Economics for Business Exam Preparation Guide
Course Introduction
Economics for Business explores the fundamental principles of microeconomics and macroeconomics as they apply to the modern business environment. The course examines how market forces, government policies, and global trends influence business decisions, resource allocation, pricing strategies, and organizational performance. Students will analyze supply and demand, market structures, cost analysis, and economic indicators to develop practical skills in decision-making and problem-solving. Through real-world case studies and interactive exercises, learners will gain insight into how economic concepts drive business strategy and shape the competitive landscape.
Recommended Textbook
Macroeconomics 14th Canadian Edition by
Campbell R. McConnell
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Page 2
Chapter 1: Limits, Alternatives, and Choices
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Sample Questions
Q1) Differentiate between the independent and dependent variables in an economic relationship.
Answer: The dependent variable changes as a consequence of the change in the independent variable.By specifying one variable as the dependent variable,a causal relationship is implied with changes in the independent variable causing changes in the dependent variable.The dependent variable is the "effect" or outcome.
Q2) What are the key economic concepts that pertain to interactions among individuals?
Answer: The three key economic concepts that pertain to interactions among individuals are:(1)individuals can make themselves better off through specialization and trade; (2)markets usually do a good job of coordinating decisions among individuals,groups,and nations;and (3)government can sometimes improve the coordinating function of markets.
Q3) Why do economists use graphs in their work?
Answer: Economists use graphs to illustrate the relationship between economic variables in a visual format which often is more efficient than explaining the relationship in words.By seeing the relationship in graphical format,the reader (viewer)is able to readily describe the relationship.
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Chapter 2: The Market System and the Circular Flow
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Q1) Explain what is meant by a command economy.
Answer: The command economy is the opposite extreme alternative to pure capitalism It is a system characterized by government ownership of all or nearly all property resources and centrally planned and administered production
Q2) In the below circular flow diagram,the household and business sectors are labelled with arrows representing the flows of income and output labelled (a)through (f)and the two appropriate markets labelled (g)and (h).Supply the correct descriptive titles for each of these labels (a)through (h).
Answer: 11ea82f3_ffa0_7125_9299_191d7eaf25b7_TB2474_00 (a)Goods and services; (b)Consumption expenditures; (c)Revenue; (d)Costs; (e)Money income; (f)Factors land,labour,capital,entrepreneurial ability; (g)Factor markets; (h)Product markets.
Q3) One of the characteristics of a modern market economy is an "active,but limited,government." How can the government "help" the economy?
Answer: The market is not always perfect.In some cases it directs the economy to an undesirable outcome.We call these instances market failures.When market failures exist,the governments can direct the economy to a more efficient outcome.
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Chapter 3: Demand, Supply, and Market Equilibrium
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Q1) What are the consequences of an increase in the demand for Euros on the equilibrium price and quantity of Euros? Does the Canadian dollar appreciate or depreciate as a result? Explain.
Answer: The increase in the demand for Euros,increases the equilibrium price of Euros and increases the equilibrium quantity of Euros.The Canadian dollar depreciates since it takes more Canadian currency to buy one Euro.
Q2) Define "demand."
Answer: Demand is a schedule or curve that shows the various amounts of a product buyers are willing and able to purchase at each price in a series of possible prices during a specified period of time.Demand portrays alternative price/quantity possibilities which can be set down in a table.The key point to be recognized is that demand is more than a statement of quantity purchased at a certain price;it is a schedule of quantities which will be demanded at various prices,other things being equal,for a specified period of time.
Q3) What are the consequences for equilibrium price and quantity if there is an equal increase in the supply and demand for sushi?
Answer: The equilibrium quantity of sushi increases but the equilibrium price of sushi is unchanged.
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Chapter 4: Market Failures: Public Goods and Externalities
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Q1) How does the market demand curve for a public good differ from the market demand curve for a private good?
Q2) Data on two individuals' preferences for a public good are reflected in the table below.P<sub>A</sub> and P<sub>B</sub> represent the prices individuals A and B,the only two people in the society,are willing to pay for the last unit of a public good,rather than do without.
Q3) How do direct controls and specific taxes affect negative externalities? Briefly explain in terms of supply and demand.
Q4) What is consumer surplus?
Q5) How is producer surplus derived from a supply curve?
Q6) Data on two individuals' preferences for a public good are reflected in the table below.P<sub>A</sub> and P<sub>B</sub> represent the prices individuals A and B,the only two people in the society,are willing to pay for an extra unit of a public good,rather than do without.
