Canadian Macroeconomics
Exam Answer Key
Course Introduction
Canadian Macroeconomics explores the fundamental principles and dynamics that shape the Canadian economy as a whole. This course examines key macroeconomic indicators such as GDP, unemployment, inflation, and fiscal and monetary policies, with particular attention to their impact on Canadian society and policy. Students will analyze how trade relationships, resource industries, and exchange rates affect economic growth, as well as assess the influence of government interventions and the role of the Bank of Canada in stabilizing the economy. Emphasis is placed on understanding current economic challenges and trends within the Canadian context, enabling students to critically evaluate public policy and economic performance from both historical and contemporary perspectives.
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) What is NOT a characteristic of markets?
A) Firms decide whom to hire and what to produce.
B) Government policies do not affect the decisions of firms and households.
C) Households decide which firms to work for and what to buy with their incomes.
D) Firms and households guide the decisions based on profit and self-interest.
Answer: B
Q2) The government can potentially improve market outcomes if market inequalities or market failure exist.
A)True
B)False
Answer: True
Q3) After much consideration,you have chosen Cancun over Fort Lauderdale for your spring break trip this year.For this decision to change,what must occur?
A) The marginal benefit of Cancun must increase.
B) The marginal cost of Cancun must decrease.
C) The marginal benefit of Fort Lauderdale must increase.
D) The marginal cost of Fort Lauderdale must increase.
Answer: C
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3
Chapter 2: Thinking Like an Economist
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Q1) Refer to Figure 2-1.Which arrow shows the flow of spending by households?
A) arrow A
B) arrow B
C) arrow C
D) arrow D
Answer: A
Q2) In the markets for goods and services,as in the markets for the factors of production,households are buyers and firms are sellers.
A)True
B)False
Answer: False
Q3) What makes a model compelling?
A) its application
B) its simplicity
C) its predictions
D) its assumptions
Answer: C
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Page 4
Chapter 3: Interdependence and the Gains From Trade
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Q1) Refer to Figure 3-4.What does each of the two producers have an absolute advantage in?
A) Ben has an absolute advantage in wine,and Jerry has an absolute advantage in neither good.
B) Ben has an absolute advantage in beer,and Jerry has an absolute advantage in wine.
C) Ben has an absolute advantage in wine,and Jerry has an absolute advantage in beer.
D) Ben has an absolute advantage in neither good,and Jerry has an absolute advantage in both goods.
Answer: C
Q2) Refer to Figure 3-2.If Paul divides his time equally between corn and wheat,what will he be able to produce?
A) 4 bushels of wheat and 1 bushel of corn
B) 4 bushels of wheat and 5 bushels of corn
C) 5 bushels of wheat and 4 bushels of corn
D) 5 bushels of wheat and 5 bushels of corn
Answer: D
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Chapter 4: The Market Forces of Supply and Demand
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Q1) If 50-inch flat screen TVs became cheaper and buyers expected Netflix subscription prices to fall next year,what could we safely conclude would happen to the equilibrium price of a new Netflix subscription?
A) It would rise.
B) It would fall.
C) It would stay the same.
D) It could either rise or fall.
Q2) In a perfectly competitive market,buyers and sellers are price setters.
A)True
B)False
Q3) What happens in a competitive market?
A) Only a few sellers sell the same product.
B) Each seller has limited control over the price of his product.
C) If one buyer chooses to purchase a large quantity of the product,the price will rise.
D) If one seller withholds his product from the market,prices will rise.
Q4) In a market,the price of any good adjusts until quantity demanded equals quantity supplied.
A)True
B)False
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Chapter 5: Measuring a Nations Income
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Q1) If a Canadian citizen buys a television made in Korea made by a Korean firm,what is the impact on net exports and GDP?
A) Canadian net exports and Canadian GDP decrease.
B) Canadian net exports are unaffected,but Canadian GDP decreases.
C) Canadian net exports and Canadian GDP are unaffected.
D) Canadian net exports decrease,but Canadian GDP is unaffected.
Q2) How are grapes treated in GDP terms?
A) They are always counted as intermediate goods.
B) They are counted as intermediate goods only if they are used to produce another good like wine.
C) They are counted as intermediate goods only if they are consumed.
D) They are counted as intermediate goods whether they are used to produce other goods or consumed.
Q3) Which nonmarket good or service is included as an estimate in Canadian GDP?
A) the value of unpaid housework
B) the value of vegetables that people grow in their gardens
C) the estimated rental value of owner-occupied homes
D) the estimated value of volunteer work
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Chapter 6: Measuring the Cost of Living
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Q1) Substitution bias in computing the CPI tends to make the CPI overstate the true increase in the cost of living.
A)True
B)False
Q2) Suppose that the CPI today is 120 and that it was 80 five years ago.Then,in today's prices something that cost $1 five years ago now costs $1.50.
A)True
B)False
Q3) Refer to the Scenario 6-1.What is Grant's 1944 income in last year's dollars?
A) $19,128
B) $21,240
C) $120,682
D) $136,363
Q4) When the relative price of a good increases,how will consumers respond?
