Canadian Macroeconomic Policy
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Course Introduction
Canadian Macroeconomic Policy examines the tools, objectives, and challenges of macroeconomic policy-making in the Canadian context. The course explores the roles of fiscal and monetary policy in shaping economic growth, controlling inflation, managing unemployment, and promoting economic stability. Students analyze the functions of key institutions such as the Bank of Canada and the federal government, as well as contemporary policy issues including exchange rate management, national debt, and responses to global economic events. Through case studies and current data, the course emphasizes real-world applications and the impacts of policy decisions on businesses and households across Canada.
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Macroeconomics 1st Canadian Edition by R. Glenn Hubbard
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Chapter 1: Introduction to Macroeconomics and the Great Recession
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Q1) What are the five steps generally used by economists to develop a model?
Answer: 1.Decide on the assumptions to be used in developing the model and decide which endogenous variables will be explained by the model and which exogenous variables will be taken as given.
2.Formulate a testable hypothesis.
3.Use economic data to test the hypothesis.
4.Revise the model if it fails to explain the economic data well.
5.Retain the revised model to help answer similar economic questions in the future.
Q2) Which of the following is a positive economic statement?
A) Income tax rates for the rich should be increased.
B) The Bank of Canada should not increase interest rates until the unemployment rate falls below 7%.
C) Rising global demand for gasoline has led to an increase in the price of oil.
D) The government should increase spending on infrastructure to lower the unemployment rate.
Answer: C
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Chapter 2: Measuring the Macroeconomy
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Q1) <b>Refer to Figure 2.1</b>GDP in 2013 is
A) $243.00.
B) $267.50.
C) $294.00.
D) $302.50.
Answer: D
Q2) An example of fixed investment spending is
A) the purchase of a new apartment building by a property management company.
B) the purchase of corporate bonds by Microsoft Corporation.
C) the purchase of a new wood chipper by a landscape maintenance company.
D) $4 million in unsold furniture at a home furnishings manufacturer.
Answer: C
Q3) ________ is/are the main category of expenditure in Canada,amounting to over 55% of GDP.
A) Consumption
B) Investment
C) Government purchases
D) Net exports
Answer: A
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Chapter 3: The Canadian Financial System
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Sample Questions
Q1) One of the key reasons that the Bank of Canada acts as a lender of last resort is to prevent ________,the process by which a run on one bank spreads to other banks,resulting in a bank panic.
A) contagion
B) asset inflation
C) moral hazard
D) bailouts
Answer: A
Q2) Suppose an increase in real GDP is accompanied by an increase in the money supply from $600 billion to $700 billion.Draw a graph of the money market showing these changes,where the equilibrium nominal interest rate remains at 5%.
Answer: 11ea42c1_d8d5_e8b3_9832_a7fffecfd21a_TB4177_00
Q3) An increase in real GDP will shift the money demand curve to the ________,causing the nominal interest rate to ________.
A) right; increase
B) right; decrease
C) left; increase
D) left; decrease
Answer: A
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Chapter 4: Money and Inflation
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Q1) If the money supply grows at 6% and the inflation rate is 2%,the quantity theory predicts that the change in real GDP will be
A) 0.33%.
B) 3%.
C) 4%.
D) 8%.
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) When a government has a large budget deficit,it must issue government bonds to finance the deficit.Explain if it matters for the rate of inflation if the government sells the bonds to the public or sells the bonds to the central bank.
Q4) Describe the three functions of money.Must all money fulfill all three functions?
Q5) Explain how inflation can be costly even if it is expected.
Q6) Explain why gold,despite its value,is difficult to use as a medium of exchange.
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Chapter 5: The Global Financial System and Exchange Rates
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Q1) An agreement among countries about how relative currency values should be determined is known as
A) an exchange rate system.
B) an international currency market.
C) a free-trade arrangement.
D) a parity intervention.
Q2) <b>Refer to Figure 5.2</b>.If you choose to invest in Japanese bonds,your investment return from Scenario C will be A) -3%.
B) -1%.
C) 2%.
D) 5%.
Q3) An increase in capital outflows from Canada will
A) decrease the balance of the Canadian current account.
B) decrease the balance of the Canadian financial account.
C) increase the balance of the capital account of Canada.
D) decrease the balance of the capital account of Canada.
Q4) What three factors regarding differences in interest rates on similar bonds can prevent the interest parity condition from holding?
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Chapter 6: The Labour Market
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Q1) Most economists believe that the natural rate of unemployment in Canada is equal to a measured unemployment rate of
A) 4% to 5%.
