Canadian Macroeconomics
Chapter Exam Questions
Course Introduction
This course explores the key concepts, theories, and policy debates in Canadian macroeconomics, with a focus on understanding the structure and performance of the Canadian economy. Topics include economic growth, business cycles, inflation, unemployment, monetary and fiscal policy, international trade, and the roles of the Bank of Canada and federal government. Through analysis of real-world data, historical trends, and policy decisions, students will gain insight into how macroeconomic forces shape the lives of Canadians and the countrys role within the global economy.
Recommended Textbook
Principles of Macroeconomics 7th Canadian Edition by N. Mankiw
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Page 2
Chapter 1: Ten Principles of Economics
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Q1) Mike has spent $500 purchasing and repairing an old fishing boat,which he expects to sell for $800.He discovers that he needs an additional repair,which will cost $600.He can sell the boat as it is now for $300.What should he do?
A) He should take the $300.
B) He should never sell something for less than its cost.
C) He should complete the repairs and sell the boat.
D) It doesn't matter which action he takes; the outcome is the same either way.
Answer: D
Q2) What happens when government policies such as the welfare system try to help the neediest members of society?
A) It increases equity and reduces efficiency.
B) It reduces charitable contributions in an economy.
C) It increases the productivity of the needy in society.
D) It causes market failure to occur.
Answer: A
Q3) Inflation increases the value of money.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Thinking Like an Economist
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Sample Questions
Q1) Who designs tax policy?
A) Ministry of Finance
B) Bank of Canada
C) Industry Canada
D) Department of Justice
Answer: A
Q2) Refer to Figure 2-8.What would happen if this economy moved from point C to point E?
A) It still would not be producing efficiently.
B) There would be no gain in either bathtubs or barrels.
C) It would be producing more barrels and more bathtubs than at point C.
D) It is not possible for this economy to move from point C to point E without additional resources.
Answer: A
Q3) In the goods and services market,how do households and firms interact?
A) They are both buyers.
B) Households are sellers and firms are buyers.
C) Households are buyers and firms are sellers.
D) They are both sellers.
Answer: C
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Chapter 3: Interdependence and the Gains From Trade
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Q1) Using all available resources,if a farmer can produce either 65 cantaloupes or 70 watermelons,what is the opportunity cost of 1 cantaloupe to the farmer?
A) 0.82 watermelons
B) 1.08 watermelons
C) 1.50 watermelons
D) 2.00 watermelons
Answer: B
Q2) Refer to Figure 3-1.What do the two producers have an absolute advantage in?
A) Paul has an absolute advantage in both wheat and corn.
B) Paul has an absolute advantage in wheat,and Cliff has an absolute advantage in corn.
C) Cliff has an absolute advantage in wheat,and Paul has an absolute advantage in corn.
D) Cliff has an absolute advantage in both wheat and corn.
Answer: A
Q3) Some countries win in international trade,while other countries lose.
A)True
B)False
Answer: False
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Page 5
Chapter 4: The Market Forces of Supply and Demand
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Sample Questions
Q1) Refer to the Figure 4-2.What would happen at the equilibrium price?
A) At the equilibrium price,200 units would be supplied and demanded.
B) At the equilibrium price,400 units would be supplied and demanded.
C) At the equilibrium price,600 units would be supplied and demanded.
D) At the equilibrium price,600 units would be supplied,but only 200 would be demanded.
Q2) What is the market demand?
A) the sum of all individual demands
B) the demand for every product in an industry
C) the average quantity demanded at each price
D) the quantity demanded that exceeds supply
Q3) Market demand is given as Qd = 120 - 2P.Market supply is given as Qs = 2P + 40.In a perfectly competitive equilibrium,what will be price and quantity traded in the market?
A) price will be $100 and quantity will be 240
B) price will be $30 and quantity will be 100
C) price will be $20 and quantity will be 80
D) price will be $130 and quantity will be 300
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Chapter 5: Measuring a Nations Income
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Q1) According to economists,why is it useful to measure the behaviour of the economy with statistics such as GDP?
