Economic Fundamentals
Final Test Solutions
Course Introduction
Economic Fundamentals introduces students to the core principles and concepts that underlie the functioning of modern economies. The course covers essential topics such as supply and demand, market equilibrium, production and costs, consumer behavior, and the roles of government and financial institutions. Students will explore how individuals and firms make decisions, how resources are allocated, and how various market structures operate. Through real-world examples and analytical tools, this course provides a strong foundation for understanding both microeconomic and macroeconomic issues, preparing students for further study in economics and related fields.
Recommended Textbook
Economics Today The Macro View 5th Canadian Edition by Roger LeRoy Miller
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Chapter 1: The Nature of Economics
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Sample Questions
Q1) People behave rationally when they ________.
Answer: make decisions they believe will make themselves better off.
Q2) In an economic model,assumptions
A)must be applicable to many real-world situations.
B)must be eliminated before being used to make sure the model is realistic.
C)are not important in determining the usefulness of the model.
D)define the set of circumstances in which the model is likely to be applicable.
Answer: D
Q3) Scarcity means
A)not being able to satisfy all of everyone's needs.
B)not being able to satisfy all of everyone's wants.
C)having too little of a product to serve all customers who wish to buy it.
D)the same thing as shortage.
Answer: B
Q4) What is Economics and what does it try to do?
Answer: Economics is the study of how people allocate limited resources in attempting to satisfy their wants.Wants may or may not be unlimited,but they certainly are greater than can be satisfied with the resources available.Therefore,economics is the study of the choices people must make.Economics tries to explain real-world outcomes as they relate to interactions of people confronting scarcity.
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Chapter 2: Production Possibilities and Economic Systems
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Sample Questions
Q1) In Table 2-1,if the economy moves from point D to point E,the opportunity cost of the extra personal computer in terms of televisions given up is ________.
Answer: 4.
Q2) The prime minister of Canada promises to produce more defence goods without causing any decreases in the production of other goods.Such a promise could be valid
A)if Canada is currently producing inside its production possibilities curve.
B)if Canada is producing to the right of its production possibilities curve.
C)if Canada is producing at a point on its production possibilities curve.
D)under no possible circumstances;the production possibilities curve would have to shift to the right.
Answer: A
Q3) Allocative efficiency is achieved when
A)a point beyond the production possibilities curve is reached.
B)technological change occurs.
C)the economy is producing on its production possibilities curve.
D)the maximum amounts of the most desired goods and services are being produced. Answer: D
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Chapter 3: Demand and Supply
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Sample Questions
Q1) Which of the following will NOT affect the market supply curve for a good?
A)an increase in the number of sellers in the market
B)an increase in the price of the good
C)a new government subsidy to producers for each unit of the good that they produce
D)an increase in the prices of the inputs used in production
Answer: B
Q2) The price of a new textbook was $60 in one year and $75 two years later.Over the same period,the price of a used copy of the text rose from $25 to $37.50.Over the two years,the relative price of a new textbook
A)increased by 25 percent.
B)decreased from 2.4 to 2.0.
C)increased from 2.4 to 3.
D)decreased from 1.4 to 1.25
Answer: B
Q3) When economists talk about a demand schedule for a product,they mean a schedule recording ________.
Answer: the amounts of a good that consumers would be willing and able to purchase at each of various possible prices in a given time period.
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Chapter 4: Introduction to Macroeconomics
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Sample Questions
Q1) An example of a cyclically unemployed individual is
A)Charles who lost his job as a real estate salesperson when the housing market went soft.
B)Alice who quit her job to enter college.
C)Mary who lost her job in the textile industry following a decrease in the tariff on textiles.
D)Bob who has just graduated from college and is entering the labour market.
Q2) Which of the following statements is TRUE?
A)Expansions and contractions of the Canadian economy usually last the same length of time.
B)Expansions vary greatly in length,but contractions last the same amount of time.
C)The Canadian economy has neither expanded nor contracted since the end of World War II.
