Course Introduction
Business Economics
Study Guide Questions
Business Economics explores the application of economic principles and methodologies to real-world business decision-making. This course examines how businesses operate within various market structures, the factors influencing supply and demand, and the way costs, revenues, and profit maximization guide firm behavior. Students will analyze topics such as pricing strategies, production decisions, market competition, and the impact of government regulation. Throughout the course, emphasis is placed on integrating economic theory with practical business scenarios, enabling students to develop analytical skills essential for effective strategic planning and problem-solving in a competitive business environment.
Recommended Textbook
Macroeconomics 1st Canadian Edition by R.
Glenn Hubbard
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Page 2
Chapter 1: Introduction to Macroeconomics and the Great Recession
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Sample Questions
Q1) Financial markets and financial intermediaries together comprise the A) business cycle.
B) economic system.
C) macroeconomic model.
D) financial system.
Answer: D
Q2) Changes in government taxes and purchases that are intended to achieve macroeconomic policy objectives refer to A) fiscal policy.
B) monetary policy.
C) quantitative analysis.
D) government transparency.
Answer: A
Q3) Explain how the "euro crisis" could potentially affect Canadian exports.
Answer: Canadian exports could suffer as European consumers reduce spending.However,with only 10% of Canadian exports going to the Eurozone,the effect would be relatively small.Some economists also believe Europe's debt crisis has led to a lack of confidence among business leaders in Canada and the United States.This lack of confidence has resulted in reduced exports to the U.S.,Canada's largest trading partner.
Page 3
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Chapter 2: Measuring the Macroeconomy
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Sample Questions
Q1) Which of the following goods is directly counted in GDP?
A) the ground beef that Taco Bell purchases for use in its burritos
B) the tortillas that Taco Bell purchases for its burritos
C) the paper wrap that Taco Bell purchases to wrap its burritos
D) the Burrito Supreme that Sondra purchases for lunch at Taco Bell
Answer: D
Q2) A country in which a substantial amount of the factories and stores that produce domestic goods and services are foreign-owned is most likely a country in which
A) GDP is much larger than GNP.
B) GNP is much larger than GDP.
C) GDP is roughly equal to GNP.
D) the relationship between GDP and GNP no longer exists.
Answer: A
Q3) <b>Refer to Figure 2.3.</b>Assume that 2010 is the base year.Real GDP in 2007 is
A) $490.00.
B) $568.00.
C) $580.00.
D) $671.00.
Answer: C
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Page 4
Chapter 3: The Canadian Financial System
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Sample Questions
Q1) The text lists five policy responsibilities of most central banks,including the Bank of Canada.What are those five policy responsibilities?
Answer: 1. regulating the money supply
2. acting as a lender of last resort to the banking system
3. acting as the government's bank by playing a role in the collection and disbursement of government funds
4. regulating the financial system
5. facilitating the payment system by providing banks with cheque-clearing and other services
Q2) The relationship among interest rates on bonds that are otherwise similar but that have different maturities is known as the
A) term structure of interest rates.
B) risk structure of interest rates.
C) term premium.
D) Treasury bond coupon.
Answer: A
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Chapter 4: Money and Inflation
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Q1) If the excess reserves-to-deposit ratio decreases and the monetary base is unchanged,the value of the money multiplier will ________ and the value of the money supply will ________.
A) decline; decline
B) decline; increase
C) increase; decline
D) increase; increase
Q2) Which of the following functions of money would be least affected if the economy experiences high rates of inflation?
A) unit of account
B) store of value
C) standard of deferred payment
D) medium of exchange
Q3) In countries that have experienced hyperinflation,what role have large government budget deficits played in causing the very high inflation rates?
Q4) How is the quantity theory of money different from the quantity equation,and why must the quantity equation always be true?
Q5) Explain how inflation can be costly even if it is expected.
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Chapter 5: The Global Financial System and Exchange Rates
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Q1) The part of the balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the country is the
A) capital account.
B) current account.
C) financial account.
D) statistical discrepancy account.
Q2) <b>Refer to Figure 5.3.</b>All else equal,a decrease in the desire of households to consume today accompanied by an increase in corporate taxes would cause which of the following shifts?
A) S to S and D to D
B) S to S and D to D
C) S to S and D to D
D) S to S and D to D
Q3) If the dollar appreciates relative to the Swiss franc,
A) Canadian exports to Switzerland become more expensive.
B) Canadian exports to Switzerland become less expensive.
C) Swiss imports to Canada become more expensive.
D) the value of Swiss imports to Canada does not change.
Q4) Why is the balance of payments always zero?