A) It can be used to forecast economic recessions and prevent them.
B) It measures the total value of a country's wealth.
C) It can be helpful in developing macroeconomic science,but is not useful for policymaking.
D) It is a crucial step toward developing the science of macroeconomics.
Q2) A country reported a nominal GDP of $100 billion in 2015 and $75 billion in 2014 and reported a GDP deflator of 125 in 2015 and 120 in 2014.What happened to real output and prices from 2014 to 2015?
A) Real output and prices both rose.
B) Real output rose and prices fell.
C) Real output fell and prices rose.
D) Real output and prices both fell.
Q3) Macroeconomic statistics include the inflation rate,the unemployment rate,GDP,and retail sales.
A)True
B)False
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Chapter 6: Measuring the Cost of Living
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Q1) Henry Ford paid his workers $5 a day in 1914 when the CPI was 10.Today,with the price index at 177,the $5 a day is worth $88.50.
A)True
B)False
Q2) When does a cost-of-living allowance (COLA)automatically raise the wage rate?
A) when GDP increases
B) when the consumer price index increases
C) when taxes increase
D) when the consumer price index is announced
Q3) If there is a reduction in the price of large tractors imported into Canada from Russia,what will happen to the GDP deflator and the consumer price index?
A) The GDP deflator and the consumer price index will decrease.
B) The GDP deflator will not change; the consumer price index will decrease.
C) The GDP deflator will decrease; the consumer price index will not change.
D) Neither the GDP deflator nor the consumer price index will change.
Q4) If the current-year CPI is 140,then,since the base year,the price level has increased 40 percent.
A)True
B)False
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Chapter 7: Production and Growth
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Q1) For background,read the article "Fruit pickers: 'The money we earn is not worth getting out of bed for'" (http: / / goo.gl / MCQcC).This article apparently has very little to do with economic growth theories.However,it offers an excellent opportunity to better understand some important aspects of economic growth and development.Fruit picking is one area where technological progress is slow or nonexistent.For instance,strawberry-picking robots are still far from taking the jobs of the thousands of workers employed in the field.Suppose a worker is paid the minimum wage,which is,let's say $8 in the UK and $3 in Bulgaria.Suppose a worker in the UK is able to pick 10 kilos of strawberries in one hour,the same as a worker in Bulgaria.Suppose all strawberries picked in the UK and Bulgaria are exported to countries such as Norway,where they sell for $10 a kilo.
a)Where does a fruit-picking worker have higher productivity,in the UK or in Bulgaria? Why are they paid different wages?
b)British people complain that foreign immigrants "steal" their jobs.Why would a British worker not want to take such a job? Why would an employer in the UK wish to hire a Bulgarian worker instead of a British one? More generally,why do developed countries tend to "export" low-productivity jobs? Does this reduce the standards of living in the developed countries?
Q2) How do inward-oriented policies affect a nation's growth?
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Chapter 8: Saving, investment, and the Financial System
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Q1) Which term refers to the sale of stocks and bonds to raise money?
A) debt finance
B) debt-equity finance
C) debt finance for stocks,and equity finance for bonds
D) equity finance for stocks,and debt finance for bonds
Q2) Which of the two bonds in each example would you expect to pay the higher interest rate? Explain why.
a.a Canadian government bond or a bond issued by the government of Turkey
b.a government of Canada bond or a municipal bond of the same face value and term
c.a 6-month Treasury bill or a 20-year bond
d.a Canadian National Railway Company bond or a bond issued by a new fitness clothing company
Q3) If the current market interest rate for loanable funds is above the equilibrium level,what would we expect to happen?
A) Because there is a surplus of loanable funds,the interest rate will rise.
B) Because there is a shortage of loanable funds,the interest rate will rise.
C) Because there is a shortage of loanable funds,the interest rate will fall.
