Economics I Study Guide Questions
Course Introduction
Economics I introduces students to the fundamental principles of microeconomics, focusing on how individuals, firms, and governments make decisions regarding the allocation of scarce resources. The course covers topics such as supply and demand, market equilibrium, elasticity, consumer and producer behavior, production and cost structures, market structures including perfect competition and monopoly, and the role of government in the economy. Through theoretical models and real-world examples, students will develop a foundational understanding of how economic agents interact within markets and how these interactions impact the overall economy.
Recommended Textbook
Macroeconomics 1st Canadian Edition by R. Glenn Hubbard
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Page 2
Chapter 1: Introduction to Macroeconomics and the Great Recession
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Sample Questions
Q1) 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.
Q2) Which of the following statements about economic analysis is true?
A) Unlike positive economic analysis, normative economic analysis can be tested.
B) Neither positive nor normative analysis can be tested.
C) Positive economic analysis is concerned with "what is," whereas normative economic analysis is concerned with "what ought to be."
D) Economics is primarily about normative analysis, which measures the costs and benefits of different courses of action.
Answer: C
Q3) Which of the following statements would make a reasonable hypothesis to test?
A) Deflation is worse than inflation in any economy.
B) An unemployment rate below 4% is bad for the economy.
C) As tax rates increase, eventually tax revenues will decline.
D) Higher real GDP per capita figures lead to happier citizens.
Answer: C
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Page 3
Chapter 2: Measuring the Macroeconomy
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Sample Questions
Q1) <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.
Q2) Which of the following would cause the unemployment rate as measured by Statistics Canada to understate the true degree of joblessness in the economy?
A) people employed in the underground economy
B) unemployed persons who falsely report themselves as actively looking for a job
C) retired people who have no intention of returning to work
D) people with part-time jobs who would prefer to be working full time
Answer: D
Q3) Which of the following goods is directly counted in GDP?
A) the ground beef that Taco Bell purchases for use in its burritos
B) the tortillas that Taco Bell purchases for its burritos
C) the paper wrap that Taco Bell purchases to wrap its burritos
D) the Burrito Supreme that Sondra purchases for lunch at Taco Bell
Answer: D
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Chapter 3: The Canadian Financial System
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Sample Questions
Q1) One of the key reasons that the Bank of Canada acts as a lender of last resort is to prevent ________,the process by which a run on one bank spreads to other banks,resulting in a bank panic.
A) contagion
B) asset inflation
C) moral hazard
D) bailouts
Answer: A
Q2) An increase in interest rates
A) increases the prices of existing financial assets.
B) increases the prices of existing financial assets and of newly issued financial assets. C) reduces the prices of existing financial assets.
D) reduces the prices of existing financial assets and of newly issued financial assets.
Answer: C
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Chapter 4: Money and Inflation
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Q1) The quantity theory of money predicts that,in the long run,inflation results from the A) money supply growing at a slower rate than real GDP.
B) money supply growing at a faster rate than real GDP.
C) velocity of money growing at a slower rate than real GDP.
D) velocity of money growing at a faster rate than real GDP.
Q2) Suppose the money supply grows at an annual rate of 10%,real GDP grows at 4%,the growth rate of velocity is 0%,and the expected real interest rate on Aaa corporate bonds averages 5.5%.Use the Fisher equation to determine the nominal interest rate on Aaa bonds.What will happen to the nominal interest rate in the long run if the growth rate of the money supply decreases to 7%?
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) Which of the following is not a consequence of hyperinflation?
A) The price level can grow in excess of hundreds of percentage points per year.
B) Hyperinflation causes an economy to suffer slow growth.
C) Money loses value so rapidly that individuals and firms stop holding it.
D) Money's function as a medium of exchange is enhanced.
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Page 6
Chapter 5: The Global Financial System and Exchange Rates
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Q1) <b>Refer to Figure 5.3.</b>All else equal,an increase in net exports accompanied by a decrease in expected future profits would cause which of the following shifts?
A) S to S and D to D
B) S to S and D to D
C) S to S and D to D
D) S to S and D to D
Q2) If Canadians decrease their purchases of Mexican beer,assuming all else remains constant,this will ________ of Canada.
A) decrease the financial account balance
B) decrease net exports
C) increase the trade deficit
D) decrease the current account balance
Q3) <b>Refer to Figure 5.2.</b>A shift from D to D will result from which of the following?
A) an increase in expected future profits
B) an increase in net exports
C) an increase in corporate taxes
D) a decrease in tax credits for savings
Q4) Why is the balance of payments always zero?