Q7) What is the economic rationale for liability rules and lawsuits? What are the limitations with this approach?
Q8) What are the basic differences between a public good and a private good?
Q9) How are producer surplus and economic profit related?
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Chapter 6: An Introduction to Macroeconomics
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Q1) In order to compare GDP across nations,economists typically make 3 adjustments.What are these adjustments and why are they carried out?
Q2) What are inventories and what role do they play in an economy with sticky prices?
Q3) In this list,identify those investments which are financial (F)and those that are economic (E): Canada Savings Bonds,stock in Potash Corporation of Saskatchewan,an old house you plan on fixing and reselling,new machinery for a factory you own,land that you plan to develop,an old window factory,your university education.
Q4) What will happen to prices and output levels if there is an unexpected decrease in demand and prices are fully flexible?
Q5) In order to grow,what must a country do?
Q6) What is modern economic growth?
Q7) What is the Great Recession? Describe its causes and also its impact on the Canadian Economy.
Q8) What three key statistics do macroeconomists study to assess the health of the economy? Give a short explanation of each.
Q9) What is the difference between nominal and real GDP?
Q10) What are two reasons why prices might be sticky?
Page 7
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Chapter 7: Measuring the Economys Output
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Q1) Of what use is national income accounting to economists and to policy makers?
Q2) Why is GDP a monetary measure?
Q3) Differentiate between nominal and real GDP.
Q4) Why do economists worry about "multiple counting" and calculate only the "value added" in the production process?
Q5) Define net exports.
Q6) How is a price index computed?
Q7) When would a fixed based price index cause GDP growth to be overstated?
Q8) The following is a list of figures for a given year in billions of dollars.Using this data,compute: (a)GDP by the Expenditure Method; (b)GDP by the Income Method; (c)Net exports;and (d)Net Investment.
Q9) Explain what is and what is not included in government purchases in GDP.
Q10) What are the components of net domestic income at factor cost? What is the relative share of GDP in 2011 going to: Wages,salaries and supplementary labour income;and to Profits of corporations and government enterprises before taxes?
Q11) What is the relationship between real GDP,nominal GDP,and the price index?
Q12) Explain the difference between final and intermediate goods,and give an example of each. Page 8
Q13) Define GDP and its characteristics.
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Chapter 8: Economic Growth
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Q1) What are some of the positive changes associated with modern economic growth?
Q2) Which is more important-the quantity of inputs or the productivity of inputs-as a source of economic growth in Canada? Explain.
Q3) What are the characteristics of current rise in the Average Rate of Productivity Growth that distinguishes it from the economy of previous periods?
Q4) List some of the institutional structures that economic historians believe promote and sustain modern economic growth.
Q5) Offer a defense of economic growth.
Q6) If an economy has 2,000 workers with each working 3,000 hours per year and the average real output per worker-hour is $10,what is real GDP?
Q7) Identify the two major ways economic growth is measured.
Q8) How might poorer nations catch up to richer countries in terms of GDP per capita?
Q9) What are the economic implications from the current rise in the Average Rate of Productivity Growth?
Q10) Summarize the anti-growth view of economic growth.
Q11) Explain the demand factor in economic growth.
Q12) Is growth felt evenly across society and around the world?
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Chapter 9: Business Cycles, Unemployment, and Inflation
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Q1) Evaluate the statement: "Inflation only benefits the rich."
Q2) How has the rate of inflation in Canada changed in the past five decades?
Q3) What is inflation and how is it measured?
Q4) Assume that nominal income is $35,000 and the price index is 1.20 in year 1.In year 2,nominal income rises to $38,000 and the price index rises to 1.25.What was the percentage change in real income from year 1 to year 2? What was the absolute amount of increase in real income? Make your calculations of the percentage change in real income and the absolute change in real income using the approximation formula and using the more precise method with index numbers.
Q5) Define the "full-employment" or "natural" rate of unemployment and give its approximate percentage rate as economists currently define it.
Q6) "Inflation is a harsh and arbitrary form of taxation." Do you agree? If so,who pays this tax?
Q7) The table below shows the price index in the economy at the end of four different years.
Q8) What are two criticisms of the unemployment rate? How do these criticisms relate to the overstating or understating of the unemployment rate?
Q9) What is "demand-pull" inflation?
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Chapter 10: Basic Macroeconomic Relationships
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Q1) What is the effect of increase in wealth on the consumption and saving schedules?
Q2) Most economists regard investment demand as being less stable than the income-consumption relationship.Looking at the determinants of the two relationships,support this contention.
Q3) Explain the economic impact of an increase in the multiplier.