D)Expansions and contractions of the Canadian economy vary greatly in length.
Q3) Unanticipated negative inflation will create
A)losses for creditors and gains for debtors.
B)losses for both creditors and debtors.
C)gains for both creditors and debtors.
D)gains for creditors and losses for debtors.
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Chapter 5: Measuring the Economys Performance
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Sample Questions
Q1) Which of the following is included in determining GDP?
A)the purchase of a new car
B)the purchase of a used car
C)a housewife preparing breakfast
D)a gardener cans vegetables for consumption during the winter
Q2) What is the difference between GDP and GNP? If Canadians generate the same income abroad as foreigners generate for their Canadian owned assets and enterprises,what will be true about the relation between GDP and GNP?
Q3) Suppose the total value of all assets in Canada is $10 billion.In 1993,the total value of all final services produced in Canada was $100 million,the total value of all final goods produced in Canada was $300 million,and the total value of all final goods and services produced by Canadian firms in other countries was $100 million.In this situation,gross domestic product for 1993 was
A)$600 million.
B)$500 million.
C)$400 million.
D)$10.4 billion.
Q4) Explain what we mean by True Purchasing Power Parity.Once complete,explain the notion using an example of your own.
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Chapter 6: Modelling Real Gdp and the Price Level in the Long Run
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Sample Questions
Q1) Describe what happens in the economy when there is an increase in the level of the factors of production (the endowment)in the short run and long run.
Q2) When the real interest rate rises,
A)AD shifts left..
B)the long-run aggregate supply curve shifts to the right.
C)the multiplier stays the same.
D)AD shifts right.
Q3) If the price level increases,the value of money balances held by individuals,firms,government,and foreigners decreases,and spending decreases.This is an example of
A)the open economy effect.
B)the interest rate effect
C)the real-balance effect.
D)the deflation effect.
Q4) What information is provided by the aggregate demand curve?
Q5) Other things equal,a higher price level is associated with A)a higher real GDP.
B)a lower real GDP.
C)a lower nominal GDP.
D)higher income levels.
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Chapter 7: Economic Growth and Development
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Sample Questions
Q1) Explain the relationship between economic growth and labour productivity.
Q2) Why might population growth and immigration stimulate economic growth?
Q3) The rate of economic growth will be faster
A)the greater the rate of growth of the money supply.
B)the greater the rate of saving.
C)the greater the rate of growth of the population.
D)the greater consumption spending is.
Q4) The most important thing about higher labour productivity is that it means
A)we are doing better than anyone else.
B)we can compete well with other nations.
C)we can achieve a happier population.
D)we can have a higher standard of living.
Q5) A higher rate of savings should lead to
A)higher current consumption.
B)less growth.
C)more investment,capital growth,and future consumption.
D)a higher price level and reduced future consumption.
Q6) Explain how the "new growth theory" treats technology differently from the way economists used to treat technology.
Q7) Why are economic growth and saving related?
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Chapter 8: Modelling Real Gdp and the Price Level in the Short Run
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Sample Questions
Q1) If there are continual ________ in aggregate supply,the economy will experience cost-push inflation.
A)spending
B)increases
C)wage decreases
D)decreases
Q2) What is the affect of a rise in the price level on potential output?
Q3) In Figure 8-3,the three curves are:
A)(1)is long-run aggregate supply, (2)is short-run aggregate supply,and (3)is aggregate demand.
B)(1)is aggregate demand, (2)is short-run aggregate supply,and (3)is long-run aggregate supply.
C)(1)is short-run aggregate supply, (2)is long-run aggregate supply,and (3)is aggregate demand.
D)(1)is long-run aggregate supply, (2)is aggregate demand,and (3)is short-run aggregate supply.
Q4) Explain in detail,with the aid of diagrams the two types of inflation tat exist in the short-run.
Q5) Distinguish between the short-run and long-run aggregate supply curves.
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Chapter 9: Consumption, investment, and the Multiplier
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Sample Questions
Q1) Other things constant,if the MPS is 0.1,and private investment spending falls by $100 million,then national income
A)decreases by $10 million.
