Canadian Macroeconomic Policy Test
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Course Introduction
This course explores the formulation, implementation, and impacts of macroeconomic policy in Canada. Topics include monetary policy conducted by the Bank of Canada, fiscal policy decisions of federal and provincial governments, and the interplay between the two. Students will examine Canadas economic growth, inflation, unemployment, public debt, exchange rates, and trade policies within the context of both historical trends and current issues. Emphasis is placed on the analysis of policy tools, their effectiveness, and the challenges of managing an open economy within a globalized environment.
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Macroeconomics 14th Canadian Edition by Campbell
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R. McConnell
Chapter 1: Limits, Alternatives, and Choices
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Sample Questions
Q1) A production possibilities table for two products,grain and airplanes,is found below.Usual assumptions regarding production possibilities are implied.Grain is measured in tons and airplanes are measured in units of 1,000.
(a)Using the below graph construct a production possibilities curve from this information placing grain on the vertical axis and airplanes on the horizontal axis.
Answer: 11ea82f3_ffcd_c318_9299_6155ef3c1114_TB2474_00
(b)What is the opportunity cost of producing the first unit of airplanes? The marginal opportunity cost of producing the fourth unit of airplanes? 11ea82f3_ffcd_c319_9299_59d3ccf46c0c_TB2474_00
(a)See graph below. 11ea82f3_ffcd_c31a_9299_cf3fb179cb3c_TB2474_00 (b)Two units of grain (56-54)are sacrificed if one unit of planes is produced.When the fourth unit of planes is produced the marginal opportunity cost is eight units of grain (44-36).
Q2) What is utility and what is its relevance to rational behaviour?
Answer: Utility is the satisfaction that individuals derive from consuming goods and services.The economic approach assumes that humans engage in rational behaviour,that individuals make decisions to maximize their utility.
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Chapter 2: The Market System and the Circular Flow
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Q1) Describe all the advantages a money economy has over a barter economy?
Answer: Trade is difficult with barter because it requires a coincidence of wants.Money overcomes that problem.A buyer can obtain goods without having to locate a seller who desires what the person has to trade.All products can be priced and traded on a common basis.Also,with money,neither party needs to carry products around with them so they are always available for trade.Money facilitates the exchange of products,which is necessary for specialization.Economic efficiency is improved with a system of money.
Q2) What are the economic advantages of the division of labour?
Answer: Specialization enables individuals to take advantage of existing differences in their abilities and skills.Other advantages come from increased productivity or output per worker as specialized workers gain skills in performing one task and avoid loss of time in switching from one task to another.Therefore,more is produced with the same amount of resources as before specialization.
Q3) Explain the term "laissez-faire capitalism.
Answer: Pure capitalism is sometimes called "laissez faire" capitalism which is a French term for "let it be." In pure capitalism the government's role is limited to protecting private property and establishing the legal framework for free enterprise and free markets to function.
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Chapter 3: Demand, Supply, and Market Equilibrium
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Q1) The price of gold is lower today than several decades ago.Yet,the production of gold is greater than in the past.How is this possible without violating the law of supply?
Answer: The supply of gold has increased and as a result,the price of gold has fallen and the quantity of gold has risen.The main reason for the increase in the supply of gold is improvement in technology that allows producers to lower production costs by using fewer resources.
Q2) What are the consequences of an increase in the demand for Euros on the equilibrium price and quantity of Euros? Does the Canadian dollar appreciate or depreciate as a result? Explain.
Answer: The increase in the demand for Euros,increases the equilibrium price of Euros and increases the equilibrium quantity of Euros.The Canadian dollar depreciates since it takes more Canadian currency to buy one Euro.
Q3) In the spaces below each of the following,indicate the [increase (+),decrease (-),or indeterminate (ind)] on equilibrium price (P)and equilibrium quantity (Q)of each of these changes in demand and/or supply.
Answer: 11ea82f3_ff9b_8f19_9299_0b5d99370505_TB2474_00 (a)ind,+; (b)+,ind; (c)ind,-; (d)-,ind;
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Chapter 4: Market Failures: Public Goods and Externalities
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Q1) Supply in a market is represented by the equation,P = 20 + .1Q<sub>S</sub>.Suppose the market price is $30.
(a)How many units do sellers wish to provide in this market?
