Contemporary Economic Issues
Midterm Exam
Course Introduction
This course examines the pressing economic challenges and debates shaping todays global landscape. Students will explore topics such as income inequality, globalization, environmental sustainability, labor market changes, monetary and fiscal policy, and the impact of technological innovation on economies. Through analysis of current data, case studies, and policy responses, the course encourages critical thinking and informed discussion about the complexities and potential solutions to contemporary economic problems faced by local, national, and international communities.
Recommended Textbook
Macroeconomics 1st Canadian Edition by R.
Glenn Hubbard
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1250 Flashcards
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Chapter 1: Introduction to Macroeconomics and the Great Recession
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Sample Questions
Q1) The underlying fluctuations in real GDP due to the business cycle are reflected by fluctuations in A) inflation.
B) population growth.
C) the labour force.
D) real GDP per capita.
Answer: D
Q2) If you were building a macroeconomic model that explores the effect of an increase in income tax rates on the size of the labour force,the exogenous variable(s)would be A) income tax rates.
B) the size of the labour force.
C) both income tax rates and the size of the labour force.
D) neither income tax rates nor the size of the labour force.
Answer: A
Q3) What is monetary policy?
Answer: Monetary policy refers to the actions that the Bank of Canada takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.
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Chapter 2: Measuring the Macroeconomy
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Q1) Many provincial and local governments find themselves faced with increasing retirement expenditures for retired government employees.These increasing expenditures will ________ GDP because they are categorized as ________.
A) increase; government purchases
B) increase; gross private domestic investment
C) decrease; state and local government purchases
D) not change; transfer payments.
Answer: D
Q2) All of the following are government purchases,except
A) the salary paid to Prime Minister Stephen Harper.
B) the pension paid to former Prime Minister John Turner.
C) the purchase of a new office building for the Canadian Security Intelligence Service.
D) the purchase of new radar tracking equipment for the Canadian Navy.
Answer: B
Q3) <b>Refer to Figure 2.2.</b>Calculate GDP in 2012 and 2013.
Answer: 2012 GDP = (30 × $0.30)+ (60 × $1.10)+ (50 × $2.00)= $175.00. 2013 GDP = (40 × $0.50)+ (75 × $1.30)+ (50 × $2.25)= $230.00.
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Chapter 3: The Canadian Financial System
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Sample Questions
Q1) A decrease in the price level 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: D
Q2) Suppose you purchase a two-year bond that has a $450 coupon and a face value of $5000,and immediately after you purchase the bond,new bonds are issued that are otherwise identical,except they have coupons of $375.If you sell your bond,you will receive a gain of
A) $67.33.
B) $134.66.
C) $269.32.
D) $389.40.
Answer: B
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Chapter 4: Money and Inflation
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Sample Questions
Q1) Suppose the money supply is set to grow at 7%,real GDP grows at 5%,and the expected real interest rate on Aaa corporate bonds averages 6%.Using the quantity theory of money and the Fisher equation,the nominal interest rate on the Aaa corporate bond should be
A) -2%.
B) 2%.
C) 6%.
D) 8%.
Q2) <b>Refer to Figure 4.1</b>In this simple economy,M2+ equals A) $4800.
B) $6400.
C) $9200.
D) $16 800.
Q3) Suppose banks hold no excess reserves,households and firms do not change the amount of currency they hold,and the required reserve ratio is 25%.If the Bank of Canada purchases $1 million in government bonds,what will be the changes in bank reserves and total chequing account deposits in the whole banking system?
Q4) Explain why gold,despite its value,is difficult to use as a medium of exchange.
Q5) Explain how inflation can be costly even if it is expected.
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Chapter 5: The Global Financial System and Exchange Rates
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Q1) Purchasing power parity does a ________ job in explaining movements in nominal exchange rates in the short run and does a ________ job in explaining movements in nominal exchange rates in the long run.
A) reasonable; reasonable
B) reasonable; poor
C) poor; reasonable
D) poor; poor
Q2) Which of the following transactions would be included in Germany's current account?
A) A German citizen purchases a new BMW made in Germany.
B) An American citizen purchases 500 shares of BMW stock.
C) A German citizen purchases 500 shares of eBay stock.
D) An American citizen purchases a new BMW made in Germany.
Q3) What three factors regarding differences in interest rates on similar bonds can prevent the interest parity condition from holding?
Q4) What determines the supply of loanable funds and the demand for loanable funds?
Q5) Explain what happens to the world real interest rate if the government of Panama runs a large government budget deficit.
