Canadian Macroeconomic Policy Test Bank
Course Introduction
This course examines the formulation, implementation, and effects of macroeconomic policy in Canada. Emphasizing both theoretical foundations and real-world applications, students explore key policy areas such as monetary policy, fiscal policy, and exchange rate management. The course analyzes the roles of major Canadian institutions including the Bank of Canada and the Department of Finance, and discusses issues such as inflation targeting, economic growth, unemployment, and responses to global economic shocks. Through the study of historical events and recent policy developments, students gain a comprehensive understanding of how macroeconomic policy shapes Canadas economic environment.
Recommended Textbook
Macroeconomics 6th Canadian Edition by Andrew B. Abel
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15 Chapters
1206 Verified Questions
1206 Flashcards
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Chapter 1: Introduction to Macroeconomics
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64 Verified Questions
64 Flashcards
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Sample Questions
Q1) Adam Smith's idea of the "invisible hand" tries to convey the idea that while there are free markets and people conduct their economic affairs in their own best interests,
A) any country can become an advanced, industrialized nation.
B) markets will eliminate problems of hunger and dissatisfaction.
C) most inequalities between the rich and the poor will be eliminated.
D) the overall economy will work well.
Answer: D
Q2) A useful macroeconomic theory
A) is based on reasonable and realistic assumptions. B) is easy to use.
C) has implications that can be tested in the real world.
D) is consistent with the data and observed behaviour of the real-world economy.
E) all of the above.
Answer: E
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3
Chapter 2: The Measurement and Structure of the Canadian Economy
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83 Verified Questions
83 Flashcards
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Sample Questions
Q1) Explain why in agricultural countries the official GDP are often underestimated.
Answer: Since in agricultural countries many people grow their own food, make their own clothes, and provide services for each other within a family or village group, these non-market activities are not counted in the official GDP.
Q2) Suppose Toyota built a new automobile plant in Mexico using Japanese management practices, Canadian capital, and Mexican labour. Which of the following statements would be true?
A) The portion of output contributed by Canadian capital would be included in Canadian GDP.
B) The portion of output contributed by Japanese management would be included in both Japanese GNP and GDP.
C) The portion of output contributed by Japanese management would be included in neither Japanese GNP nor GDP.
D) The portion of output contributed by Mexican labour would be included in both Mexican GNP and GDP.
Answer: D
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4
Chapter 3: Productivity, Output, and Employment
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94 Verified Questions
94 Flashcards
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Sample Questions
Q1) The less permanent an employee perceives an increase in her real wages to be,
A) the smaller the income effect is and the more likely it is that the quantity of labour supplied will be increased.
B) the smaller the income effect is and the more likely it is that the quantity of labour supplied will be reduced.
C) the smaller the substitution effect is and the more likely it is that the quantity of labour supplied will be increased.
D) the smaller the substitution effect is and the more likely it is that the quantity of labour supplied will be reduced.
Answer: A
Q2) What is the employment ratio (in percentage terms) if there are 17 million people employed, 2.5 million people unemployed, and 3.5 million not in the labour force?
A) 74%
B) 83%
C) 87%
D) 100%
Answer: A
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Chapter 4: Consumption, Saving, and Investment
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77 Flashcards
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Sample Questions
Q1) A lump-sum increase in current taxes would cause interest rates to
A) fall if Ricardian equivalence held.
B) fall if Ricardian equivalence did not hold.
C) fall regardless of whether Ricardian equivalence held.
D) rise.
Q2) If consumers foresee future taxes completely, a reduction in taxes this year that is accompanied by an offsetting increase in future taxes would cause
A) an increase in the real interest rate and a decrease in desired investment.
B) a decrease in the real interest rate and an increase in desired investment.
C) a decrease in the real interest rate and an uncertain effect on desired investment.
D) a change in neither the real interest rate nor desired investment.
Q3) What is the difference between gross investment and net investment?
A) net investment = gross investment minus taxes
B) net investment = gross investment minus net factor payments
C) net investment = gross investment minus inventory accumulation
D) net investment = gross investment minus depreciation
Q4) What are the economic consequences of reductions in defense spending by the government? What happens to national saving, the interest rate, and investment?
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Page 6
Chapter 5: Saving and Investment in the Open Economy
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79 Verified Questions
79 Flashcards
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Sample Questions
Q1) Suppose a country has the following balance of payments data:
Merchandise exports 100
Merchandise imports 130
Service exports 60
Service Imports 50
Investment income receipts 75
Investment income payments 100
Transfers to other countries 15
Increase in home country assets abroad 130
Increase in foreign assets in home country 190
a. Calculate the current account balance.
b. Calculate the capital account balance.
c. Calculate the trade balance.
d. Calculate net factor payments.