Q4) List four factors that could shift the current consumption schedule.
Q5) Explain the difference between a movement along the consumption schedule and a shift in the consumption schedule.
Q6) Use the graphs below to answer the following questions:
Q7) List six events that could cause a shift in the investment demand curve to the right.
Q8) Suppose a family's annual disposable income is $8,000 of which it saves $2,000.
(a)What is their APC?
(b)If their income rises to $10,000 and they plan to save $2,800,what are their MPS and MPC?
(c)Did the family's APC rise or fall with their increase in income?
Q9) Describe the relationship between the size of the MPC and the multiplier.How does it compare to the relationship between the size of the MPS and the multiplier?
Page 12
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Chapter 11: The Aggregate Expenditures Model
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Q1) Why does the inclusion of a lump-sum tax cause domestic consumption to fall initially by an amount less than the tax?
Q2) What is the effect of net exports,either positive or negative,on equilibrium GDP?
Q3) Explain the difference between an equilibrium level of GDP and a level of GDP that is in disequilibrium.
Q4) What is the difference between the multiplier in a closed private economy and the multiplier in a mixed open economy?
Q5) Explain the effect of a cut in lump-sum taxes of $40 billion on the economy.Assume that investment,net exports,government expenditures,and taxes do not change with changes in real GDP and the MPC is .75.How does the impact of this change differ from that of a $40 billion increase in government spending?
Q6) Explain the difference between planned and actual investment in the economy.Why is the distinction important?
Q7) Use the table below to answer the following questions.Assume that investment,net exports,government expenditures,and taxes do not change with changes in real GDP.
Q8) Refer to the following table to answer the questions.
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Chapter 12: Aggregate Demand and Aggregate Supply
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Q1) Using the aggregate demand-aggregate supply (short-run)model,explain how the depreciation of the Canadian dollar in terms of foreign currencies would affect the economy.
Q2) Differentiate between "demand-pull" and "cost-push" inflation using the aggregate demand-aggregate supply (short-run)model.
Q3) The determinants of aggregate demand "determine" the location of the aggregate demand curve.Explain the four basic determinants of aggregate demand.
Q4) Using the aggregate demand-aggregate supply (short-run)model,explain the impact of the public's expectations of severe inflation on real GDP and the price level.
Q5) Would increased downward price flexibility lead to less severe or more severe recessions? Explain.
Q6) What are five reasons for the downward price-level inflexibility,especially as it pertains to wages and prices?
Q7) Explain the relationship between the aggregate expenditures model in graph (A)below and the aggregate demand model in graph (B)below.In other words,explain how points 1,2,and 3 are related to points 1',2',and 3'.
Q8) What is the aggregate demand curve? What is the characteristic of its slope? To view all questions and flashcards with answers, click on the resource link above. Page 14
Chapter 13: Fiscal Policy, Deficits, Surpluses, and Debt
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Q1) How does the public debt contribute to income inequality?
Q2) Explain the crowding-out effect.
Q3) Identify and explain the three lags associated with the implementation of fiscal policy.
Q4) The following table shows government spending and tax revenue for a hypothetical economy over a five-year period.All figures are in billions.
Q5) Assume that without any taxes the consumption schedule for an economy is as shown in the table.Also assume that investment,net exports,and government expenditures do not change with changes in real GDP.
Q6) In Year 1,the full-employment budget showed a deficit of $100 billion and the actual budget showed a deficit of $125 billion.In Year 2,the full employment budget showed a deficit of $100 billion and the actual budget showed a deficit of $150 billion.Based on the data,what can be concluded about the direction of fiscal policy and the performance of the economy between Years 1 and 2?
Q7) Give two examples of expansionary fiscal policy.What will be the effect on government surplus/deficit?
Q8) What are four real and potential problems with the public debt?
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Q9) Describe Canada's Economic Action Plan to combat the Great Recession of 2009.
Chapter 14: Money, Banking, and Money Creation
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Q1) How does a decrease in the desired reserve ratio affect multiple-deposit expansion?
Q2) The following is the consolidated balance sheet for the chartered banking system.Assume the desired reserve ratio is 10%.Show the new consolidated balance sheet after maximum loan expansion has occurred.
Q3) Banks pursue two conflicting goals.Explain what they are and why the conflict.
Q4) Explain what is meant by fractional reserve banking.
Q5) Describe the nature,causes,and effects of the U.S Mortgage Default Crisis.
Q6) Why is money considered to be debt?