D) Because there is a surplus of loanable funds,the interest rate will fall.
Q4) Draw and label a graph showing equilibrium in the market for loanable funds.
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Chapter 9: Unemployment and Its Natural Rate
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Q1) Someone who is without work but is not looking for work would be counted as unemployed.
A)True
B)False
Q2) Cyclical unemployment and the natural rate of unemployment are sometimes hard to distinguish from each other,so economists are not very confident about estimates of the natural rate of unemployment.Still,since unemployment rates are consistently higher in Canada and most Western European countries than in the United States,it appears that the natural rate of unemployment is lower in the United States.What might explain this difference?
Q3) Refer to the Table 9-1.What is the adult male labour force in Bolivar?
A) 75 million
B) 90 million
C) 100 million
D) 120 million
Q4) About half of all spells of unemployment end when the unemployed person leaves the labour force.
A)True
B)False
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Chapter 10: The Monetary System
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Q1) During wars,the public tends to hold relatively more currency and relatively fewer deposits.Which statement best describes the effects of this increase in currency holdings?
A) Reserves would decrease,and the money supply would increase.
B) Reserves and the money supply would decrease.
C) Reserves would increase,but the money supply would be unchanged.
D) Reserves would decrease,but the money supply would be unchanged.
Q2) Which statement best describes the process of open-market sales conducted by the Bank of Canada?
A) The Bank of Canada sells Treasury bills,which increases the money supply.
B) The Bank of Canada sells Treasury bills,which decreases the money supply.
C) The Bank of Canada borrows from member banks,which increases the money supply.
D) The Bank of Canada lends money to member banks,which decreases the money supply.
Q3) In order for currency to be widely used as a medium of exchange,it is sufficient for the government to designate it as legal tender.
A)True
B)False
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Page 12
Chapter 11: Money Growth and Inflation
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Q1) According to the quantity equation,if P = 6 and Y = 800,which of the following pairs could M and V be?
A) 200,3
B) 400,4
C) 600,5
D) 800,6
Q2) The quantity theory of money can explain hyperinflations but not moderate inflation.
A)True
B)False
Q3) According to the classical dichotomy,what increases when the money supply increases?
A) the real interest rate
B) the real GDP
C) the value of money
D) the price level
Q4) A rising price level eliminates an excess supply of money.
A)True
B)False
Q5) What are the costs of inflation?
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Chapter 12: Open-Economy Macroeconomics: Basic Concepts
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Q1) According to the theory of purchasing-power parity,the real exchange rate defined as foreign goods per unit of Canadian goods will equal the domestic price level divided by the foreign price level.
A)True
B)False
Q2) How do nominal exchange rates change over time?
A) They vary little over time.
B) They vary substantially over time.
C) They appreciate over time for most countries.
D) They depreciate over time for most countries.
Q3) How are net exports of a country determined?
A) the value of goods and services imported minus the value of goods and services exported
B) the value of goods and services exported minus the value of goods and services imported
C) the value of goods exported minus the value of goods imported
D) the value of goods imported minus the value of goods exported
Q4) What is the logic behind the theory of purchasing-power parity?
Q6) Why are net exports and net capital outflow always equal? Page 14
Q5) How do we find the real exchange rate from the nominal exchange rate?
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Page 15
Chapter 13: A Macroeconomic Theory of the Small Open Economy
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Q1) What is the term for a limit on the quantity of an imported good?
A) a tariff
B) an excise tax
C) an import quota
D) net imports
Q2) What would make the equilibrium interest rate increase and the equilibrium quantity of funds decrease?
A) The supply of loanable funds shifts right.
B) The supply of loanable funds shifts left.
C) The demand for loanable funds shifts right.
D) The demand for loanable funds shifts left.
Q3) Which statement best describes the effects of trade policies?
A) Trade policies affect the trade balance,plus all industries in the same ways.
