Foundations of Macroeconomics Pre-Test Questions
Course Introduction
Foundations of Macroeconomics introduces students to the central concepts, models, and issues that define the study of the economy as a whole. The course covers national income determination, economic growth, unemployment, inflation, and fiscal and monetary policy. Students will gain an understanding of how economies operate at the aggregate level, exploring the interactions between households, firms, governments, and the foreign sector. Emphasis is placed on real-world policy applications, contemporary economic challenges, and the analytical tools used by economists to assess the overall performance and stability of economies.
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Economics Today The Macro View 5th Canadian Edition by Roger LeRoy Miller
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2
Chapter 1: The Nature of Economics
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Sample Questions
Q1) The most basic concept in economics is
A)wealth.
B)income.
C)scarcity.
D)spending.
Answer: C
Q2) Why do economists always mean "opportunity cost" even when they just refer to "cost"?
Answer: In analysing choice,the only cost that matters is opportunity cost.It is the value of the best alternative given up when one option is selected and others rejected that is relevant in directing self-interested behaviour.Money given up in exchange for something often is a useful indicator of cost,but the true cost always is the value of the best other thing the money could have bought.
Q3) The horizontal axis on a graph is known as
A)the x axis
B)the y axis
C)ceteris paribus
D)normative
Answer: A
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Page 3
Chapter 2: Production Possibilities and Economic Systems
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Sample Questions
Q1) In Figure 2-1,point D shows
A)the use of all resources to produce Health Care.
B)using some resources to produce Education and some to produce Health Care.
C)the use of all resources to produce Education.
D)some unemployed resources.
Answer: C
Q2) Describe the three basic types of economic systems.
Answer: A pure command economy is an economic system characterized by public ownership of all property resources and centralized decision-making.A pure capitalist economy is characterized by private ownership of all resources and decisions made by the interaction of resource owners in markets.A mixed economy involves a mix of public and private ownership characteristics.
Q3) The more goods and services a society consumes today,
A)the more it will be able to consume in the future.
B)the harder it will be to reduce consumption in the future because people will find it difficult to accept having less.
C)the less it can consume in the future.
D)the easier it will be to consume less in the future.
Answer: C
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Page 4
Chapter 3: Demand and Supply
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Sample Questions
Q1) All of the following will cause the supply curve of good A to shift rightward EXCEPT
A)a reduction in the prices of inputs used to produce good A.
B)an increase in the market price of good A.
C)a decrease in the sales tax on good A which producers must pay.
D)an increase in the number of firms in the industry producing good A.
Answer: B
Q2) When demand decreases and supply increases
A)equilibrium price will rise and equilibrium quantity will fall.
B)equilibrium price will fall and equilibrium quantity will fall.
C)equilibrium price will fall but equilibrium quantity may rise or fall.
D)equilibrium price will fall and equilibrium quantity will rise.
Answer: C
Q3) Which of the following will shift today's supply curve to the right?
A)Input prices rise
B)Prices are expected to be lower in the future
C)Sales taxes increase
D)Prices are expected to be higher in the future
Answer: B
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Chapter 4: Introduction to Macroeconomics
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Sample Questions
Q1) Who stands to gain as a result of continued unanticipated inflation?
A)creditors
B)debtors
C)persons living on a fixed income
D)retired individuals
Q2) Unemployment implies that society is
A)on the wrong point on its production possibilities curve.
B)inside its production possibilities curve.
C)outside its production possibilities curve.
D)on an endpoint of the production possibilities curve.
Q3) Many economists would argue that some frictional unemployment
A)creates massive economic disruptions and should be eliminated as quickly as feasible.
B)should be eliminated whatever the cost.
C)no longer exists because increased unemployment benefits have generally solved this problem.
D)cannot and probably should not be eliminated.
Q4) Describe in detail the types of unemployment,their consequences and provide an example of each as it applies in context.
