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

$$\frac{1}{1-0.8} = 5$$, so $$5 \times 100$$ million = $$500$$ million

Q: A bank has $$10 million in checkable deposits and a required reserve ratio of 10%. If the bank holds 2 $$million in reserves, what are its excess reserves?

Required reserves: $$10 \text{ million} \times 0.10 = 1 \text{ million}. $$Excess reserves: $$2 \text{ million} - 1 \text{ million} = 1 \text{ million}.$$

Question 1

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

Accepted Answer

$$\frac{1}{1-0.8} = 5$$, so $$5 	imes 100$$ million = $$500$$ million

Question 2

If actual aggregate expenditure is less than real GDP, what will happen to inventories and what does this indicate about the economy?

Accepted Answer

Inventories will rise, indicating that firms are producing more than is being purchased.

Question 3

Which of the following would cause a rightward shift in the short-run aggregate supply (SRAS) curve?

Accepted Answer

A decrease in the price of oil, a key input for many firms.

Question 4

Which of the following best describes the difference between M1 and M2?

Accepted Answer

M2 includes all of M1 plus savings deposits, small time deposits, and money market mutual funds.

Question 5

A bank has $$10 million in checkable deposits and a required reserve ratio of 10%. If the bank holds 2 $$million in reserves, what are its excess reserves?

Accepted Answer

Required reserves: $$10 	ext{ million} 	imes 0.10 = 1 	ext{ million}. $$Excess reserves: $$2 	ext{ million} - 1 	ext{ million} = 1 	ext{ million}.$$

Question 6

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

Accepted Answer

Sell government securities in open market operations.

Question 7

Suppose the consumption function is $$C = 200 + 0.75Y. If $$disposable income increases by $$400$$, by how much does consumption increase?

Accepted Answer

$$0.75 	imes 400 = 300$$

Question 8

Which of the following is NOT a function of money?

Accepted Answer

A means of production

Question 9

If the economy is experiencing stagflation, which of the following is most likely true?

Accepted Answer

The economy has high inflation and high unemployment.

Question 10

A negative supply shock, such as a sudden increase in oil prices, will most likely cause which of the following in the AD/AS model?

Accepted Answer

A leftward shift of the SRAS curve, leading to higher prices and lower output.

Question 11

If the required reserve ratio is 20%, what is the simple money multiplier?

Accepted Answer

$$\frac{1}{0.20} = 5$$

Question 12

Which of the following would be considered an example of commodity money?

Accepted Answer

Gold coins used as currency

Question 13

If the Federal Reserve lowers the interest rate on reserve balances (IORB), what is the likely effect on bank lending and the money supply?

Accepted Answer

Banks will be more likely to lend, increasing the money supply.

Question 14

Suppose the growth rate of the money supply is 6% and the growth rate of real GDP is 2%. According to the quantity theory of money, what is the implied inflation rate if velocity is constant?

Accepted Answer

Inflation rate = Money growth rate - Real GDP growth rate = $$6\% - 2\% = 4\%$$

Question 15

Which of the following best describes the concept of 'double coincidence of wants' in a barter economy?

Accepted Answer

Both parties must want what the other has to offer at the same time.

Question 16

If the marginal propensity to save (MPS) is 0.3, what is the marginal propensity to consume (MPC)?

Accepted Answer

$$MPC = 1 - MPS = 1 - 0.3 = 0.7$$

Question 17

Which of the following is an example of an unplanned increase in inventories?

Accepted Answer

Firms produce more than consumers purchase, so unsold goods accumulate.

Question 18

Which of the following would shift the long-run aggregate supply (LRAS) curve to the right?

Accepted Answer

An increase in the economy's capital stock

Question 19

If the Federal Reserve conducts quantitative easing, what is it primarily doing?

Accepted Answer

Purchasing longer-term financial assets to increase the money supply and lower long-term interest rates.

Question 20

Suppose the economy is in a recessionary gap. Which monetary policy action is most appropriate for the Federal Reserve to take?

Accepted Answer

Lower the federal funds rate to stimulate aggregate demand.

Macroeconomics Study Guide: Aggregate Expenditure, AD/AS Model, Money & Banking, and Monetary Policy

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