Page 7
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Chapter 6: The Labour Market
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Q1) Unemployment due to factors such as weather or fluctuations in demand for certain goods and services during different times of the year is called ________ unemployment.
A) frictional
B) structural
C) cyclical
D) seasonal
Q2) <b>Refer to Figure 6.2.</b>Holding other variables constant,an increase in the real wage will result in a
A) movement from point A to point B.
B) movement from point B to point A.
C) shift from curve S to curve S .
D) shift from curve S to curve S .
Q3) The income effect of a real wage increase is observed when
A) the higher wage causes workers to take more leisure and work fewer hours.
B) the higher wage causes workers to take less leisure and work more hours.
C) leisure's higher opportunity cost causes workers to take less leisure and work more hours.
D) leisure's higher opportunity cost causes workers to take more leisure and work more hours.
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Chapter 7: The Standard of Living Over Time and Across Countries
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Q1) All else equal,as the capital stock increases,the marginal product of capital will
A) increase at an increasing rate.
B) increase at a decreasing rate.
C) decrease at an increasing rate.
D) decrease at a decreasing rate.
Q2) The aggregate production function is an equation that shows the relationship between ________ and ________.
A) the inputs employed by firms; the maximum output firms can produce with those inputs
B) the inputs employed by an individual firm in an economy; the average of the inputs employed by all firms in an economy
C) the output produced by an individual firm in an economy; the average of the output produced by all firms in an economy
D) the average level of capital used in production in an economy; the average level of labour used in production in an economy
Q3) Explain how a well-functioning financial system can increase total factor productivity and promote economic growth.
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Page 9
Chapter 8: Long-Run Economic Growth
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Q1) If the capital-labour ratio equals 1.5 in the steady state,depreciation equals 20,and dilution equals 10,break-even investment equals
A) 15.
B) 20.
C) 30.
D) 45.
Q2) In the Solow growth model,the growth rate of real GDP per worker depends on the ________,and in the AK growth model,the growth rate of real GDP per worker depends on the ________.
A) rate of depreciation; rate of dilution
B) investment growth; rate of population growth
C) growth rate of the capital stock; growth rate of the labour force
D) rate of labour-augmenting technological change; national saving rate
Q3) In the Solow growth model,the steady state occurs when A) investment = depreciation.
B) depreciation = 0.
C) the capital-labour ratio = 1.
D) saving = investment.
Q4) Why does growth occur in two-sector growth models?
Q5) Describe the steady state in the Solow growth model.
Page 10
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Chapter 9: Business Cycles
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Q1) As the best measure of the size of economic fluctuations associated with a business cycle,economists typically use
A) real GDP.
B) the deviation of real GDP from potential GDP.
C) potential GDP.
D) the deviation of real GDP from nominal GDP.
Q2) If the output gap is greater than zero,real GDP is ________ potential GDP,and the economy will ________ to reach full employment.
A) greater than; expand
B) greater than; contract
C) less than; expand
D) less than; contract
Q3) Multiplier effects occur when there is a change in spending that does not depend on income.Spending that does not depend on income is referred to as
A) coincident spending.
B) nominal spending.
C) autonomous expenditures.
D) induced expenditures.
Q4) List three reasons why nominal wages can be sticky in the short run.
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Chapter 10: Explaining Aggregate Demand: the Is-Mp Model
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Q1) The aggregate demand curve is all of the equilibrium combinations of
A) the IS curve and the MP curve.
B) the output gap and the price level.
C) the price level and the real interest rate.
D) the real interest rate and the output gap.
Q2) For each of the following changes,identify whether there will be a shift in the IS curve or a movement along the IS curve.In each case identify the direction of the movement or shift.
a. The real interest rate decreases.
b. The government decreases tax rates.
c. Government spending decreases.
d. Investors become optimistic about future profitability.
Q3) <b>Refer to Figure 10.5.</b>A shift from MP to MP will occur if
A) investors increase the short-term interest they expect in the future.
B) investors increase the term premium they require on long-term bonds.
C) the Bank of Canada decreases its target for the short-term nominal interest rate.
D) the expected inflation rate decreases.
Q4) Explain how the AD curve can be derived from the IS-MP model.
Page 12
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Chapter 11: The Is-Mp Model: Adding Inflation and the Open Economy
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Q1) A decrease in the real interest rate in Canada will cause the dollar to ________ relative to other currencies and ________ net exports and real GDP.
A) appreciate; increase B) appreciate; reduce C) depreciate; increase
D) depreciate; reduce
Q2) An increase in the real interest rate in Canada will cause the dollar to ________ relative to other currencies and ________ net exports and real GDP.