Q5) What is a price index? How do the CPI,the PPI and the GDP deflator differ?
Page 6
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Chapter 5: Measuring the Economys Performance
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Q1) The value of GDP,when estimated by the income approach,is the sum of
A)consumption expenditures,investment spending,and profits.
B)consumption,wages,rents,interest,and profits.
C)income earned by all factors of production.
D)depreciation,indirect business taxes,and income earned by the factors of production.
Q2) Adjusting nominal GDP for price changes from a base year yields
A)current GDP.
B)real GDP.
C)constant disposable income.
D)GDP net of relative price changes.
Q3) Wheat used for producing bread is
A)a final good.
B)not going to generate any employment.
C)an intermediate good.
D)a durable good.
Q4) Explain with the assistance of the enhanced circular flow diagram why the dollar value of total output must equal total income.
Q5) Describe in detail the "other" components of GDP and National Income Accounting.
Q6) Explain how value added is used to compute GDP.
Page 7
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Chapter 6: Modelling Real Gdp and the Price Level in the Long Run
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Q1) All of the following explain the downward slope of the aggregate demand curve EXCEPT
A)changes in the stock of real wealth held by individuals.
B)the effect of changing interest rates on the quantity demanded of interest-rate-sensitive goods.
C)the availability of foreign substitute goods.
D)the presence of unused production capacity and unemployment.
Q2) Persistent inflation in an economy is only possible if A)supply issues come into full effect.
B)the AD curve shifts to the left over time.
C)the supply side is dominant.
D)the AD curve shifts to the right over time.
Q3) The fact that real GDP decreases when the price level rises is a property of A)the open economy effect.
B)the interest rate effect.
C)the AD curve.
D)the real-balance effect.
Q4) Explain with the aid of diagrams and explanations how price level changes effect the long run equilibrium
Q5) What is the long-run aggregate supply curve?
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Chapter 7: Economic Growth and Development
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Sample Questions
Q1) With the aid of diagrams,describe how an in crease in the population of a country will cause a rightward shift in the long-run aggregate supply curve.
Q2) In Canada,a patent lasts
A)7 years.
B)14 years.
C)20 years.
D)24 years.
Q3) A small improvement in a country's growth rate is a benefit to policy makers because
A)a small change can have large effects on per capita GDP over time.
B)inflationary pressures will prove inconsequential.
C)policy makers focus too much on economic growth and not enough on increasing savings rates.
D)the larger GDP is the better the economic welfare will be in the future.
Q4) The slower economic growth is,the
A)flatter the slope of the production possibilities curve.
B)farther the production possibilities curve shifts inward.
C)closer to the origin the production possibilities curve becomes.
D)more bowed the production possibilities curve becomes.
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Chapter 8: Modelling Real Gdp and the Price Level in the Short Run
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Sample Questions
Q1) Short run changes in the price level can affect real output because
A)supply curves of individual firms are upward sloping.
B)higher prices encourage technological change.
C)some production costs are relatively fixed.
D)the labour force increases as wages increase.
Q2) In the ________,an increase in the price level induces firms to expand production because prices of inputs are held constant so the higher prices for their product implies that it is profitable to expand production.
A)short run
B)long run
C)medium run
D)inflationary period
Q3) In the short-run it is possible for output to be affected by governmental policies.Define and explain the three types of output gaps.
Q4) Which point or points on Figure 8-3 illustrate a short-run equilibrium?
A)Point A
B)Point B
C)Point C
D)Points A and C
Page 10
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Chapter 9: Consumption, investment, and the Multiplier
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Sample Questions
Q1) A rise in the price level causes
A)an increase in aggregate demand.
B)a decrease in aggregate demand.
C)a reduction in the quantity of aggregate goods and services demanded.
D)an increase in the quantity of aggregate goods and services demanded.
Q2) If business executives become more optimistic about the future,we would expect that
A)the investment curve would shift outward to the right.
B)the saving function would shift up.