B) 7% to 8%.
C) 5% to 6%.
D) 6% to 7%.
Q2) From 2005-2008,the unemployment rate in Canada was significantly different from the rates in France,Germany,and Italy.This is often attributed to the idea that the rate of ________ unemployment in these European countries was ________ than it was in Canada.
A) frictional; lower
B) structural; higher
C) cyclical; lower
D) seasonal; higher
Q3) The birthrate in Canada decreased during the 1960s,and as a result
A) structural and frictional unemployment increased.
B) cyclical unemployment declined.
C) cyclical unemployment increased.
D) the natural rate of unemployment declined.
Q4) How does a real wage above the equilibrium wage cause unemployment?
Page 8
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Chapter 7: The Standard of Living Over Time and Across Countries
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Q1) If the marginal product of labour is less than the nominal wage divided by the price of output,a firm that wishes to maximize profits will
A) hire more labour.
B) lay off workers.
C) maintain its current level of workers.
D) raise the real wage.
Q2) The Cobb-Douglas production function represents real GDP as a function of all of the following variables except A) capital.
B) labour.
C) the price level.
D) total factor productivity.
Q3) A firm that wishes to maximize profits will continue to hire labour until the A) real wage = MPL.
B) nominal wage = MPL.
C) nominal wage = the real wage.
D) nominal wage = the price level.
Q4) Explain how firms choose the amount of capital goods to purchase and the amount of labour to hire.
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Chapter 8: Long-Run Economic Growth
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Q1) An economy accumulates capital when
A) its capital-labour ratio increases.
B) it increases the number of workers.
C) GDP per capita increases.
D) labour productivity declines.
Q2) From 1950-1970,labour productivity growth in the Soviet Union was driven primarily by
A) capital accumulation.
B) population increases.
C) total factor productivity.
D) capital, population increases, and total factor productivity that contributed about equally to labour productivity growth.
Q3) When an economy is on the balanced growth path,the growth rate of real GDP per capita is determined by the growth rate of A) convergence.
B) capital accumulation.
C) total factor productivity.
D) the labour force.
Q4) Why does growth occur in two-sector growth models?
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Chapter 9: Business Cycles
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Q1) If a variable moves in the opposite direction from real GDP and other measures of aggregate economic activity,it is a ________ variable.
A) procyclical
B) countercyclical
C) coincidental
D) recessionary
Q2) The percentage deviation of real GDP from potential GDP is called
A) nominal GDP.
B) the output gap.
C) the multiplier.
D) Okun's law.
Q3) The increasing importance of services and declining importance of goods since 1950 can help explain
A) why Canada has only experienced one recession since 1950.
B) the severity of the 2007-2009 recession.
C) the increase in the gap between potential GDP and real GDP.
D) the decrease in severity of business cycle fluctuations.
Q4) What is the business cycle and why does it occur?
Q5) List three reasons why nominal wages can be sticky in the short run.
Q6) Explain the relationship between business cycles in different countries.
Page 11
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Chapter 10: Explaining Aggregate Demand: the Is-Mp Model
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Q1) <b>Refer to Table 10.1.</b>Suppose that all of the information given in the table remains the same except that taxes equal $0.5 billion.If potential GDP equals $17 billion,by how much would taxes have to decrease for equilibrium GDP to equal potential GDP?
A) $1.9 billion
B) $0.3 billion
C) $1.5 billion
D) $5 billion
Q2) <b>Refer to Figure 10.3.</b>..An increase in the real interest rate,with no other changes that affect aggregate expenditure,is best represented by ________ in panel (a)and ________ in panel (b).
A) a shift from AE to AE ; a shift from IS to IS
B) a shift from AE to AE ; a shift from IS to IS
C) a shift from AE to AE ; a movement from point B to point A
D) a shift from AE to AE ; a movement from point C to point A
Q3) List three factors that will cause the MP curve to shift.Explain what needs to happen to each of these factors to cause the MP curve to shift upward and to shift downward.
Q4) Explain how the AD curve can be derived from the IS-MP model.
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Chapter 11: The Is-Mp Model: Adding Inflation and the Open Economy
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Q1) What is the Phillips curve? Explain the difference in movements along the Phillips curve and shifts in the Phillips curve,and explain what can cause these movements and shifts.
Q2) An increase in the real interest rate in Canada will cause net capital outflows to ________ and cause the dollar to ________ relative to other currencies.
