Applied Macroeconomics
Midterm Exam
Course Introduction
Applied Macroeconomics explores the practical application of macroeconomic theories and principles to real-world issues and policy challenges. The course covers topics such as national income determination, economic growth, unemployment, inflation, fiscal and monetary policies, and the role of government intervention in the economy. Through the use of case studies, empirical data analysis, and contemporary events, students gain insights into how macroeconomic tools are used to address issues like recession, financial crises, and economic development. The course emphasizes analytical thinking and equips students with the skills to interpret economic trends and evaluate the effectiveness of various policy measures in different economic contexts.
Recommended Textbook
Macroeconomics 14th Canadian Edition by Campbell R. McConnell
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Chapter 1: Limits, Alternatives, and Choices
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Q1) "Economists are scientists and therefore should not become involved in making value judgments which policy formulation necessarily entails".Do you agree?
Answer: It is important to distinguish between positive and normative economics.When conducting positive economic analysis,economists use objective,scientific methods to collect data and test hypotheses to arrive at economic theories and principles.However,there is a need to apply economic theories to real-world problems and this necessarily requires some value judgments or the use of normative economics.Even scientists who can experiment in laboratories have to make value judgments when they arrive at the point of applying their theories.For example,geneticists must make value judgments about the uses of genetic science. Economists know their own theories best so they should be involved in the decisions about how to apply those theories.Of course,in a democratic society those judgments are often advisory and must be approved by elected representatives before they are enacted.
Q2) How do income changes affect the position of the budget line?
Answer: Increases in income causes a parallel shift outward of the budget line (without changing its slope)while decreases in income cause the budget line to shift inward.
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Chapter 2: The Market System and the Circular Flow
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Q1) Explain the most important consequence of legally enforceable property rights?
Answer: The most important consequence of legally enforceable property rights is that they encourage people to cooperate by helping to ensure that only mutually agreeable economic transactions take place.Without legally enforceable property rights the strong could simply take whatever they wanted from the weak without giving them any compensation.But in a world of legally enforceable property rights,any person wanting something from you has to get you to agree to give it to them.And you can say no.The result is that if they really want what you have,they must offer you something that you value more highly in return.That is,they must offer you a mutually agreeable economic transaction-one that benefits you as well as them.
Q2) Describe the three major virtues of a market system.
Answer: First,the market system promotes efficient use of scarce resources.Products are produced in the least costly way and the products most desired by society get produced.Second,the market system provides incentives for continual improvement and innovation.Rewards are given to entrepreneurs,workers,and consumers who attempt to make the best use of scarce resources.Third,the market system supports individual freedom for producers,consumers,and workers.Each group is able to pursue their own self-interest and thus promote the social interest.
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Chapter 3: Demand, Supply, and Market Equilibrium
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Q1) Despite a higher price for widgets,buyers are purchasing more units.How is this possible if the law of demand has not been violated? Give and explain two distinct reasons.
Answer: One reason that can explain the higher sales despite the higher price is an increase in demand.The rightward shift of the demand curve leads to a lower equilibrium price and a lower equilibrium quantity.The higher demand could be the result of an favourable change in tastes,an increase in the number of buyers,an increase in consumer income if widgets are normal goods,a decrease in consumer income if widgets are an inferior good,an increase in the price of a substitute,a decrease in the price of a complement,or newly formed expectations of a higher price.
A second explanation for the higher sales is the removal of a price ceiling,which raises the price to its equilibrium level.Although buyers wish to purchase fewer units,actual sales are higher since sellers are willing to increase the quantity supplied.When the price ceiling was in place,a shortage existed and buyers could not purchase all of the units they desired.
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Chapter 4: Market Failures: Public Goods and Externalities
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Q1) Demand is represented by the equation,P = 200 - 2Q<sub>D</sub> and supply by the equation P = 25 + 3Q<sub>S</sub>.
(a)Suppose this market produces 30 units of output.What price would this output be sold at if consumers we going to buy all goods? What is the marginal benefit to society of the 30<sup>th</sup> unit? What is the marginal cost of the 30<sup>th</sup> unit?
(b)What is consumer surplus if the market produces 30 units of output? What is producer surplus? What is the sum of consumer and producer surplus?
(c)What are the equilibrium price and quantity?
(d)What is consumer surplus at equilibrium? What is producer surplus? What is the sum of consumer and producer surplus?
(e)Is allocative efficiency achieved when the market produces 30 units of output? Explain in three different ways.
Q2) What are quasi-public goods and why does the government provide them?
