Contemporary Macroeconomics
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Course Introduction
Contemporary Macroeconomics explores the advanced theories, models, and real-world applications shaping todays economies on a national and global scale. The course examines key topics such as economic growth, unemployment, inflation, fiscal and monetary policy, financial markets, and international trade, emphasizing their relevance in current economic events and debates. Students will learn to analyze complex macroeconomic data, assess the impact of policy decisions, and critically evaluate differing schools of thought. Through a blend of theoretical frameworks and empirical studies, the course prepares students to understand and engage with the dynamic challenges facing modern economies.
Recommended Textbook
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) Firms are able to expand their operations by acquiring funds from households.They can do this directly through financial markets such as ________,or indirectly through financial intermediaries such as ________.
A) stock markets; bond markets
B) stock markets; banks
C) banks; bond markets
D) bond markets; stock markets
Answer: B
Q2) Changes in government taxes and purchases that are intended to achieve macroeconomic policy objectives refer to
A) fiscal policy.
B) monetary policy.
C) quantitative analysis.
D) government transparency.
Answer: A
Q3) What is the difference between positive analysis and normative analysis?
Answer: Positive analysis is concerned with what is,and normative analysis is concerned with what ought to be.
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Chapter 2: Measuring the Macroeconomy
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Q1) Economists measure the price level with a(n)________,which is a measure of the average of the prices of goods and services in one year relative to a base year.
A) inflation index
B) chain-weighted index
C) deflation index
D) price index
Answer: D
Q2) National income accounting reveals that the value of total production in an economy
A) is always greater than the value of total income in the economy.
B) is always less than the value of total income in the economy.
C) is always equal to the value of total income in the economy.
D) may be greater than, less than , or equal to the value of total income in the economy.
Answer: C
Q3) <b>Refer to Figure 2.6</b>What is the inflation rate for 2012?
Answer: The GDP deflator for 2011 = ($350 million / $325 million)× 100 = 107.7. The GDP deflator for 2012 = ($390 million / $375 million)× 100 = 104.0. The inflation rate for 2012 = [(104.0 - 107.7)/ 107.7] × 100 = -3.44%.
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Chapter 3: The Canadian Financial System
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Sample Questions
Q1) ________ is a company that obtains funds primarily from wealthy investors and uses the funds to make complicated,often risky investments.
A) A mutual fund
B) A pension fund
C) A hedge fund
D) An investment bank
Answer: C
Q2) Suppose you purchase a new home for $150 000,making a down payment of 10% and taking out a mortgage on the balance.What is the return on your investment in your home if one year later the price of your home decreases by 20%?
A) -10%
B) -30%
C) -50%
D) -200%
Answer: D
Q3) How does a primary financial market differ from a secondary financial market?
Answer: Primary financial markets are places or channels where financial assets are sold for the first time.Secondary financial markets are places or channels where financial assets are resold.
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Chapter 4: Money and Inflation
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Sample Questions
Q1) If Jennifer withdraws $750 from her savings account and deposits it in her chequing account,then M1+ will ________ and M2+ will ________.
A) increase; increase
B) increase; decrease
C) increase; not change
D) not change; decrease
Q2) 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%.
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) Explain how inflation can be costly even if it is expected.
Q5) 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) A currency's spot exchange rate against every other individual currency is known as a ________ exchange rate,and the exchange rate that shows how a currency is changing relative to a group of other countries' currencies is known as a ________ exchange rate.
A) nominal; real
B) unilateral; bilateral
C) nominal; parity
D) bilateral; multilateral
Q2) All else equal,an increase in the government's budget deficit accompanied by a decrease in corporate taxes would definitely result in
A) an increase in the equilibrium real interest rate.
B) a decrease in the equilibrium real interest rate.
C) an increase in the equilibrium level of saving and investment.
D) a decrease in the equilibrium level of saving and investment.
Q3) What three factors regarding differences in interest rates on similar bonds can prevent the interest parity condition from holding?
Q4) Why is the balance of payments always zero?
Q5) What determines the supply of loanable funds and the demand for loanable funds?
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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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Q1) Luke was earning $60 per hour and working 40 hours per week.Luke's wage rose to $70 per hour,and as a result,he now works 50 hours per week.What can you conclude from this information about the substitution and income effects of a wage increase for Luke?