A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate
Q3) Positive demand shocks have a tendency to ________ real GDP relative to potential GDP and ________ the inflation rate. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease
Q4) Explain three shocks that the Canadian economy experienced during the Great Recession,and how these shocks affect the IS curve,the MP curve,and the Phillips curve.
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Chapter 12: Monetary Policy in the Short Run
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Q1) <b>Refer to Figure 12.4.</b>The implementation of corrective policy by the central bank is designed to move the economy from
A) point A to point B.
B) point B to point D.
C) point D to point C.
D) point C to point A.
Q2) If exchange rates are floating,the Bank of Canada increasing its target inflation rate will cause the dollar to ________ relative to other currencies and cause net capital outflows to ________.
A) appreciate; increase
B) appreciate; decrease
C) depreciate; increase
D) depreciate; decrease
Q3) What are the main arguments for and against central bank independence?
Q4) Explain the dilemma that supply shocks pose when the Bank of Canada chooses to use monetary policy to achieve its goals.
Q5) What are policy lags? Explain the three policy lags faced by the Bank of Canada when implementing monetary policy.
Q6) What is the policy trilemma?
Page 14
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Chapter 13: Fiscal Policy in the Short Run
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Q1) Suppose the economy is in a recession and the government decides it needs to reduce the budget deficit.Other things equal,this would tend to
A) increase the output gap and make the recession worse.
B) decrease the output gap and make the recession worse.
C) help to eliminate the recession, but at the cost of a much higher inflation rate.
D) keep output from declining further, but increase the real interest rate and the inflation rate.
Q2) If the government is running a cyclically adjusted budget deficit,________ fiscal policy is ________ because aggregate expenditure is increasing.
A) discretionary; contractionary
B) discretionary; expansionary
C) expansionary; ineffective
D) contractionary; appropriate
Q3) The federal government debt as a percentage of GDP fell during
A) 2008-2010.
B) 1980-1995.
C) 1996-2006.
D) World War II.
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Q1) <b>Refer to Figure 14.1.</b>.Other things equal,if the Canadian dollar increases in value relative to other currencies,this is best represented as a movement from
A) point X to point Y.
B) point X to point Z.
C) point Y to point Z.
D) point Y to point X.
Q2) When the economy responds to a supply shock,there is ________ in the short run and ________ in the long run between inflation and unemployment
A) an inverse relationship; no trade-off
B) no trade-off; an inverse relationship
C) an inverse relationship; an inverse relationship
D) no trade-off; no trade-off
Q3) Other things equal,if the central bank raises the target inflation rate,this would result in the
A) AD curve shifting temporarily to the right.
B) AD curve shifting permanently to the right.
C) AS curve shifting temporarily to the left.
D) AS curve shifting permanently to the left.
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Chapter 15: Fiscal Policy and the Government Budget in the Long Run
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Q1) If the government decreases income taxes by $500 billion and does not pursue a policy change,which of the following would require the private sector to adjust in order to finance the tax decrease?
A) Increase other taxes by $500 billion.
B) Reduce transfer payments by $500 billion.
C) Reduce expenditures on programs such as education or defence by $500 billion.
D) Issue $500 billion in new Treasury bonds.
Q2) Of the primary tax sources of revenue for the Canadian federal government,which have trended downward as a percentage of GDP since 1981?
A) corporate income and individual income taxes
B) social insurance and corporate income taxes
C) sales and social insurance taxes
D) individual income and sales taxes
Q3) Gross federal debt is ________ net federal debt.
A) greater than
B) less than
C) the same as
D) the negative equivalent of
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Chapter 16: Consumption and Investment
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Q1) The Vuvuza Corporation currently has 10 million shares of stock outstanding,the stock is trading for $42 per share,and its stock of capital goods is valued at $70 million.The Tobin's q value for the Vuvuza Corporation is
A) 0.14.
B) 1.7.
C) 6.
D) 7.
Q2) Samantha's wealth is $100 000,she expects to work for another 30 years at a constant salary of $200 000 and live for another 50 years.Assume taxes are zero and that Samantha completely smooths consumption over her lifetime.Calculate the following:
a. Samantha's annual consumption
b. Samantha's annual consumption if she won $50 000 in the lottery during her first year of work
c. Samantha's annual consumption if her lottery win paid $50 000 per year for 30 years
Q3) Explain the permanent-income hypothesis and the life-cycle hypothesis.How are these hypotheses similar?
Q4) Explain how changes in corporate taxes affect the investment decisions of firms.
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