A) by buying more of it and its substitutes
B) by buying less of it and its substitutes
C) by buying less of it and more of its substitutes
D) by buying more of it and less of its substitutes
Q5) Why does the GDP deflator give a different rate of inflation than the CPI does?
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Chapter 7: Production and Growth
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Q1) The real GDP per capita in an economy increases at a rate of 2.6 percent.Calculate the number of years that it takes for real GDP to double.Assuming that the current GDP per capita is $40,000 and the growth rate will be on average 2.6 percent,how much will GDP per capita be after 10 years? After 20 years? After 30 years? Draw a graph to show approximately the evolution of this economy for the next 30 years.
Q2) In medieval Europe,an important technological advance was the use of the padded horse collar for plowing.Once this idea was thought of,other people used it.What does this example illustrate about knowledge?
A) It is generally a public good.
B) It is generally a societal good.
C) It is generally a private good.
D) It is generally a normal good.
Q3) According to Malthus's view,what is a consequence of increased population?
A) increased GDP per person
B) more people imply more ideas and more labour force,which promotes growth
C) depletion of productive resources and lower standards of living
D) increase in productivity in the food sector,which is necessary to support the increase in population
Q4) What is the difference between human capital and technology?
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Chapter 8: Saving, investment, and the Financial System
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Q1) The country of Meritor uses the merit as its currency.Recent national income statistics shows that it has GDP of 700 million merits,no government transfer payments,taxes of 210 million merits,a budget surplus of 60 million merits,and investment of 200 million merits.What is the sum of its consumption and government expenditures?
A) 470 million merits
B) 490 million merits
C) 500 million merits
D) 560 million merits
Q2) Lenders sell bonds,and borrowers buy them.
A)True
B)False
Q3) 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
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Page 10
Chapter 9: Unemployment and Its Natural Rate
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Q1) Sally is on a temporary summer layoff from the public school where she works as an administrator.If Sally participates in the Statistics Canada survey,how will she be classified?
A) as unemployed and in the labour force
B) as unemployed and out of the labour force
C) as employed and in the labour force
D) as employed and out of the labour force
Q2) Suppose that consumers decide to buy more Blu-Ray players and fewer DVD players.As a result,Blu-Ray companies expand production while DVD companies lay off workers.What is this an example of?
A) structural unemployment created by efficiency wages
B) cyclical unemployment created by a recession
C) frictional unemployment created by a sectoral shift in demand
D) frictional unemployment created by a sectoral shift in supply
Q3) What is a possible effect of unions?
A) Unions decrease the natural rate of unemployment.
B) Unions decrease the wages of workers in the union.
C) Unions raise the profits of firms they work for.
D) Unions cause wages of nonunionized workers to fall.
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Page 11
Chapter 10: The Monetary System
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Q1) If the reserve ratio is 20 percent,how much money can be created from $100 of reserves? Show your work.
Q2) Which list contains only actions that increase the money supply?
A) lowering the bank rate; raising the reserve requirement ratio
B) lowering the bank rate; lowing the reserve requirement ratio
C) raising the bank rate; raising the reserve requirement ratio
D) raising the bank rate; lowering the reserve requirement ratio
Q3) Are credit cards and debit cards money? What's the difference between credit and debit cards?
Q4) What is the fundamental function of credit cards?
A) Credit cards are used for deferring payments.
B) Credit cards are used as store of value.
C) Credit cards are used for increasing the money supply.
D) Credit cards are used as investment assets.
Q5) If the reserve ratio is 20 percent,how much is the money multiplier?
A) 2
B) 4
C) 5
D) 8
Q6) What is the difference between money and wealth?
Page 12
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Chapter 11: Money Growth and Inflation
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Q1) Refer to the following:
a.The central bank of the Republic of Moldova needs to determine by how much to increase the money supply next year,if they estimate an increase in the overall economic activity (real GDP)of 2.5 percent and have a target inflation rate of 4 percent.The velocity of money has been observed to be constant over the past many years.If you were a consultant to the government,what would your advice be?
b.Next year,the National Bank of Moldova wishes to reduce inflation to 2 percent,and estimates an increase in real GDP by 1.5 percent.What should be the change in the money supply?
Q2) As the price level decreases,what happens to the value of money?
A) It increases,so people want to hold more of it.
B) It increases,so people want to hold less of it.
C) It decreases,so people want to hold more of it.
D) It decreases,so people want to hold less of it.
Q3) What does the shoe leather cost of inflation refer to?
A) the fall in real income associated with inflation
B) the time spent searching for low prices when inflation rises
C) the waste of resources used to maintain lower money holdings
D) the increased cost to the government of printing more money
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Page 13
Chapter 12: Open-Economy Macroeconomics: Basic Concepts
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Q1) Suppose that a country has $120 billion of national saving and $80 billion of domestic investment.Is this possible? Where did the other $40 billion of national saving go?
Q2) Which of the following would be Canadian foreign direct investment?
A) Your Canadian-based mutual fund buys shares of stock in Eastern European companies.
B) A Canadian citizen opens a Tim Hortons franchise in Hong Kong.