Q3) What resource problem is created by negative externalities and what methods are suggested for dealing with this problem?
Q4) What are negative and positive externalities? How do they affect supply and demand curves?
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Chapter 6: An Introduction to Macroeconomics
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Q1) If prices are "stuck" and there is an unexpected demand increase,describe what happens in the economy.
Q2) What are two broad categories of macroeconomic shocks?
Q3) What will happen to prices and output levels if there is an unexpected demand increase and prices are fully flexible?
Q4) What is the Great Recession? Describe its causes and also its impact on the Canadian Economy.
Q5) In this list,identify those investments which are financial (F)and those that are economic (E): Canada Savings Bonds,stock in Potash Corporation of Saskatchewan,an old house you plan on fixing and reselling,new machinery for a factory you own,land that you plan to develop,an old window factory,your university education.
Q6) What are two reasons why prices might be sticky?
Q7) Suppose that we are in a condition of "stuck" prices so that the price of nails will not go above or below $2/kg.Further suppose that nail factories have been built on a business plan designed to deliver 6,000 kg/week.How many nails will be sold in a market in which demand (which includes a modest amount of inventory)is characterized by: (a)P = 5 - 0.5Q, (b)P = 6 - 0.5Q,and (c)P = 4 - 0.5Q,where P is in $/kg and Q is in thousands of kg/week? In each case,what happens to inventory.
Page 7
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Chapter 7: Measuring the Economys Output
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Q1) Define net exports.
Q2) What is the relationship between real GDP,nominal GDP,and the price index?
Q3) What are the two basic ways of deriving real GDP from nominal GDP?
Q4) Net investment can be positive,negative,or zero,but gross investment can never be less than zero.Explain.
Q5) Identify at least four transactions and other variables,which are not included in the GDP.
Q6) The following data show nominal GDP and the appropriate price index for several years.Compute real GDP for each year and indicate whether you have "inflated" or "deflated" nominal GDP in finding real GDP.All GDP are in billions.
Q7) The following is a list of figures for a given year in billions of dollars.Using this data,compute: (a)GDP by the Expenditure Method; (b)GDP by the Income Method; (c)Net exports;and (d)Net Investment.
Q8) Differentiate between nominal and real GDP.
Q9) What adjustments need to be made to go from net domestic income at factor cost to GDP?
Q10) The following table shows the price of a specific stereo receiver for a five-year period.Using Year 3 as the base year,calculate the price index for each year.
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Chapter 8: Economic Growth
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Q1) How might poorer nations catch up to richer countries in terms of GDP per capita?
Q2) What are the reasons for improved resource allocation?
Q3) What are the characteristics of current rise in the Average Rate of Productivity Growth that distinguishes it from the economy of previous periods?
Q4) Suppose an economy's real GDP is $125 billion in year 1 and $130 billion in year 2.What is the growth rate of its GDP?
Q5) Suppose an economy's real GDP is $700 billion in year 1 and $718 billion in year 2.What is the growth rate of its GDP?
Q6) Explain why even small changes in the rate of economic growth are significant.Use the "rule of 70" to demonstrate the point.
Q7) If an economy has 9,000 workers with each working 2,000 hours per year and the average real output per worker-hour is $20,what is real GDP?
Q8) Canada's economy has realized significant economic growth in the last 50 or so years.Still,there are some items missing in our growth calculations that might impact our standard of living.List three of them and describe how their inclusion might modify our interpretation of economic growth statistics.
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Chapter 9: Business Cycles, Unemployment, and Inflation
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Q1) "Inflation is a harsh and arbitrary form of taxation." Do you agree? If so,who pays this tax?
Q2) Some economists believe that moderate inflation cannot be accepted because a gradual increase in prices leads to an ever-rising rate of inflation.Other economists argue that in order to achieve rapid economic growth,some moderate price increases are necessary and that rigid price stability would cause considerable unemployment.Contrast and evaluate these two points of view.
Q3) Which types of industries are hit hardest by a recession? Explain.
Q4) What are the economic and non-economic costs of unemployment?
Q5) In the table below are statistics showing the labour force and total employment during year 1 and year 5.Make the computations necessary to complete the table.
Q6) What is meant by the term business cycle? List the four phases of the business cycle.
Q7) Calculate the rate of inflation between Year 1 and Year 2.The price index in Year 1 was 124.0.It was 130.7 in Year 2.
Q8) How is the unemployment rate affected if employment increases from 9 million to 9.5 million and the labour force increases from 10 million to 11 million?