B)increases by $90 million.
C)decreases by $1 billion.
D)increases by $1 billion.
Q2) When real national income exceeds total expenditures,
A)there will be unplanned decreases in inventories.
B)the circular flow will increase.
C)a lower level of equilibrium income will result.
D)a higher level of equilibrium income will prevail.
Q3) Suppose investment spending is $5 billion,real disposable income is $200 billion,and the marginal propensity to consume is 0.8.If real disposable income increases to $220 billion,investment spending will be
A)$5 billion.
B)$9 billion.
C)$21 billion.
D)$96 billion.
Q4) What are the simplifying assumptions that are made in the Keynesian Model?
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Chapter 10: The Public Sector
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Sample Questions
Q1) The free-rider problem is encountered when
A)all individuals are willing to pay for what they consume.
B)someone benefits from the consumption of a good without paying his or her full share.
C)all individuals who consume a public good pay for it.
D)all goods consumed and produced are private goods.
Q2) Suppose the tax rate on the first $10,000 of income is zero;10% on the next $20,000;20% on the next $20,000;30% on the next $20,000;and 40% on income over $70,000.Family C has an income of $100,000.The family's average tax rate is ________%.
Q3) Which of the following goods is subject to the free-rider problem?
A)a public transit system
B)a public golf club
C)national defense
D)a public university
Q4) Private goods are goods or services
A)that can only be consumed by one individual at a time.
B)that violate the principle of rival consumption.
C)to which the exclusion principle applies.
D)for which no public market exists.
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Chapter 11: Fiscal Policy and the Public Debt
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Sample Questions
Q1) If increased government spending has no effect on either the level of real national income or the price level,we know that
A)the economy was already at full employment.
B)the crowding out of private sector investment spending and consumption spending was complete.
C)the interest rate effect was small.
D)the government spending was on goods and services the people didn't value.
Q2) A country reports that its government spending is $950 billion while tax revenues total $500 billion.Does the country have a budget surplus or deficit and what is the surplus or deficit?
Q3) To reduce an expansionary gap,the government could
A)decrease taxes.
B)increase taxes.
C)increase spending on goods and services.
D)increase military spending.
Q4) The size of the federal government debt is astounding! Comment relative to the national debt and the relative size of the Federal budget balance.
Q5) What are automatic stabilizers? How do they help stabilize economic activity?
Q6) Explain what fiscal policy actions could eliminate an inflationary gap.
Page 13
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Chapter 12: Money and the Banking System
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Sample Questions
Q1) Which of the following is an example of M1+ money?
A)a credit card
B)savings deposits
C)coins
D)chequing accounts
Q2) Which of the following is TRUE of M2+?
A)It is larger than M1+.
B)It excludes savings deposits.
C)It does not include the most highly liquid components of the money supply.
D)It is less than M1+.
Q3) which of the following statements is TRUE of money during times of inflation.
A)Money still retains the characteristic of predictability of value.
B)Money can easily be made so people can still purchase the goods and services they want.
C)Money is no longer a liquid asset.
D)The opportunity cost of money falls as inflation rises.
Q4) If you have $50 in cash,a balance of $635 in your chequing account at the Royal Bank,and a jar with $15.75 in coins,how much M1+ do you have?
Q5) In terms of the functions of money,can credit cards be considered money?
Q6) Explain the structure of the Canadian Banking system.
Page 14
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Chapter 13: Money Creation and Deposit Insurance
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Sample Questions
Q1) There are zero excess reserves at all banks and the required reserve ratio is 20 percent.If a check for $100,000 on Bank ABC is deposited in Bank XYZ,then excess reserves at Bank ABC equal ________ and excess reserves at Bank XYZ equal
A)-$20,000;+$80,000
B)-$100,000;+$80,000
C)-$80,000;+$100,000
D)-$80,000;+$80,000
Q2) In Table 13-4,the Bank of Wealth can make additional loans up to
A)$25,000.