C) A Swiss bank buys a Canadian government bond.
D) A German tractor factory opens a plant in Victoria,British Columbia.
Q3) 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.
Q4) What is the formula for saving in an open economy?
A) Saving = Foreign saving + Net capital outflow
B) Saving = Domestic investment - Net capital outflow
C) Saving = Domestic saving + Net capital outflow
D) Saving = Domestic investment + Net capital outflow
Q5) How do the nominal exchange rate and the real exchange rate differ?
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Chapter 13: A Macroeconomic Theory of the Small Open Economy
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Q1) How does an increase in the Canadian government budget deficit change the graph representing the Canadian market for loanable funds?
A) The supply of loanable funds curve shifts to the right.
B) The supply of loanable funds curve shifts to the left.
C) The demand for loanable funds shifts to the right.
D) The demand for loanable funds shifts to the left.
Q2) Refer to the Figure13-1.If the world interest rate equals 4 percent,what is the net capital outflow?
A) -$4000
B) -$2000
C) $2000
D) $4000
Q3) Which of the following will decrease Canadian net capital outflow?
A) capital flight from Canada
B) a decrease in the tax on investment income
C) the imposition of Canadian government import quotas
D) a decrease in the tax on capital gains
Q4) A drop in the Peruvian real interest rate reduces Peruvian net capital outflow.
A)True
B)False
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Chapter 14: Aggregate Demand and Aggregate Supply
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Q1) What was one of the major reasons why the United States was slower to recover from the 2008-2009 recession than Canada?
A) Housing price increases in Canadian were much larger than in the United States.
B) Housing price increases in the United States were much larger than in Canada.
C) The impact of the fall in house prices on Canadian household consumption was greater.
D) The impact of the fall in house prices on American household consumption was greater.
Q2) Suppose there was an economic contraction caused by a shift in aggregate supply.Further,suppose the central bank changes the money supply to offset the effects of that contraction.How would the effects of the change in money supply be reflected in the aggregate demand and aggregate supply model?
A) aggregate supply would shift to the right.
B) Aggregate supply would shift to the left.
C) Aggregate demand would shift to the right.
D) Aggregate demand would shift to the left.
Q3) Discuss what economists believe is different about the long and short run.
Q4) Make a list of expenditures whose sum equals GDP.
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Chapter 15: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) Assume that the MPC is 0.8.Assuming that only the multiplier effect matters,how will a decrease in government purchases of $150 billion shift the aggregate demand curve?
A) It will shift the aggregate demand curve left by $120 billion.
B) It will shift the aggregate demand curve left by $150 billion.
C) It will shift the aggregate demand curve right by $150 billion.
D) It will shift the aggregate demand curve left by $750 billion.
Q2) Which of the following defines the government purchases multiplier?
A) MPC + MPI
B) 1 - MPC
C) 1 / MPC
D) 1 / (1 - MPC)
Q3) How does an increase in the interest rate affect the demand for goods and services?
A) It increases the cost of borrowing and people consume more.
B) It decreases the cost of borrowing and people consume more.
C) It increases the cost of borrowing and people consume less.
D) It decreases the cost of borrowing and people consume less.
Q4) Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.
Page 17
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Chapter 16: The Short-Run Tradeoff Between Inflation and Unemployment
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Q1) Refer to the Figure 16-2.Where is the money supply growth rate the greatest?
A) at a
B) at b
C) at c
D) at e
Q2) What do the data for the period of 1973 through 1980 demonstrate?
A) that there is a short-run tradeoff between inflation and unemployment in a stable economy
B) that a supply shock changes the natural rate of unemployment
C) that there is no long-run tradeoff between inflation and unemployment
D) that a supply shock increases both inflation and unemployment
Q3) What did Phillips discover?
A) a positive relation between unemployment and inflation in the United Kingdom
B) a positive relation between unemployment and inflation in Canada
C) a negative relation between unemployment and inflation in Canada
D) a negative relation between unemployment and inflation in the United Kingdom
Q4) If macroeconomic policy expands aggregate demand,unemployment will fall and inflation will rise in the short run.
A)True
B)False
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Chapter 17: Five Debates Over Macroeconomic Policy
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Q1) A nation's saving rate is not a primary determinant of its long-run economic prosperity.
A)True
B)False
Q2) In which situation is a program to reduce inflation likely to have the highest costs?
A) if the sacrifice ratio is high and the reduction is unexpected
B) if the sacrifice ratio is high and the reduction is expected
C) if the sacrifice ratio is low and the reduction is unexpected
D) if the sacrifice ratio is low and the reduction is expected
Q3) Explain why a government deficit is likely to lead to lower living standards in the future.
Q4) Why should the central bank aim for zero inflation?
A) Reducing inflation imposes temporary costs but provides permanent benefits.
B) Reducing inflation from 2 percent to 0 percent is virtually costless.
C) The government has indexed tax brackets to prevent the adverse effects of inflation.
D) The costs of inflation are very high.
Q5) Explain how a higher rate of return on saving could,at least in theory,lead to lower saving.
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