C)the consumption curve would shift up.
D)investment spending would decrease.
Q3) A lump-sum tax,such as a $1,000 tax that every family must pay one time,is
A)a type of income tax.
B)an autonomous tax.
C)negatively related to real national income.
D)a regressive tax.
Q4) What is the multiplier? How is it calculated? Why is the multiplier related only to consumption spending?
Q5) What is the primary determinant of saving and consumption according to Keynes? Explain.
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Chapter 10: The Public Sector
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Sample
Questions
Q1) If corporate income taxes are collected on a firm's economic profit rather than its accounting profits,how will the firm change its output and price as a result?
Q2) Examples of transfer payments are
A)wages,profits,interest and rents.
B)federal government spending for national defense.
C)benefits provided by CPP,welfare,and employment insurance.
D)salaries of educators,police,and fire fighters.
Q3) Explain the similarities and differences between market and public-sector decision-making.
Q4) The largest source of receipts for the Canadian federal government is
A)corporate income taxes.
B)personal income taxes.
C)capital gains taxes.
D)import duties.
Q5) Government goods are
A)merit goods supplied by government.
B)public goods supplied by government.
C)private goods supplied by government.
D)government-supplied goods,whether public or private.
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Chapter 11: Fiscal Policy and the Public Debt
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Sample Questions
Q1) Explain what fiscal policy actions could eliminate an inflationary gap.
Q2) What are direct expenditure offsets and what are their effects on the effectiveness of fiscal policy?
Q3) Suppose the government increases lump-sum taxes.This causes
A)disposable income to decrease,which causes consumption spending to decrease and aggregate demand to decrease.
B)government spending to decrease,which causes aggregate demand to decrease.
C)consumption spending to decrease and spending on imports to increase.The effect on aggregate demand depends on whether domestic spending or spending on imports decreased the most.
D)disposable income to decrease,which causes aggregate supply to decrease.
Q4) Suppose the economy is at a short run equilibrium and is beyond the economy's long run potential level of real GDP.Which of the following fiscal policies would increase output and prices in the short run?
A)a decrease in government spending
B)a reduction in taxes
C)an increase in taxes
D)an increase in interest rates
Q5) List and describe in detail the 5 possible offsets to fiscal policy.
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Chapter 12: Money and the Banking System
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Sample Questions
Q1) The term "financial intermediaries" refers to
A)commercial banks only.
B)credit unions only.
C)savings and loan associations only.
D)both commercial banks,credit unions,and trust companies.
Q2) What is liquidity? Why is money the most liquid of all assets? What is the cost of this liquidity?
Q3) Describe the various definitions of money in detail.With this in mind,comment of the possibility of moving to a system with only digital money.
Q4) Why do people often buy gold in times of war?
A)They want the unit-of-account function of money and government currencies lack this function in times of war.
B)They want a store of value as well as a medium of exchange since it is uncertain what will happen to the value of local currencies or whether they will be accepted.
C)They think that gold will be a good investment in the future.
D)They want something that can be carried easily in case of flight.
Q5) Describe the issue of asymmetric information and relate it to insurance companies and financial institutions.
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Chapter 13: Money Creation and Deposit Insurance
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Sample Questions
Q1) The CDIC can
A)charge all banks different rate.
B)pay too much attention to the riskiness of the bank in setting prices.
C)require sound business practices.
D)insure deposits over $100,000.
Q2) The Canadian Deposit Insurance Corporation insures
A)banks against lawsuits.
B)the federal funds market.
C)the deposits held in member banks.
D)the deposits held in the Bank of Canada.
Q3) The manner in which CDIC deposit insurance is set up in Canada encourages banks to
A)be too conservative in their lending practices.
B)maintain excess reserves that are too great.
C)make riskier loans than they otherwise would.
D)reject some loans that probably would be profitable.
Q4) What are reserves? Discuss the various types of reserves used in the Canadian banking system.