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Q6) What is the difference between nominal exchange rates and real exchange rates?
Chapter 6: The Labour Market
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Sample Questions
Q1) The natural rate of unemployment consists of
A) frictional unemployment plus structural unemployment.
B) frictional unemployment plus cyclical unemployment.
C) structural unemployment plus cyclical unemployment.
D) frictional unemployment plus structural unemployment plus cyclical unemployment.
Q2) The marginal product of labour is
A) the extra revenue a firm receives from adding one more unit of labour, holding everything else constant.
B) the extra output a firm receives from adding one more unit of labour, holding everything else constant.
C) the extra income a firm receives from adding one more unit of labour, holding everything else constant.
D) the supply of labour for a firm.
Q3) The economy reaches full employment when A) every employee has a job.
B) structural unemployment is zero.
C) cyclical unemployment is zero.
D) frictional unemployment is zero.
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Chapter 7: The Standard of Living Over Time and Across Countries
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Sample Questions
Q1) Suppose y = Ak¹/³,the capital-labour ratio is $30 000 per worker,the level of total factor productivity is 400,50% of the population works,and there are 50 million workers.Real GDP per worker is
A) $9861.69.
B) $12 424.66.
C) $15 530.82.
D) $18 067.92.
Q2) Suppose that the production function for the economy is Y = AK .² . .If the capital stock = 40 000,the quantity of labour = 10 000,and the efficiency index = 1,real GDP is
A) $13 195.08.
B) $16 000.00.
C) $16 946.34.
D) $28 000.00.
Q3) The marginal product of capital is always ________ and it ________ as the capital stock increases.
A) positive; increases
B) positive; decreases C) negative; increases D) negative; decreases
Page 9
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Chapter 8: Long-Run Economic Growth
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Sample Questions
Q1) Explain why GDP per capita varies among countries even though countries eventually converge to their balanced growth paths.
Q2) If d = the depreciation rate,n = the growth rate of the labour force,and k = the capital-labour ratio,which of the following expressions best describes break-even investment?
A) dnk
B) (d - n)/k
C) dk - nk
D) (d + n)k
Q3) In the Solow growth model,if the level of investment is less than depreciation at the initial capital-labour ratio,then k is ________ and the capital-labour ratio ________ toward the steady-state capital-labour ratio.
A) greater than zero; increases
B) greater than zero; decreases
C) less than zero; increases
D) less than zero; decreases
Q4) Explain how an economy that is presently above its balanced growth path will converge back to its balanced growth path.
Q5) Why does growth occur in two-sector growth models?
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Chapter 9: Business Cycles
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Sample Questions
Q1) At full-employment GDP,
A) the long-run aggregate demand curve is horizontal.
B) the long-run aggregate demand curve is vertical.
C) the long-run aggregate supply curve is horizontal.
D) the long-run aggregate supply curve is vertical.
Q2) Suppose that in 2013,potential GDP in the nation of Octavia is $85 000,real GDP is $75 000,and potential GDP grows at a rate of 2% per year.
a. If real GDP is $78 000 in 2014,using Okun's law,calculate the cyclical rate of unemployment.
b. If real GDP is $83 000 in 2015,using Okun's law,calculate the cyclical rate of unemployment.
Q3) <b>Refer to Figure 9.1</b>.Assume the economy is initially at point A.The eventual change from a shock that increases investment expenditure is best represented by which long-run equilibrium combination of price level and real GDP?
A) P ; Y
B) P ; Y
C) P ; Y
D) P ; Y
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Chapter 10: Explaining Aggregate Demand: the Is-Mp
Model
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Q1) Suppose the economy is initially in short-run equilibrium and the Bank of Canada decreases the nominal money supply.If the price level remains constant,real GDP will ________ relative to potential GDP and the real interest rate will ________.
A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease
Q2) <b>Refer to Figure 10.2.</b>f in this economy the MPC = 0.6,Y = $50 billion,and AE is $5 billion below AE ,potential GDP is
A) $53 billion.
B) $55 billion.
C) $58.3 billion.
D) $62.5 billion.
Q3) If the MPC = 0.75,a decrease in government spending from $875 billion to $840 billion will decrease real GDP by
A) $26.25 billion.
B) $35 billion.
C) $46.67 billion.
D) $140 billion.
Page 12
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Chapter 11: The Is-Mp Model: Adding Inflation and the Open Economy
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Q1) If the real interest rate in Canada increases,foreign investors will ________ their demand for Canadian dollars because they desire to ________ more Canadian financial assets.