Q2) The substitution effect of a real wage increase is observed when A) the higher wage causes workers to take more leisure and work more hours. B) the higher wage causes workers to take more leisure and work fewer hours.
C) leisure's higher opportunity cost causes workers to take less leisure and work more hours.
D) leisure's higher opportunity cost causes workers to take more leisure and work fewer hours.
Q3) <b>Refer to Figure 6.3.</b>Holding other variables constant,a decrease in income taxes accompanied by an increase in the skill level of workers will result in a
A) shift from curve D to curve D and a shift from curve S to curve S .
B) shift from curve D to curve D and a shift from curve S to curve S .
C) shift from curve D to curve D and a shift from curve S to curve S . D) shift from curve D to curve D and a shift from curve S to curve S .
Q4) Explain how efficiency wages,labour unions,and minimum wage laws affect labour markets.
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Chapter 7: The Standard of Living Over Time and Across Countries
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Q1) Suppose that the production function is Y = AK . .³,the number of workers equals 800,the capital stock is $150 000,and total factor productivity is 3.What is the value of real GDP? What will happen to real GDP if total factor productivity doubles?
Q2) In the aggregate production function,the symbol "A " represents an index of how efficiently the economy transforms capital and labour into real GDP."A" measures the influence
A) of any factor that determines real GDP.
B) of the quantities of capital and labour that determine real GDP.
C) of any factor that determines real GDP other than the quantities of capital and labour.
D) of the quantities of capital and labour that determine real GDP, holding other factors constant.
Q3) The supply curves for labour and capital are ________ and the demand curves for labour and capital are ________.
A) upward sloping; downward sloping
B) vertical; horizontal
C) vertical; downward sloping
D) upward sloping; vertical
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Chapter 8: Long-Run Economic Growth
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Q1) What is break-even investment,and what happens to the break-even level of investment when the growth rate of the labour force either increases or decreases?
Q2) Balanced growth paths can differ across countries due to differences in saving rates,labour force growth rates,and the rates of labour-augmenting technological change.These differences are likely to result in differences in ________,a common measure of the standard of living.
A) happiness
B) life expectancy
C) income distribution
D) real GDP per capita
Q3) The break-even investment line becomes steeper when the depreciation growth rate ________ or the labour force growth rate ________.
A) increases; decreases
B) increases; increases
C) decreases; increases
D) decreases; decreases
Q4) Why does growth occur in two-sector growth models?
Q5) Describe the steady state in the Solow growth model.
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Chapter 9: Business Cycles
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Sample Questions
Q1) Explain the differences between aggregate demand shocks and aggregate supply shocks.
Q2) Okun's law summarizes the relationship between
A) unemployment and inflation.
B) potential GDP and real GDP.
C) potential GDP and the deviation from potential GDP.
D) the output gap and the cyclical rate of unemployment.
Q3) On average,expansions in Canada have become ________,and recessions have become ________ since 1950.
A) longer; longer
B) longer; shorter
C) shorter; longer
D) shorter; shorter
Q4) If the price level is constant in the short run,
A) the short-run aggregate demand curve is horizontal.
B) the short-run aggregate demand curve is vertical.
C) the short-run aggregate supply curve is horizontal.
D) the short-run aggregate supply curve is vertical.
Q5) What are some of the explanations offered for why the Canadian economy experienced a period of relative stability from 1950-2007?
Page 11
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Chapter 10: Explaining Aggregate Demand: the Is-Mp Model
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Q1) <b>Refer to Figure 10.1.</b>.If the level of real GDP is initially Y ,spending is ________ production and there is an unexpected ________ in inventories. A) greater than; increase B) greater than; decrease C) less than; increase D) less than; decrease
Q2) If the MPC = 0.75,a decrease in personal taxes from $100 billion to $80 billion will increase real GDP by
A) $20 billion.
B) $40 billion.
C) $60 billion.
D) $80 billion.
Q3) Other things equal,when the real interest rate falls,C,I,and NX ________ and the output gap will ________.
A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease
Q4) Explain how the AD curve can be derived from the IS-MP model.
Page 12
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Chapter 11: The Is-Mp Model: Adding Inflation and the Open Economy
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Q1) An increase in the unemployment rate that is accompanied by an increase in the inflation rate is represented by a(n)________ the Phillips curve.