Q5) As far as reserves and deposits are concerned,describe the assets and liabilities of a bank.
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Chapter 14: The Bank of Canada and Monetary Policy
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Sample Questions
Q1) Other things constant,the crude quantity theory of money suggests that any increase in the money supply
A)causes a reduction in the demand for money.
B)results in a decrease in the aggregate price level.
C)causes the aggregate level of nominal income to fall.
D)results in a proportional increase in the price level.
Q2) Keynesians argue that for a change in the money supply (with constant prices),the mechanism through which aggregate demand changes is
A)change in the money supply change in speculative balances change in transactions balances change in planned investment change in aggregate demand.
B)change in the money supply change in planned investment change in government spending change in aggregate demand.
C)change in the money supply change in interest rates change in planned investment change in aggregate demand.
D)change in the money supply change in interest rates change in transactions balances change in government spending change in aggregate demand.
Q3) Discuss the Bank of canada and its organizational structure.
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Chapter 15: Issues in Stabilization Policy
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Sample Questions
Q1) If the economy is in a strong expansion and moved beyond its long-run equilibrium real national output,then the
A)natural rate of unemployment has fallen.
B)cyclical rate of unemployment is positive.
C)cyclical rate of unemployment is zero.
D)cyclical rate of unemployment is negative.
Q2) In the short run,unanticipated inflation typically leads to
A)higher rates of unemployment.
B)decreases in aggregate demand.
C)lower rates of unemployment.
D)workers' thinking the real wage has been reduced.
Q3) In Figure 15-2,suppose the economy is currently at an equilibrium at point C.Applying rational expectations theory,what will happen if the Bank of Canada announces that it is decreasing the money supply?
A)the price level will increase
B)real GDP per year will increase
C)real GDP per year will decrease
D)the price level will decrease
Q4) What is the main tenet(s)of the Real Business Cycle Theory?
Q5) Describe new Keynesian economics and the arguments used to support the ideas.
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Chapter 16: Comparative Advantage and the Open Economy
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Sample Questions
Q1) Governments sometimes subsidize domestic industries.When this occurs,
A)the governments also impose tariffs on imports to protect the industries even more.
B)the subsidized industries have an advantage on international markets relative to non-subsidized industries.
C)firms cannot be guilty of dumping because their prices are not below their costs.
D)the subsidized industries sell less in international markets because it is more profitable to sell domestically.
Q2) According to international trade theory
A)trade is based on absolute advantage.
B)comparative advantage is based on absolute advantage.
C)every country has a comparative advantage in something.
D)less developed countries cannot trade successfully with developed countries.
Q3) Comparative advantage is defined as
A)producing all goods at lower opportunity costs than other countries can.
B)producing more output of all goods than anyone else can.
C)producing one good at a lower opportunity cost than another country can.
D)the ability to produce more output from given inputs than anyone else can.
Q4) Distinguish between absolute advantage and comparative advantage.
Page 18
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Chapter 17: Exchange Rates and the Balance of Payments
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Sample Questions
Q1) If there is an outward shift Canadian demand for French goods,the result will be
A)a decrease in the dollar price of a euro.
B)an inward shift in French demand for Canadian goods.
C)a decrease in euros traded.
D)an increase in the dollar price of a euro.
Q2) If there is a negative sign in front of transfers for Canada,then
A)Canada imported more services than it exported.
B)the value of Canadian gifts to foreigners exceeded foreign gifts to Canadians.
C)Canada imported more commercial financial assets than it exported.
D)Canada had a negative balance of trade.
Q3) Define the three categories of balance of payments transactions.
Q4) Which of the following would contribute to a positive trade balance for a country?
A)having tourists visit the country
B)importing textiles
C)having foreigners buy the government bonds of the country
D)importing financial services
Q5) Why does the supply curve of euros slope up?
Q6) Outline how exchange rates are determined in a free market.
Q7) What are the pros and cons of a fixed exchange rate?
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