(b)What is the minimum amount that sellers are willing to accept for this quantity of output?
(c)What is the actual amount that sellers receive for providing for this quantity of output?
(d)What is the producer surplus that sellers obtain for providing this quantity of output?
Q2) Evaluate: "Pollution is undesirable.Therefore,all pollution should be banned."
Q3) In your own words,describe what free-riding means.
Q4) How do direct controls and specific taxes affect negative externalities? Briefly explain in terms of supply and demand.
Q5) What is the meaning of Market Failures and how do the Demand and Supply curves cause such failures?
Q6) How is producer surplus derived from a supply curve?
Q7) The following table shows marginal costs and benefits of the optimal quantity of pollution abatement that will occur at a local factory.
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Chapter 6: An Introduction to Macroeconomics
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Q1) What is GDP per capita?
Q2) What roles do expectations play in macroeconomics?
Q3) If prices are "stuck" and there is an unexpected demand decrease,describe what happens in the economy.
Q4) What is the difference between financial investment and economic investment?
Q5) Suppose that we are in a condition of fully flexible prices,but production of nails will not go above 6,000 kg/week.What price will nails sell for if market demand 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?
Q6) Define macroeconomics and provide two key concerns it studies.
Q7) If prices are "stuck" and there is an unexpected demand increase,describe what happens in the economy.
Q8) 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.
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Chapter 7: Measuring the Economys Output
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Q1) Firms A-E are involved in the production of some good.What is the total value added by all the firms in the production of this good? What did each firm add separately in value and what does it total?
Q2) What adjustments need to be made to go from net domestic income at factor cost to GDP?
Q3) Define GDP and its characteristics.
Q4) Explain the difference between final and intermediate goods,and give an example of each.
Q5) Differentiate between nominal and real GDP.
Q6) 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.
Q7) Explain what is and what is not included in government purchases in GDP.
Q8) 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.
Q9) If Canada doubled its real GDP,it would be a much less liveable society than it is today.Explain this view.
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Chapter 8: Economic Growth
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Q1) Is growth felt evenly across society and around the world?
Q2) How much faster will a nation's Real GDP double if its annual rate of growth is 3 percent rather than 1.5 percent per year?
Q3) Are economic growth and progress synonymous? How might they differ?
Q4) 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?
Q5) Suppose an economy's real GDP is $50,000 in year 1 and $55,000 in year 2.What is the growth rate of its GDP? Assume that population was 100 in year 1 and 105 in year 2.What is the growth rate in real GDP per capita?
Q6) What are some of the positive changes associated with modern economic growth?
Q7) Offer a defense of economic growth.
Q8) 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?
Q9) Aside from increases in labour and capital inputs,what accounts for economic growth in Canada?
Q10) How might poorer nations catch up to richer countries in terms of GDP per capita?
Q11) Summarize the four supply factors in economic growth.
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Chapter 9: Business Cycles, Unemployment, and Inflation
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Q1) Explain the difference between nominal and real interest rates.
Q2) Assume that nominal income is $35,000 and the price index is 1.20 in year 1.In year 2,nominal income rises to $38,000 and the price index rises to 1.25.What was the percentage change in real income from year 1 to year 2? What was the absolute amount of increase in real income? Make your calculations of the percentage change in real income and the absolute change in real income using the approximation formula and using the more precise method with index numbers.
Q3) Explain the differences among the frictional,structural,cyclical,and seasonal forms of unemployment.
Q4) What is Okun's law? Give an example of how it works.
Q5) Use the following data to calculate: (a)the size of the labour force and (b)the official unemployment rate.
Total population 1,500;population under age 15 and institutionalized,360;not in labour force,450;unemployed,69;workers with part-time jobs who are looking for full-time jobs,30.
Q6) Define the "full-employment" or "natural" rate of unemployment and give its approximate percentage rate as economists currently define it.
Q7) What is hyperinflation and what are its effects?
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Chapter 10: Basic Macroeconomic Relationships
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Q1) Suppose a family's annual disposable income is $8,000 of which it saves $2,000.
(a)What is their APC?
(b)If their income rises to $10,000 and they plan to save $2,800,what are their MPS and MPC?
(c)Did the family's APC rise or fall with their increase in income?