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Chapter 10: Basic Macroeconomic Relationships
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Q1) List six events that could cause a shift in the investment demand curve to the right.
Q2) Suppose that the linear equation for consumption in a hypothetical economy is C = 50 + 0.9 Y.Also suppose that income (Y)is $400.Determine the following: (a)MPC; (b)MPS; (c)level of consumption; (d)APC; (e)APS.
Q3) What are the relationships between the multiplier and the marginal propensities to consume and save?
Q4) Define the multiplier.How is it related to real GDP and the initial change in spending? How can the multiplier have a negative effect?
Q5) Explain the difference between a movement along the consumption schedule and a shift in the consumption schedule.
Q6) List four factors that could shift the current consumption schedule.
Q7) Complete the accompanying table.
Q8) Complete the accompanying table.
Q9) Define the consumption and saving schedules.
Q10) Describe the relationship between the size of the MPC and the multiplier.How does it compare to the relationship between the size of the MPS and the multiplier?
Page 11
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Chapter 11: The Aggregate Expenditures Model
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Q1) Use the table below to answer the following questions.Assume that investment,net exports,government expenditures,and taxes do not change with changes in real GDP.
Q2) At the current level of real GDP,
S<sub>a</sub> = $180
I<sub>g</sub> = $160
X = $300
M = $280
G = $250
T = $270
(a)What is the size of injections? Leakages?
(b)Is GDP at its equilibrium level? Explain.
(c)What is the unplanned change in inventories? Explain.
Q3) Other things being constant,what will be the effect of each of the following upon the equilibrium level of GDP?
(a)An increase in the amount of liquid assets consumers are holding;
(b)A sharp rise in stock prices;
(c)A rapid upsurge in the rate of technological advance;and (d)A sharp increase in the interest rate.
Q4) Compare and contrast the recessionary gap and the inflationary gap.
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Chapter 12: Aggregate Demand and Aggregate Supply
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Q1) Identify the ways in which each of the following determinants would have to change to cause a decrease in aggregate demand: consumer wealth,consumer expectations,business taxes,national income in countries abroad,exchange rates.
Q2) How is the short-run aggregate supply curve sloped and why is it sloped this way?
Q3) Suppose that a hypothetical economy has the following relationship between its real domestic output and the input quantities necessary for producing that level of output.
Q4) List four government tax or spending policy options that would shift the short-run aggregate supply curve rightward.
Q5) Why does aggregate demand shift outward by a greater amount than the initial change in spending?
Q6) What are five reasons for the downward price-level inflexibility,especially as it pertains to wages and prices?
Q7) How is the long-run aggregate supply curve sloped? Explain.
Q8) Suppose the aggregate demand and short-run aggregate supply schedules for a hypothetical economy are as shown below:
Q9) In the table below are aggregate demand and aggregate supply schedules.
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Chapter 13: Fiscal Policy, Deficits, Surpluses, and Debt
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Q1) In 2011,the public debt was $617 billion.Put this number in perspective by relating the debt to GDP,to other countries' debt,to the amount of interest payments on the debt,and to ownership of the debt.
Q2) Identify five problems or complications that arise in the implementation of fiscal policy.
Q3) Give two examples of contractionary fiscal policy.What will be the effect on government surplus/deficit?
Q4) "The more progressive a tax system,the greater is the economy's built-in stability." Explain this statement for both recessionary and peak phases of the business cycle.
Q5) How can the effect of an expansionary fiscal policy be weakened?
Q6) Why do some economists,who favour government intervention to address high unemployment or demand-pull inflation,nonetheless reject the use of fiscal policy?
Q7) Explain what is meant by a built-in stabilizer and give two examples.
Q8) Is it possible to impose a burden on future generations by increasing the public debt?
Q9) "If economic forecasting was a more exact science,the business cycle could be entirely corrected by fiscal measures." Do you agree?
Page 14
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Chapter 14: Money, Banking, and Money Creation
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Q1) Some government bonds can be redeemed for currency or a cheque at banks.Why,then,isn't it universally agreed that government bonds are part of the money supply?
Q2) What happens to the money supply when a bank accepts deposits of currency from the public and places it in demand deposits?
Q3) Money is what money does.Explain.
Q4) What is meant by the overnight lending rate?
Q5) Give an equation that shows the relationship between excess cash reserves,maximum demand-deposit expansion,and the monetary multiplier.
Q6) Describe the basic features of a chartered bank's balance sheet.
Q7) What is the difference between the M1 and M2 definitions of the money supply?