A) movement down
B) movement up
C) upward shift of D) downward shift of
Q2) If the real interest rate in Canada decreases,foreign investors will ________ their demand for Canadian dollars because they desire to ________ fewer Canadian financial assets.
A) increase; buy
B) increase; sell
C) decrease; buy
D) decrease; sell
Q3) A decrease 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
Page 13
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Chapter 12: Monetary Policy in the Short Run
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Q1) 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.
Q2) What is a liquidity crisis?
Q3) Why does the Bank of Canada attempt to achieve a low,stable rate of inflation rather than an inflation rate of 0%?
Q4) The rate that financial institutions use to lend and borrow from each other at the end of the day is called the A) discount rate.
B) overnight rate.
C) interbank rate.
D) bank rate.
Q5) Explain the dilemma that supply shocks pose when the Bank of Canada chooses to use monetary policy to achieve its goals.
Q6) What are the effects of an expansionary monetary policy on interest rates and output in an open economy with fixed exchange rates?
Q7) What is the policy trilemma?
Page 14
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Chapter 13: Fiscal Policy in the Short Run
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Q1) Three policy lags limit the effectiveness of monetary policy: recognition lags,implementation lags,and impact lags.Of these three policy lags,fiscal policy is impacted by
A) only implementation and impact lags.
B) only recognition and implementation lags.
C) only recognition and impact lags.
D) all three policy lags.
Q2) Suppose the federal budget deficit for the year was $500 billion and the economy were in a recession.If the economy had been at potential GDP,it is estimated that tax revenue would have been $350 billion higher and government spending on transfer payments would have been $200 billion lower.Using these estimates,the cyclically adjusted budget
A) deficit was $1050 billion.
B) deficit was $650 billion.
C) surplus was $50 billion.
D) surplus was $650 billion.
Q3) Explain the differences between discretionary fiscal policy and automatic stabilizers,and give one example of each.
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Chapter 14: Aggregate Demand,
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Q1) Assume that the Bank of Canada has a target inflation rate of 2% and that the values for how much the nominal target overnight rate responds to a deviation of inflation from its target,g,and how much the nominal target overnight rate responds to real GDP,h,are both 0.5.According to the Taylor rule,if inflation decreases by 2%,the real interest rate will decrease by
A) 1%.
B) 2%.
C) 3%.
D) 4%.
Q2) <b>Refer to Figure 14.3.</b>Suppose the economy is initially at long-run equilibrium and the economy experiences a demand shock such as a stock market crash.The economy then reaches a new,short-run equilibrium point.Assuming expectations are adaptive,this will allow the central bank to decrease the real interest rate,moving the economy to another new equilibrium point.The stock market crash is temporary,so the next movement on the path to the long-run equilibrium will be from
A) point A to point B.
B) point A to point C.
C) point A to point D.
D) point B to point C.
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Chapter 15: Fiscal Policy and the Government Budget in the Long Run
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Questions
Q1) The conventional view among economists is that persistent budget deficits lead to ________ real interest rates and ________ private investment.
A) higher; crowd in B) higher; crowd out C) lower; crowd in D) lower; crowd out
Q2) Since 1992,Canadian federal expenditures have ________ as a percentage of GDP. A) remained fairly stable B) increased dramatically C) slowly declined
D) been extremely volatile
Q3) Suppose the government cuts taxes by $300 million dollars this year and must pay off its debt next year by increasing taxes by $300 million.According to Ricardian equivalence,private saving will ________ this year and ________ next year,all else equal.
A) increase by $300 million; decrease by $300 million
B) increase by $150 million; decrease by $150 million
C) increase by $300 million; not change
D) not change; not change
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Chapter 16: Consumption and Investment
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Q1) Explain how changes in corporate taxes affect the investment decisions of firms.
Q2) A decrease in the real interest rate acts as ________ for lenders and as ________ for borrowers.
A) an increase in wealth; an increase in wealth
B) an increase in wealth; a decrease in wealth
C) a decrease in wealth; an increase in wealth
D) a decrease in wealth; a decrease in wealth
Q3) Economists assume that the objective of households is to maximize ________,and that the objective of firms is to maximize ________.
A) leisure; profits
B) utility; profits
C) utility; utility
D) leisure; utility
Q4) Given a decrease in the real interest rate,the substitution effect will be ________ for lenders and ________ for borrowers.
A) negative; negative
B) negative; positive
C) positive; negative
D) positive; positive
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