Q2) Describe the relationship between the Great Recession of 2008-2009 and the Paradox of Thrift.
Q3) Complete the following table assuming that (a)MPS = 1/5, (b)there is no government and all saving is personal saving.
Q4) What is the effect of increase in wealth on the consumption and saving schedules?
Q5) Complete the accompanying table.
Q6) What are two key facts that serve as the rationale for the multiplier effect?
Q7) 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.
Q8) Define the multiplier.How is it related to real GDP and the initial change in spending? How can the multiplier have a negative effect?
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Chapter 11: The Aggregate Expenditures Model
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Q1) Explain why exports are added to,and imports are subtracted from,aggregate expenditures in moving from a closed to an open economy.
Q2) Whenever there is an upshift or downshift in aggregate expenditures due to a change in one of its non-income determinants,the equilibrium GDP changes by a multiple of the initial change in spending.Explain this multiplier effect.
Q3) Whenever there is a shift in the investment schedule and/or the consumption-saving schedules,there will be a new equilibrium level of GDP.Explain why this is so.
Q4) The data in the first two columns below are for a closed economy without government.Use this table to answer the following questions.
Q5) Explain how the recession resulting from the financial crisis in the United States in late-2008 was transmitted to Canada.
Q6) What is the difference between the multiplier in a closed private economy and the multiplier in a mixed open economy?
Q7) In addition to stuck prices,what are the two simplifying assumptions of the initial model in this chapter? What are two implications from these simplifications?
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Chapter 12: Aggregate Demand and Aggregate Supply
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Q1) List the three major determinants that can cause a shift in the short-run aggregate supply.
Q2) Explain the relationship between the aggregate expenditures model in graph (A)below and the aggregate demand model in graph (B)below.In other words,explain how points 1,2,and 3 are related to points 1',2',and 3'.
Q3) Using the aggregate demand-aggregate supply (short-run)model,explain how the depreciation of the Canadian dollar in terms of foreign currencies would affect the economy.
Q4) How can the aggregate demand curve be derived from the aggregate expenditures model?
Q5) Why does aggregate demand shift outward by a greater amount than the initial change in spending?
Q6) Differentiate between "demand-pull" and "cost-push" inflation using the aggregate demand-aggregate supply (short-run)model.
Q7) Explain the three reasons given for the downward slope of the aggregate demand curve.
Q8) Would increased downward price flexibility lead to less severe or more severe recessions? Explain.
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) Give two examples of expansionary fiscal policy.What will be the effect on government surplus/deficit?
Q2) If we as individuals continue to spend more than we made,we would sooner or later have to pay up or go bankrupt.Our government is in the same position or will be unless we get serious about our liabilities and reduce expenditures enough to reduce the deficits or increase revenues enough to pay our bills and have some left over to pay the old bills.Evaluate this statement.
Q3) In Year 1,the full-employment budget showed a deficit of $100 billion and the actual budget showed a deficit of $150 billion.In Year 2,the full employment budget showed a deficit of $125 billion and the actual budget showed a deficit of $175 billion.Based on the data,what can be concluded about the direction of fiscal policy and the performance of the economy between Years 1 and 2?
Q4) Differentiate between the federal deficit and the federal debt.
Q5) During which phases of the business cycle would fiscal policies that reduce budget deficits (or even increase surpluses)be appropriate?
Q6) Assume that without any taxes the consumption schedule for an economy is as shown in the table.Also assume that investment,net exports,and government expenditures do not change with changes in real GDP.
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Chapter 14: Money, Banking, and Money Creation
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Q1) What is the history behind the idea of a fractional reserve banking system?
Q2) Provide three key reasons why money has value.
Q3) Describe the nature,causes,and effects of the U.S Mortgage Default Crisis.
Q4) What are the two significant characteristics of the fractional reserve banking system?
Q5) How does deterioration in the quality of borrowers affect multiple-deposit expansion?
Q6) Suppose the First National Bank has the following simplified balance sheet.The reserve ratio is 20% and all dollar figures are in thousands.
Q7) Suppose depositors at chartered banks transfer $10 billion from their savings deposits to their demand deposits.What impact does this have on M1,M2,and M2+?
Q8) What is the effect on the money supply when a chartered bank sells government securities to the public?