B)$10,000.
C)$5,000.
D)$250,000.
Q3) If the desired reserve requirement is raised,the money multiplier A)is lowered.
B)is increased.
C)stays the same. D)is doubled.
Q4) Explain the process by which the banking system creates money
Q5) Why did the federal government set up CDIC?
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Chapter 14: The Bank of Canada and Monetary Policy
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Sample Questions
Q1) When the Bank of Canada sells a government security to a commercial bank,
A)the cash reserves of the commercial bank decrease.
B)the net worth of the commercial bank increases.
C)the loans of the commercial bank will increase.
D)the balance sheet of the commercial bank is thrown off balance.
Q2) In Figure 14-5,if the economy is in equilibrium at E ,then
A)the economy is underutilizing its resources.
B)the economy is producing above its potential long run equilibrium at full employment.
C)there is an expansionary gap in the economy.
D)the economy is in a period of high inflation.
Q3) If V = 5,P = $3,and Q = 50,then the money supply equals
A)$10.
B)$30.
C)$150.
D)$300.
Q4) What are monetarists? How do they differ from Keynesians with respect to the effects of monetary policy on the macroeconomy?
Q5) What are three reasons people want to hold money balances?
Q6) What are the functions of the Bank of Canada?
Page 16
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Chapter 15: Issues in Stabilization Policy
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Sample Questions
Q1) During the 1960s many Keynesian economists felt that,by studying the Phillips curve,
A)policymakers could dispense with the Bank of Canada's open market operations.
B)policymakers could fine-tune the economy by selecting policies that would produce the exact mix of unemployment and inflation that suited current government objectives.
C)the Prime Minister and Parliament did not need to attempt to balance the budget.
D)policymakers could eliminate even frictional unemployment in the economy.
Q2) The rate of unemployment below which the rate of inflation tends to rise and above which the rate of inflation tends to fall is called.
A)structural unemployment.
B)extraneous inflation rate.
C)the unemployment rate.
D)the NAIRU.
Q3) If a policy is carried out by a rule,then we have an example of A)active policymaking.
B)discretionary policymaking.
C)nondiscretionary policymaking.
D)natural policymaking.
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Chapter 16: Comparative Advantage and the Open Economy
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Sample Questions
Q1) For the infant-industry argument for tariffs to be appropriate,it is necessary that A)the industry be deemed essential by the government.
B)the government can identify which industries will eventually be able to compete with more established foreign producers.
C)only industries that currently are operating efficiently will be protected.
D)the country has access to the most modern production techniques.
Q2) A country will specialize in that good in which
A)it has absolute advantage.
B)it has a moderate cost of production.
C)it can produce at minimum average cost.
D)it has comparative advantage.
Q3) According to economic historians,one characteristic of international trade is that it A)aids in the international transmission of ideas.
B)reduces the world-wide output of goods.
C)reduces the world-wide consumption of goods.
D)causes persistent world-wide inflation.
Q4) What do you think are the main benefits of China's membership in the WTO?
Q5) What are the effects of a tariff on a good?
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Chapter 17: Exchange Rates and the Balance of Payments
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Sample Questions
Q1) Every transaction concerning the exportation of Canadian goods constitutes a A)demand for dollars,with no effect on markets for foreign currencies.
B)supply of foreign currency with no effect on the market for dollars.
C)supply of foreign currency and demand for dollars.
D)demand for foreign currency and supply of dollars.
Q2) When the dollar price of a euro is $0.20,it is correct to state that a Canadian traveling in Europe will receive ________ euros per dollar.
A)2
B)4
C)5
D)20
Q3) An increase in the value of a domestic currency in terms of other currencies is known as
A)an appreciation.
B)a depreciation.
C)a flexible exchange rate.
D)a discount rate.
Q4) Why does the supply curve of euros slope up?
Q5) What are the pros and cons of a fixed exchange rate?
Q6) Does Canada's frequent current account deficit mean it has a weak economy?
Page 19
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