A) increase; buy
B) increase; sell
C) decrease; buy
D) decrease; sell
Q2) Under a fixed exchange rate system,a real interest rate corresponding to the upward-sloping portion of the NCF curve reflects the fact that a central bank ________,and the real interest rate corresponding to the horizontal portion of the NCF curve reflects the fact that a central bank ________.
A) can always supply more domestic currency; can always meet the demand for foreign currency
B) can always supply more domestic currency; is limited in meeting the demand for foreign currency
C) is limited in meeting the demand for domestic currency; can always meet the demand for foreign currency
D) is limited in meeting the demand for domestic currency; is limited in meeting the demand for foreign currency
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Chapter 12: Monetary Policy in the Short Run
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Q1) What is a liquidity crisis?
Q2) According to the policy trilemma hypothesis,of the three goals generally pursued by policymakers in an open economy,
A) only one of the goals is possible to achieve at any one time.
B) it is possible for a country to achieve two of the goals at the same time, but not all three.
C) it is possible for a country to achieve all three goals at the same time in the short run, but not in the long run.
D) it is only possible for a country to achieve all three goals at the same time in the long run.
Q3) What are the effects of an expansionary monetary policy on interest rates and output in an open economy with floating exchange rates?
Q4) What is the policy trilemma?
Q5) The Bank of Canada conducts open market operations with the primary goal of A) affecting the overnight rate.
B) affecting the discount rate.
C) stabilizing the foreign-exchange market.
D) adjusting reserve requirements.
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Chapter 13: Fiscal Policy in the Short Run
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Sample Questions
Q1) The federal government debt as a percentage of GDP fell during A) 2008-2010.
B) 1980-1995.
C) 1996-2006.
D) World War II.
Q2) Explain the differences between a federal budget deficit,a federal budget surplus,and the federal government debt.
Q3) Typically,discretionary fiscal policy changes have to be approved by the parliament so a detailed proposal needs to be put forward by the government; parliamentary approvement may take a significant amount of time.As a result,________ for fiscal policy can be several months longer than for monetary policy.
A) the response and recognition lags
B) the recognition lag
C) the response lag
D) all three policy lags
Q4) What are the effects of an expansionary fiscal policy on interest rates and output in an open economy with floating exchange rates?
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Chapter 14: Aggregate Demand, aggregate Supply, and Monetary Policy
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Q1) Suppose the economy is initially in equilibrium where real GDP equals potential GDP and the inflation rate is at the target rate.Other things equal,a housing boom will cause aggregate expenditures to increase,which will result in a new,short-run equilibrium.To return GDP to its potential level,the inflation rate will adjust.With adaptive expectations,this moves the economy to another new short-run equilibrium point.Since the housing boom is temporary,the end of the housing boom will now cause
A) a decrease in aggregate demand and an increase in the inflation rate.
B) a decrease in aggregate supply and an increase in the inflation rate.
C) a decrease in aggregate demand and a decrease in the inflation rate.
D) a decrease in aggregate supply and a decrease in the inflation rate.
Q2) The steeper the central bank reaction function,the ________ the central bank increases the interest rate in response to the current inflation rate being above the target inflation rate and the ________ the central bank decreases the interest rate in response to the actual inflation rate being below the target inflation rate.
A) more; more
B) more; less
C) less; more
D) less, less
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Chapter 15: Fiscal Policy and the Government Budget in the
Long Run
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Q1) An increase in the inflation rate will lead to a ________ nominal interest rate,which will ________ the debt-to-GDP ratio.
A) higher; raise
B) higher; reduce C) lower; raise
D) lower; reduce
Q2) <b>Refer to Table 15.1.</b>The primary budget deficit for Arugula in 2012 is
A) $135 million.
B) $195 million.
C) $380 million.
D) $600 million.
Q3) The debt-to-GDP ratio decreases when the primary deficit ________ or when seigniorage ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Q4) Explain why many economists are skeptical about whether Ricardian equivalence describes the behaviour of households in the economy.
Page 17
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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.Based on the Tobin's q value for the Vuvuza Corporation,we would expect Vuvuza to A) increase its capital stock. B) depreciate more of its assets. C) issue more shares of stock to be able to afford to finance investment expenditures. D) cut back on current production.
Q2) 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.
Q3) What is meant by the statement that investment projects are irreversible? How does the idea that investment projects are irreversible affect the volatility of investment in capital goods?
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