Q9) Suppose a fraction of any new loan was kept as cash and not deposited into a bank.How would this currency drain affect multiple-deposit expansion?
Q10) What are the two conflicting goals of bankers? How do these conflicting goals get resolved in the overnight loans market?
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Chapter 15: Interest Rates and Monetary Policy
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Q1) Explain how the net export effect strengthens the effects an easy money and a tight money policy.
Q2) The following are simplified balance sheets for the chartered banking system and the Bank of Canada.Perform the two following transactions, (1)and (2),making appropriate changes in columns (1)and (2)in each balance sheet.Do not cumulate your answers.Also,answer these three questions for each part: (a)What change,if any,took place in the money supply as a direct result of this transaction? (b)What change,if any,occurred in chartered bank reserves? (c)What change occurred in the money-creating potential of the chartered banking system if the reserve ratio is 20%? All figures are in billions of dollars.
Q3) Use the table below to answer the questions:
Q4) 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.
Q5) Explain the impact of each of the following upon chartered bank reserves: (a)the Bank of Canada sells government bonds in the open market to private buyers; (b)the chartered banks reduce their indebtedness to the Bank of Canada.
Q6) Differentiate between expansionary and restrictive monetary policies.
Q7) Trace the cause-effect chain that results from a tight money policy.
Page 16
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Chapter 16: Long-Run Macroeconomic Adjustments
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Q1) If the long-run supply curve is fixed in place,can there be persistent inflation?
Q2) What contributed to stagflation's demise between 1982 and 1989? How did these events affect aggregate supply and the Phillips Curve?
Q3) What is the long-run equilibrium in the aggregate demand-aggregate supply model?
Q4) (a)Using a graph showing aggregate demand,short-run aggregate supply,and long-run aggregate supply,illustrate an economy that faces a recessionary gap.
Q5) What is the Laffer Curve? Explain the relationship that is shown in the curve.
Q6) Explain the Phillips Curve concept and construct an example of the curve on the below graph.
Q7) What is the basic difference between the short run and long run as these terms relate to macroeconomics? Why does this difference occur?
Q8) 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.
Q9) What are three severe criticisms of the Laffer Curve?
Q10) Use the following diagram to answer the next three questions.
Q11) Answer the questions based on the following diagram.
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Chapter 17: International Trade
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Q1) Suppose that by devoting all of its resources to the production of X,nation L can produce 40 X.By devoting all of its resources to Y it can produce 20 Y.Comparable figures for nation M are 15 X and 15 Y.According to the principle of comparative advantage,which nation will specialize in which product? What are the limits to the terms of trade?
Q2) What are the benefits of having a common currency such as the Euro?
Q3) Evaluate this argument for a trade barrier: "Canada needs protection from cheap foreign labour."
Q4) Who gains and who loses from a protective tariff? Explain.
Q5) Evaluate the statement: "Tariffs and quotas are needed to protect Canadian products from dumping."
Q6) What are Canada's top four exports and imports?
Q7) Critique the argument that trade protection is needed to protect Canadian jobs.
Q8) How can Canada compete successfully with relatively low-wage nations such as India and China?
Q9) Identify the four basic types of trade barriers and describe each of them.
Q10) In what ways are national economies linked?
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Q11) How do protectionist policies affect consumers,workers,producers,and the government? Explain.
Chapter 18: Exchange Rates and the Balance of Payments
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Q1) In the table below are the supply and demand schedules for Malaysian ringgits.
Q2) Answer the next five questions on the basis of the following hypothetical data for a nation Malthusia.All numbers are in billions of dollars.Assume that there is no Statistical Discrepancy.
Q3) What happens in the foreign exchange market when there is a Canadian import transaction?
Q4) What were the Current Account Balance,the Capital Account Balance,and the Official Settlement Accounts Balance in Canada for the year 2011?
Q5) What is the official settlement account and how is it used in the balance of payments?
Q6) Explain how the exchange rate gets determined in a flexible exchange rate system.
Q7) Explain the relationship between the current account and the capital account in the balance of payments.
Q8) What happens in the foreign exchange market when there is a Canadian export transaction?
Q9) What is a balance of payments deficit? What is a balance of payments surplus?
Q10) What is meant by currency appreciation?
Q11) Describe the three major disadvantages of flexible exchange rates.
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