Q7) The following is the consolidated balance sheet for the chartered banking system.Assume the desired reserve ratio is 10%.Show the new consolidated balance sheet after maximum loan contraction has occurred.
Q8) Define the monetary multiplier.
Q9) Suppose the First National Bank has the following simplified balance sheet.The reserve ratio is 20% and all dollar figures are in thousands.
Q10) Suppose a fraction of any new loan was kept as cash and not deposited into a bank.How would this currency drain affect multiple-deposit expansion?
Q11) Why do financial institutions keep reserves?
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Chapter 15: Interest Rates and Monetary Policy
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Q1) Describe the links between monetary policy and the international economy due to the net export effect,and its impact on the trade deficit.
Q2) Other things being equal,what effect will each of the following have on the equilibrium rate of interest? (a)an increase in the money supply; (b)an increase in nominal GDP; (c)a decrease in the money supply; (d)a leftward shift of the asset demand for money.
Q3) Explain how nominal GDP and the real interest rate are related to the transactions and asset demands for money.
Q4) Identify two key tools of monetary policy.
Q5) Explain how the net export effect strengthens the effects an easy money and a tight money policy.
Q6) How does monetary policy affect equilibrium GDP? How can it address the problem of recession or slow growth? Inflation?
Q7) Suppose the economy is experiencing a recession and high unemployment.Describe the transmission mechanism through which monetary policy could address these problems?
Q8) Why is the transactions demand for money less than nominal GDP?
Q9) What is the goal of monetary policy?
Page 17
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Chapter 16: Long-Run Macroeconomic Adjustments
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Q1) What is the long-run equilibrium in the aggregate demand-aggregate supply model?
Q2) Why is the difference between the actual and expected rates of inflation important for explaining falling inflation?
Q3) Suppose the potential level of real GDP for a hypothetical economy is $250 and the price level (P)initially is 100.Use the following short-run aggregate supply schedules below to answer the questions.
Q4) Compare and contrast the short-run Phillips Curve and the long-run Phillips Curve.
Q5) (a)Using a graph showing aggregate demand,short-run aggregate supply,and long-run aggregate supply,illustrate an economy that faces an inflationary gap.
Q6) Why is the difference between the actual and expected rates of inflation important for explaining rising inflation?
Q7) If the Phillips Curve exists in reality,what dilemma does this create for fiscal and monetary policies? Explain.
Q8) If the long-run supply curve is fixed in place,can there be persistent inflation?
Q9) What is the Laffer Curve? Explain the relationship that is shown in the curve.
Q10) What are three severe criticisms of the Laffer Curve?
Page 18
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Chapter 17: International Trade
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Q1) How does relaxing the assumption of constant costs affect the comparative advantage argument for trade?
Q2) Explain and evaluate the validity of the self-sufficiency argument for trade protection.
Q3) How can Canada compete successfully with relatively low-wage nations such as India and China?
Q4) Of all the reason for protests against the WTO,which are most substantive?
Q5) "The international flow of goods helps compensate for the international immobility of resources." Analyze and explain.
Q6) In what ways are national economies linked?
Q7) Critique the argument that trade protection is needed to protect Canadian jobs.
Q8) Evaluate the validity of the argument that a new industry in a nation needs protection from foreign competition if it is to prosper.
Q9) What is the problem with protecting industries in Canada from the dumping of foreign products on the domestic market?
Q10) What are the economic benefits of free trade?
Q12) What are the benefits of having a common currency such as the Euro? Page 19
Q11) Identify the four basic types of trade barriers and describe each of them.
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Chapter 18: Exchange Rates and the Balance of Payments
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Q1) How does a fixed exchange rate system work? How can a nation maintain its fixed exchange rate?
Q2) What role does the foreign exchange market play in facilitating the trade of goods?
Q3) Explain how the exchange rate gets determined in a flexible exchange rate system.
Q4) In the table below are the supply and demand schedules for Malaysian ringgits.
Q5) In the table below are the supply and demand schedules for Russian roubles.
Q6) What are the major components of the current account in the balance of payments? How is the current account balance determined?
Q7) Explain the problems with exchange rate controls.
Q8) The graph below shows a change in the demand for Swiss francs from D<sub>1</sub> to D<sub>2</sub>.What would happen when D<sub>1</sub> shifted to D<sub>2</sub> under a flexible exchange rate system compared to a fixed exchange rate system?
Q9) What is a balance of payments deficit? What is a balance of payments surplus?
Q10) Explain how a nation might persistently import more goods than it exports and still maintain equilibrium in its balance of payments.
Q11) Describe the three major disadvantages of flexible exchange rates.
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