Q: If the required reserve ratio is 10%, what is the maximum potential increase in the money supply from a new deposit of $1,000?

$$\frac{1}{0.10} \times 1,000 = 10,000 ($$but only $$9,000 is $$new money created)

Question 1

Which of the following best explains why some countries experience sustained economic growth while others do not?

Accepted Answer

Because countries with higher rates of investment in physical and human capital, stable institutions, and technological innovation tend to grow faster.

Question 2

Suppose Country A has a real GDP per capita that doubles every 20 years. Using the Rule of 70, what is Country A's approximate annual growth rate?

Accepted Answer

$$\frac{70}{20} = 3.5\%$$

Question 3

Which of the following is NOT a reason why the entire world is not equally rich?

Accepted Answer

Identical levels of savings and investment across all countries.

Question 4

If the aggregate demand curve shifts to the right, which of the following is the most likely short-run effect on the economy?

Accepted Answer

An increase in the price level and an increase in real GDP.

Question 5

Which of the following best describes the long-run aggregate supply (LRAS) curve?

Accepted Answer

It is vertical at the potential output level, indicating that output is determined by resources and technology, not the price level.

Question 6

During the 2007-2009 recession, which of the following actions did the Federal Reserve take to stabilize the economy?

Accepted Answer

It implemented unconventional monetary policies such as quantitative easing to increase liquidity.

Question 7

Which of the following is a function of money that helps facilitate trade in a modern economy?

Accepted Answer

Money acts as a unit of account, allowing prices to be expressed in a common measure.

Question 8

If the required reserve ratio is 10%, what is the maximum potential increase in the money supply from a new deposit of $1,000?

Accepted Answer

$$\frac{1}{0.10} 	imes 1,000 = 10,000 ($$but only $$9,000 is $$new money created)

Question 9

Which of the following is included in the M2 measure of money in the United States but NOT in M1?

Accepted Answer

Savings deposits

Question 10

A bank receives a $5,000 deposit. If the reserve requirement is 20%, how much can the bank lend out from this deposit?

Accepted Answer

$$4,000$$

Question 11

Which of the following best describes the main tool the Federal Reserve uses to conduct monetary policy?

Accepted Answer

Open market operations, which involve buying and selling government securities.

Question 12

Suppose the economy is experiencing high unemployment and low inflation. According to Keynesian theory, which policy would be most appropriate?

Accepted Answer

Increase government spending or lower interest rates to boost aggregate demand.

Question 13

If the Federal Reserve wants to decrease the money supply, which of the following actions should it take?

Accepted Answer

Sell government securities in the open market.

Question 14

Which of the following is a likely consequence of a negative supply shock (such as a sudden increase in oil prices) in the short run?

Accepted Answer

Aggregate supply shifts left, leading to higher prices and lower output.

Question 15

Which of the following best explains how banks create money in a fractional reserve banking system?

Accepted Answer

By lending out a portion of deposits, which creates new deposits in the banking system.

Question 16

Which of the following statements about economic growth in the United States is correct?

Accepted Answer

The U.S. has experienced long-term growth, but with periods of recession and expansion.

Question 17

Which of the following is NOT a typical policy to promote long-term economic growth?

Accepted Answer

Restricting trade and limiting foreign investment.

Question 18

Suppose the economy is at equilibrium where aggregate demand equals aggregate supply. If consumer confidence suddenly increases, what is the most likely short-run effect?

Accepted Answer

Aggregate demand will increase, leading to higher output and a higher price level.

Question 19

Which school of thought argues that government intervention is often unnecessary because markets are self-correcting in the long run?

Accepted Answer

Classical

Question 20

If the Federal Reserve lowers the federal funds rate, what is the most likely effect on aggregate demand?

Accepted Answer

Aggregate demand will increase because lower interest rates encourage borrowing and spending.

Exam Two Study Guide: Macroeconomics (Spring 2026)

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