Q2) A large open economy is an economy
A) that has a large government sector.
B) that has a positive net exports.
C) that is large enough to affect the world real interest rate.
D) that has a positive balance of payments.
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Chapter 6: Long-Run Economic Growth
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84 Verified Questions
84 Flashcards
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Sample Questions
Q1) The idea that measurement problems could explain the productivity slowdown since 1973 is based on the fact that
A) official output measures make no adjustment for quality.
B) output can't be measured.
C) capital can't be measured.
D) quality improvements aren't fully accounted for in the data.
Q2) Analysis of the Canadian economy found that
A) total factor productivity was the largest source of economic growth since 1948.
B) the contribution of labour growth has been more variable than the contribution of capital growth.
C) productivity growth has been positive over any period of more than five years since World War II.
D) the contribution of labour growth has been greater than the contribution of capital growth.
Q3) Describe the pros and cons of industrial policy. Which type of economist is more likely to support industrial policy, a Keynesian or a classical economist? Why?
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8
Chapter 7: The Asset Market, Money, and Prices
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79 Verified Questions
79 Flashcards
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Sample Questions
Q1) If the income elasticity of money demand is 3/4, income increases 8%, and real money supply increases 10%, by about how much does the price level change?
A) falls 4%
B) unchanged
C) rises 4%
D) rises 6%
Q2) Suppose velocity is constant at 3, real output is 6000, and the price level is 20. From this initial situation, the government increases the nominal money supply to $50,000. If velocity and output remain unchanged, by how much will the price level increase?
A) 10%
B) 20%
C) 25%
D) 50%
Q3) For something to satisfy the medium of exchange function of money, it must be A) backed by gold.
B) readily exchangeable for other goods.
C) issued by a Central Bank.
D) an inherently valuable commodity.
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9
Chapter 8: Business Cycles
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76 Verified Questions
76 Flashcards
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Sample Questions
Q1) One of the first organizations to investigate the business cycle was
A) the Federal Reserve System.
B) the National Bureau of Economic Research.
C) the Council of Economic Advisors.
D) the Brookings Institution.
Q2) An economic variable that moves in the same direction as aggregate economic activity (up in expansions, down in contractions) is called
A) procyclical.
B) countercyclical.
C) acyclical.
D) a leading variable.
Q3) Turning points in business cycles occur when
A) a new business cycle is initiated at the trough.
B) the economy hits the peak or trough in the business cycle.
C) the business cycle begins to follow a new pattern that differs from previous business cycles.
D) a new business cycle is initiated at the peak.
Q4) How has the severity and duration of business cycles changed over time in Canada?
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Chapter 9: The IS-LMAD-AS Model: A General Framework for Macroeconomic Analysis
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91 Verified Questions
91 Flashcards
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Sample Questions
Q1) An increase in expected inflation causes the real interest rate to ________ and output to ________ in the short run, before prices adjust to restore equilibrium.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Q2) To reach general equilibrium, the price level adjusts to shift the ________ until it intersects with the ________.
A) IS curve; FE line and LM curve
B) FE line; LM and IS curves
C) LM curve; FE line and IS curve
D) ND curve; FE line and NS curve
Q3) A rise in the price of a bond causes the yield of the bond to A) rise.
B) fall.
C) remain unchanged.
D) rise if it's a short-term bond and fall if it's a long-term bond.
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Page 11
Chapter 10: Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy
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93 Verified Questions
93 Flashcards
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Sample Questions
Q1) Which of the following statements about the effectiveness of the fiscal and the monetary policies in response to a recession in a small open economy is true?
A) In recession, fiscal policy is ineffective, but monetary policy is effective.
B) In recession, fiscal policy is effective, but monetary policy is ineffective.
C) In recession, both fiscal and monetary policies are effective.
D) In recession, both fiscal and monetary policies are in effective.
Q2) According to the classical model, an increase in the Canadian nominal money supply would cause the nominal exchange rate to ________ and the real exchange rate to ________.
A) depreciate; appreciate
B) appreciate; depreciate
C) depreciate; not change
D) appreciate; not change
Q3) Which of the following changes would cause Canadian net exports to decrease?