Page 7
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Chapter 6: The Labour Market
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Sample Questions
Q1) The income effect of a real wage increase is observed when
A) the higher wage causes workers to take more leisure and work fewer hours.
B) the higher wage causes workers to take less leisure and work more 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 more hours.
Q2) Holding other factors constant,decreasing the amount and duration of unemployment benefits would likely
A) decrease cyclical unemployment and the natural rate of unemployment.
B) increase structural unemployment and the natural rate of unemployment.
C) increase frictional unemployment and the natural rate of unemployment.
D) decrease the natural rate of unemployment.
Q3) <b>Refer to Figure 6.1.</b>Holding other variables constant,an improvement in technology will result in a
A) shift from curve D to curve D .
B) shift from curve D to curve D .
C) movement from point A to point B.
D) movement from point B to point A.
Q4) How does a real wage above the equilibrium wage cause unemployment?
Page 8
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Chapter 7: The Standard of Living Over Time and Across Countries
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Q1) Of the determinants of real GDP per capita,the more important one is
A) the capital-labour ratio.
B) the size of the labour force.
C) total factor productivity.
D) the hours worked by the labour force.
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,the marginal product of capital is
A) $0.066.
B) $0.20.
C) $1.05.
D) $1.58.
Q3) The marginal product of capital is the ________ curve for capital and the marginal product of labour is the ________ curve for labour.
A) demand; demand
B) demand; supply
C) supply; demand
D) supply; supply
Q4) What is human capital? How do workers acquire human capital?
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Chapter 8: Long-Run Economic Growth
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Q1) What is the difference between real GDP per worker and real GDP per effective worker?
Q2) Explain why GDP per capita varies among countries even though countries eventually converge to their balanced growth paths.
Q3) <b>Refer to Figure 8.1</b>.Suppose the economy is originally in steady state at k* .If the saving rate increases from s to s ,the capital-labour ratio will begin to ________,and real GDP per worker will ________.
A) rise; rise
B) rise, fall
C) fall, fall
D) fall; rise
Q4) To analyze the Solow growth model,we make the simplifying assumption that A) the capital-labour ratio remains constant.
B) the economy is open.
C) the ratio of workers to the population is constant.
D) households save an increasing portion of their income.
Q5) Describe the relationship between the production function,the investment function,and the capital-labour ratio.
Q6) Why does growth occur in two-sector growth models?
Page 10
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Chapter 9: Business Cycles
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Sample Questions
Q1) As the best measure of the size of economic fluctuations associated with a business cycle,economists typically use
A) real GDP.
B) the deviation of real GDP from potential GDP.
C) potential GDP.
D) the deviation of real GDP from nominal GDP.
Q2) If households spend $0.75 of each additional dollar of increased income,the expenditure multiplier will be
A) 1.33.
B) 4.
C) 5.
D) 7.5.
Q3) Prices and wages are considered "sticky" if
A) their rates of increase and decrease are identical.
B) as prices increase, wages increase by the same percentage.
C) their rates of change are directly connected to the rate of change in unemployment.
D) they do not fully adjust to changes in demand and supply.
Q4) Explain the differences between aggregate demand shocks and aggregate supply shocks.
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Chapter 10: Explaining Aggregate Demand: the Is-Mp Model
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Q1) <b>Refer to Figure 10.8.</b>.Other things equal,an increase in the price level would best be represented by
A) a movement from point A to point C.
B) a movement from point A to point D.
C) a shift from LM to LM .
D) a shift from LM to LM .
Q2) <b>Refer to Figure 10.5.</b>.A shift from MP to MP will occur if A) investors decrease the short-term interest they expect in the future.
B) investors decrease the term premium they require on long-term bonds.
C) the default-risk premium decreases.
D) the expected inflation rate decreases.
Q3) <b>Refer to Figure 10.2.</b>.Assume the economy is initially at equilibrium at potential GDP of $250 billion.If the MPC = 0.50 and the difference between AE and AE represents a $75 billion decrease in planned investment spending,real GDP at Y will be equal to
A) $100 billion.
B) $125 billion.
C) $175 billion.
D) $212.5 billion.
Q4) Explain how the AD curve can be derived from the IS-MP model.
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Chapter 11: The Is-Mp Model: Adding Inflation and the Open Economy
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Sample Questions
Q1) A decrease in the real interest rate in Canada will cause the dollar to ________ relative to other currencies and ________ net exports and real GDP. A) appreciate; increase B) appreciate; reduce C) depreciate; increase D) depreciate; reduce
Q2) <b>Refer to Figure 11.2.</b>..Assume the economy is in equilibrium at ,where real GDP equals potential GDP.The economy experiences a positive demand shock,and the Bank of Canada responds by increasing real interest rates to bring real GDP and inflation back to their original levels.Other things equal,the positive demand shock is best represented by am initial movement from
A) point A to point B.