Q8) The following is the consolidated balance sheet for the chartered banking system.Assume the desired reserve ratio is 33%.Show the new consolidated balance sheet after maximum loan expansion has occurred.
Q9) Use the figures in the table below to answer the following questions.
Q10) What are Mortgage-Backed Securities and how are they created?
Q11) How does the problem of Moral Hazard relate to financial investments?
Q12) What are the two significant characteristics of the fractional reserve banking system? Page 15
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Page 16
Chapter 15: Interest Rates and Monetary Policy
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Q1) Differentiate between expansionary and restrictive monetary policies.
Q2) What are the five functions of the Bank of Canada? Which one is most important?
Q3) Suppose the economy is experiencing a recession and high unemployment.Describe the transmission mechanism through which monetary policy could address these problems?
Q4) Explain how the two principal tools of monetary policy are used.
Q5) Identify the major items in the consolidated balance sheet of the Bank of Canada.
Q6) Explain what is meant by cyclical asymmetry with regard to monetary policy effects.
Q7) What is the difference between the Bank of Canada's purchases of securities from the chartered banking system and those from the public? Give an example.
Q8) How does an increase in the price level affect the equilibrium rate of interest?
Q9) What are the two instruments the Bank of Canada has for influencing the money supply? Which instrument is more important?
Q10) Why is the transactions demand for money less than nominal GDP?
Q11) Explain how the net export effect strengthens the effects an easy money and a tight money policy.
Q12) Use the table below to answer the questions.
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Chapter 16: Long-Run Macroeconomic Adjustments
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Q1) Explain the basic arguments for supply-side economics.
Q2) If the Phillips Curve exists in reality,what dilemma does this create for fiscal and monetary policies? Explain.
Q3) (a)Using a graph showing aggregate demand,short-run aggregate supply,and long-run aggregate supply,illustrate an economy that faces a recessionary gap.
Q4) Suppose the potential level of real GDP for a hypothetical economy is $250 and the price level (P)initially is 100.Use the following short-run aggregate supply schedules below to answer the questions.
Q5) Why is the difference between the actual and expected rates of inflation important for explaining falling inflation?
Q6) In general,the Canadian economy has experienced ongoing inflation.Explain how this is possible.
Q7) Describe the characteristics of the long-run aggregate supply curve.Explain how changes in the price level affect the short-run aggregate supply curve and the long-run aggregate supply curve.
Q8) What is stagflation and what was one of its causes in the 1970s and early 1980s?
Q9) Compare and contrast the short-run Phillips Curve and the long-run Phillips Curve. To view all questions and flashcards with answers, click on the resource link above.
Page 18
Chapter 17: International Trade
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Q1) Evaluate the argument: "Restricting imports from other nations will save Canadian jobs."
Q2) Why has international trade grown rapidly since World War II?
Q3) What are the similarities and differences in the economic effects of tariffs and quotas?
Q4) How do protectionist policies affect consumers,workers,producers,and the government? Explain.
Q5) Identify the four basic types of trade barriers and describe each of them.
Q6) What are the net costs of tariffs and quotas on consumption and income distribution?
Q7) Answer the following questions regarding international trade:
(a)What is the common myth regarding the benefits from international trade?
(b)What is the associated implication arising from this myth?
(c)What is the true benefit from international trade?
Q8) How can Canada compete successfully with relatively low-wage nations such as India and China?
Q9) Who gains and who loses from a protective tariff? Explain.
Page 19
Q10) "The international flow of goods helps compensate for the international immobility of resources." Analyze and explain.
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Chapter 18: Exchange Rates and the Balance of Payments
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Q1) If a nation's balance of payments is always in balance,why isn't it also always in equilibrium?
Q2) What is the "managed float"?
Q3) What domestic macroeconomic adjustments would be necessary to maintain fixed exchange rates when there are persistent balance of payments deficits? What are the problems with these adjustments?
Q4) What is meant by currency appreciation?
Q5) Explain how the exchange rate gets determined in a flexible exchange rate system.
Q6) What role does the foreign exchange market play in facilitating the trade of goods?
Q7) What happens in the foreign exchange market when there is a Canadian export transaction?
Q8) What happens in the foreign exchange market when there is a Canadian import transaction?
Q9) Answer the next five questions on the basis of the following hypothetical data for a hypothetical nation Economia.All numbers are in billions of dollars.Assume that there is no Statistical Discrepancy.
Q10) In the table below are the supply and demand schedules for Russian roubles.
Page 20
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