A) appreciate; increase B) appreciate; reduce C) depreciate; increase D) depreciate; reduce
Q3) The housing shock that occurred during the Great Recession reduced wealth and residential construction,causing the
A) IS curve to shift to the right.
B) IS curve to shift to the left.
C) MP curve to shift up.
D) MP curve to shift down.
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Chapter 12: Monetary Policy in the Short Run
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Q1) <b>Refer to Figure 12.1.</b>..Suppose the economy is initially at full employment with real GDP equal to potential GDP,and the expected inflation rate equal to the actual inflation rate.If the economy then experiences a negative demand shock,and the central bank responds to the results of the demand shock with an appropriate monetary policy,the central bank response will
A) push the economy further down the Phillips curve, lowering the inflation rate further.
B) push the economy back up the Phillips curve, raising the inflation rate toward its full-employment level.
C) push the economy back down the Phillips curve, lowering the inflation rate towards its full-employment level.
D) push the economy further up the Phillips curve, lowering the inflation rate further.
Q2) The Board of Directors of the Bank of Canada consists of
A) 12 outside directors, the governor, the senior deputy governor, and a deputy minister of finance.
B) the governor, a deputy minister, and several CEOs of large commercial banks.
C) 8 outside directors.
D) CEOs of the largest 5 commercial banks in Canada.
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Page 14
Chapter 13: Fiscal Policy in the Short Run
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Q1) Which of the following would not be considered an automatic stabilizer?
A) rising corporate income tax revenues due to an expanding economy
B) increasing welfare payments due to more people becoming unemployed during a recession
C) legislation increasing funding for job retraining passed during a recession
D) decreasing employment insurance payments due to increased employment during an expansion
Q2) Briefly explain the effects on potential GDP of cutting each of the following taxes:
a. Individual income tax
b. Corporate income tax
c. Taxes on dividends and capital gains
Q3) If the MPC is 0.6 and the tax rate is 20%,a $200 decrease in autonomous net exports will decrease equilibrium income by
A) $384.
B) $416.
C) $478.
D) $1666.
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Page 15
Chapter 14: Aggregate Demand, aggregate Supply, and Monetary Policy
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Q1) The steeper the central bank reaction function,the ________ the central bank increases the interest rate in response to the current inflation rate being above the target inflation rate and the ________ the central bank decreases the interest rate in response to the actual inflation rate being below the target inflation rate.
A) more; more
B) more; less
C) less; more
D) less, less
Q2) The short-run effect of a negative supply shock is
A) lower inflation and a declining output gap.
B) lower inflation and an increasing output gap.
C) higher inflation and a declining output gap.
D) higher inflation and an increasing output gap.
Q3) <b>Refer to Figure 14.1.</b>Other things equal,a decrease in government spending on infrastructure projects is best represented as a movement from A) point A to point B.
B) point C to point A.
C) point C to point B.
D) point B to point C.
Page 16
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Chapter 15: Fiscal Policy and the Government Budget in the Long Run
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Sample Questions
Q1) <b>Refer to Table 15.1.</b>The uses of government funds for Arugula in 2012 total
A) $135 million.
B) $195 million.
C) $380 million.
D) $600 million.
Q2) The debt-to-GDP ratio decreases when the primary deficit ________ or when seigniorage ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Q3) Suppose the government cuts taxes by $300 million dollars this year and must pay off its debt next year by increasing taxes by $300 million.According to Ricardian equivalence,consumption spending will ________ this year and ________ next year,all else equal.
A) increase by $300 million; decrease by $300 million
B) increase by $150 million; decrease by $150 million
C) increase by $300 million; not change
D) not change; not change
Page 17
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Chapter 16: Consumption and Investment
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Q1) Maryanne expects to work for another 30 years and expects to live another 10 years after she retires.If Maryanne completely smooths consumption over her lifetime,her marginal propensity to consume out of wealth is
A) 0.025.
B) 0.033.
C) 0.075.
D) 0.10.
Q2) Explain why asymmetric information can cause the real interest rate to increase,and why increases in the real interest rate can actually make lending more risky for financial institutions.
Q3) Hector's wealth is zero,he expects to work for another 45 years at a constant salary of ?$80 000 and live for another 60 years.If yearly taxes are $20 000 and Hector completely smooths consumption over his lifetime,Hector's annual consumption is ________ less than it would be if yearly taxes were zero.
A) $5000
B) $7500
C) $15 000
D) $20 000
Q4) Explain how changes in corporate taxes affect the investment decisions of firms.
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