B) point A to point C.
C) point D to point B.
D) point D to point C.
Q3) What is the Phillips curve? Explain the difference in movements along the Phillips curve and shifts in the Phillips curve,and explain what can cause these movements and shifts.
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Chapter 12: Monetary Policy in the Short Run
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Q1) <b>Refer to Figure 12.6.</b>Under a fixed exchange rate system,if the central bank can increase the output gap with expansionary policy and still maintain the fixed exchange rate,this would best be represented by a movement from ________ in Panel (a)and a movement from ________ in Panel (b).
A) point A to point B; point X to point Y
B) point C to point A; point X to point Y
C) point D to point C; point Y to point X
D) point B to point D; point Y to point X
Q2) Suppose the economy is initially at full employment,with real GDP equal to potential GDP,and the expected inflation rate equal to the actual inflation rate.Use the IS-MP model and the Phillips curve to explain what happens if the economy experiences a negative demand shock,and the Bank of Canada responds to the shock by changing its target for the overnight rate.
Q3) The most important policy tool used by the Bank of Canada is
A) the target inflation rate.
B) the discount rate.
C) the required reserve rate.
D) the target for the overnight rate.
Q4) What are the main arguments for and against central bank independence?
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Chapter 13: Fiscal Policy in the Short Run
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Sample Questions
Q1) What are the effects of an expansionary fiscal policy on interest rates and output in an open economy with floating exchange rates?
Q2) Identify whether each of the following policies is (1)an example of a discretionary fiscal policy,(2)an example of an automatic stabilizer,or (3)not a fiscal policy.
a. Food stamps
b. Government spending on rebuilding airports
c. Tax credits for the purchase of energy-efficient appliances
d. Changing the required reserve ratio
e. The progressive income tax system
Q3) An increasing federal budget deficit will ________ the federal government debt as this will ________ the total value of Canadian government bonds outstanding.
A) increase; increase
B) increase; decrease
C) not impact; not change
D) not impact; be offset by
Q4) Briefly explain how policy lags related to the expansionary fiscal policy adopted by the Canadian government during the last recession.
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Chapter 14: Aggregate Demand, aggregate Supply, and Monetary Policy
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Q1) What are rational expectations,and how might rational expectations make monetary policy ineffective?
Q2) What is stagflation,and how does it occur? How is stagflation represented in the aggregate demand-aggregate supply model?
Q3) Use a graph to show the differences in the central bank reaction function if the Bank of Canada is more tolerant or less tolerant of deviations from inflation in the short run.
Q4) <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,so the next movement is best represented as a movement from A) point B to point D.
B) point D to point B.
C) point C to point D. D) point D to point A.
Q5) Explain why some shifts to the aggregate demand curve are temporary and why some are permanent.
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Chapter 15: Fiscal Policy and the Government Budget in the
Long Run
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Q1) Of the primary tax sources of revenue for the Canadian federal government,which have trended downward as a percentage of GDP since 1981?
A) corporate income and individual income taxes
B) social insurance and corporate income taxes
C) sales and social insurance taxes
D) individual income and sales taxes
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) Since 1981,which of the following federal expenditures,measured by their share of federal government spending,have increased the most?
A) transfers to other governments and interest on debt
B) transfers to other governments and old age security payments
C) goods and services and interest on debt
D) goods and services and old age security payments
Q4) List the three possible ways the government can make adjustments to an increase in the government's budget deficit.
Page 17
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Chapter 16: Consumption and Investment
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Q1) Hector's wealth is zero,he expects to work for another 45 years at a constant salary of ?$80 000 and live for another 60 years.If Hector receives an unexpected $20 000 increase in salary his first year of work and he completely smooths consumption over his lifetime,his marginal propensity to consume is
A) 0.6.
B) 0.67.
C) 0.75.
D) 0.8.
Q2) Hector's wealth is zero,he expects to work for another 45 years at a constant salary of ?$80 000 and live for another 60 years.Yearly taxes are $20 000,and Hector received a one-time tax rebate of $5000 during his first year of work.If Hector completely smooths consumption over his lifetime,he will save ________ of the tax rebate during his first year of work.
A) $1250.00
B) $2666.67
C) $3750.00
D) $4916.67
Q3) Explain the permanent-income hypothesis and the life-cycle hypothesis.How are these hypotheses similar?
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Page 18