B) Trade policies affect the trade balance,plus some industries differently than others.
C) Trade policies do not affect the trade balance,but they affect some industries differently than others.
D) Trade policies do not affect the trade balance,but they affect all industries in the same ways.
Q4) Why do higher real interest rates lead to lower net capital outflow?
Page 16
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Chapter 14: Aggregate Demand and Aggregate Supply
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Q1) What variables besides real GDP tend to decline during recessions? Given the definition of real GDP,argue that declines in these variables are to be expected.
Q2) What happens when the dollar appreciates?
A) Canadian exports decrease while imports increase.
B) Canadian exports and imports decrease.
C) Canadian exports and imports increase.
D) Canadian exports increase while imports decrease.
Q3) A decrease in the price level makes consumers feel wealthier,so they purchase more.This logic helps explain why the aggregate demand curve slopes downward.
A)True
B)False
Q4) Which of the following is NOT a reason for the Bank of Canada and the government to keep a close watch on the housing market?
A) the potential effect on consumption spending caused by large decreases in housing prices
B) the financial consequences to mortgage holders if interest rates rise
C) the financial consequences to mortgage holders if house prices suddenly drop
D) the financial consequences to mortgage holders if house prices suddenly rise
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Chapter 15: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) If expected inflation is constant and the nominal interest rate increases,how does the real interest rate change?
A) It increases by more than the change in the nominal interest rate.
B) It increases by the change in the nominal interest rate.
C) It decreases by the change in the nominal interest rate.
D) It decreases by more than the change in the nominal interest rate.
Q2) Stock prices often rise when the Bank of Canada raises interest rates.
A)True
B)False
Q3) According to liquidity-preference theory,if the price level increases,how do the equilibrium interest rate and the aggregate quantity of goods change?
A) The interest rate and the quantity demanded rise.
B) The interest rate rises and the quantity demanded falls.
C) The interest rate falls and the quantity demanded rises.
D) The interest rate and the quantity demanded fall.
Q4) During recessions,the government tends to run a budget deficit.
A)True
B)False
Q5) What is the difference between monetary policy and fiscal policy?
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Chapter 16: The Short-Run Tradeoff Between Inflation and Unemployment
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Q1) If there is an adverse supply shock,what will most likely happen?
A) The aggregate supply curve and the short-run Phillips curve will both shift right.
B) The aggregate supply curve and the short-run Phillips curve will both shift left.
C) The aggregate supply curve will shift right,and the short-run Phillips curve will shift left.
D) The aggregate supply curve will shift left,and the short-run Phillips curve will shift right.
Q2) Explain the connection between the vertical long-run aggregate supply curve and the vertical long-run Phillips curve.
Q3) How will a favourable supply shock shift short-run aggregate supply,and how will output change?
A) It will shift short-run aggregate supply left,making output rise.
B) It will shift short-run aggregate supply left,making output fall.
C) It will shift short-run aggregate supply right,making output rise.
D) It will shift short-run aggregate supply right,making output fall.
Q4) Are the effects of an increase in aggregate demand in the AD-AS model consistent with the Phillips curve? Explain.
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Chapter 17: Five Debates Over Macroeconomic Policy
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Q1) In practice,the problems created by time inconsistency and the political business cycle appear to be quite serious.
A)True
B)False
Q2) Why should policymakers NOT try to stabilize the economy?
A) Recessions represent a waste of resources.
B) Pessimism on the part of households and firms may become a self-fulfilling prophecy.
C) "Leaning against the wind" requires policymakers to increase aggregate demand in recessions and reduce aggregate demand in booms.
D) Economic conditions can easily change between the time when a policy action begins and when it takes effect.
Q3) Explain why a government deficit is likely to lead to lower living standards in the future.
Q4) Explain the main argument in favour of economic stabilization.
Q5) What is the political business cycle and how does it relate to whether the central bank should have discretion or use a rule?
Q6) Identify three of the five costs of inflation.
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