A) a decrease in the real value of the dollar
B) a decrease in Canadian income
C) an increase in foreign income
D) a shift in demand by Canadian consumers away from domestically produced goods
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Chapter 11: Classical Business Cycle Analysis:
Market-Clearing Macroeconomics
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84 Verified Questions
84 Flashcards
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Sample Questions
Q1) According to classical economists, the government should increase government purchases when
A) the benefits of the spending exceed the costs.
B) the economy is in a recession.
C) the economy is likely to go into a recession in the next six months to a year.
D) inflation is lower than its targeted level.
Q2) Dynamic Stochastic General Equilibrium (DSGE) models are models that allows analysis of
A) productivity shocks only.
B) productivity as well other shocks that have impacts on the economy.
C) fiscal policy shocks only.
D) monetary policy shocks only.
Q3) Measures of the Solow residual show it to be
A) strongly procyclical.
B) mildly procyclical.
C) mildly countercyclical.
D) strongly countercyclical.
Q4) Why do many economists believe that money affects output? What is the empirical evidence in support of that belief?
Page 13
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Chapter 12: Keynesian Business Cycle Analysis:
Non-Market-Clearing Macroeconomics
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72 Verified Questions
72 Flashcards
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Sample Questions
Q1) Anticipated changes in the aggregate demand, in the Keynesian model,
A) would affect the output in the short run.
B) would affect the output in the long run.
C) would not affect the output in the short and long runs.
D) would affect the output in the case of the money supply changes.
Q2) The Keynesian theory is consistent with the business cycle fact that inflation is
A) procyclical and leading.
B) procyclical and lagging.
C) countercyclical and leading.
D) countercyclical and lagging.
Q3) In the Keynesian model, the economy can be off the FE line and the LRAS in the short run, because
A) the interest rate is slow to adjust.
B) the unemployment rate is high during recession.
C) the actual price level differs from what was expected when nominal wage contracts were signed.
D) real wage is sticky in short run.
Q4) Discuss the major problems that arise in practice in attempting to use aggregate demand management to stabilize the economy.
Page 14
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Chapter 13: Unemployment and Inflation
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82 Flashcards
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Sample Questions
Q1) The idea that the natural rate of unemployment rises when the actual rate of unemployment rises is known as
A) stabilization.
B) insider-outsider theory.
C) hysteresis.
D) an efficiency wage model.
Q2) How would each of the following changes likely affect the natural unemployment rate?
a. Government increases the subsidies for training workers.
b. According to a new law, the laid off employees will receive a higher lump sum payment.
c. In a new law, the number of months an unemployed worker can receive benefit is reduced by half.
d. An aggressive easy monetary policy introduced to keep unemployment rate low.
Q3) One cost of a perfectly anticipated inflation is that it
A) transfers wealth from lenders to borrowers.
B) transfers wealth from borrowers to lenders.
C) erodes the value of currency.
D) damages the role of prices as signals in the economy.
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Page 15
Chapter 14: Monetary Policy and the Bank of Canada
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71 Verified Questions
71 Flashcards
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Sample Questions
Q1) Which of the following are included in the Bank of Canada's Board of Directors?
A) the governor, the senior deputy governor, the deputy minister of finance, and 12 private citizens
B) the governor, minister of finance, and 12 part time CEOs of private firms
C) the governor, prime minister, and 12 part time citizens
D) the governor, the senior deputy governor, and 12 member of parliament
Q2) The Bank of Canada's largest liability is
A) notes in circulation at banks.
B) notes in circulation outside banks.
C) deposits at members of the CPA.
D) Treasury bills.
Q3) Which of the following might the Bank rely on as an intermediate target?
A) the monetary base
B) the bank rate
C) M2
D) the inflation rate
Q4) Should the Central Bank be independent? Or should the Central Bank be required to confer with Parliament to coordinate fiscal and monetary policies? Explain the pros and cons.
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Chapter 15: Government Spending and Its Financing
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77 Verified Questions
77 Flashcards
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Sample Questions
Q1) The total spending by government during a period of time includes
A) government purchases of goods and services.
B) transfer payments.
C) interest payments.
D) all of the above.
Q2) Assume that the lost output due to tax distortions is proportional to the square of the tax rate. If the government increased the tax rate from 25% to 40%, the lost output would increase by a factor of
A) 1.56.
B) 1.60.
C) 1.96.
D) 2.56.
Q3) Why should government smooth tax rates? If they do so, what happens to deficits over the business cycle?
Q4) Increases in the debt-GDP ratio are primarily caused by A) a high growth rate of GDP.
B) a high primary government deficit.
C) increases in government.
D) increases in interest rates.
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