following best explains why tariffs create deadweight loss?

Accepted Answer

They reduce total economic efficiency by raising prices and limiting mutually beneficial trade.

Question 17

Which of the following is a direct effect of an expansionary monetary policy?

Accepted Answer

Lower interest rates, leading to increased investment and aggregate demand.

Question 18

If the price level increases but the money supply remains constant, what happens in the money market?

Accepted Answer

The demand for money increases, raising the equilibrium interest rate.

Question 19

Which of the following is the correct equation for the Quantity Theory of Money?

Accepted Answer

$$M V = P Q$$

Question 20

Which of the following best describes the effect of a stronger domestic currency on international trade?

Accepted Answer

Exports become more expensive and imports become cheaper.

Comprehensive Study Notes: Money, Banking, Macroeconomic Policy, Growth, and International Trade

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