Fundamentals of Economics
Test Preparation
Course Introduction
Fundamentals of Economics introduces students to the basic principles and concepts of economic theory, exploring both microeconomic and macroeconomic perspectives. The course covers supply and demand, market equilibrium, elasticity, consumer and producer behavior, the role of government in the economy, fiscal and monetary policy, and the fundamentals of international trade. Through real-world examples and analytical tools, students will develop a foundational understanding of how economic decisions are made by individuals, businesses, and governments, as well as the impact of these decisions on resource allocation, economic growth, and societal welfare.
Recommended Textbook
Macroeconomics 5th Canadian Edition by N Gregory Mankiw
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14 Chapters
1476 Verified Questions
1476 Flashcards
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Chapter 1: The Science of Macroeconomics
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54 Verified Questions
54 Flashcards
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Sample Questions
Q1) The assumption of continuous market clearing means that:
A) sellers can sell all that they want at the going price.
B) buyers can buy all that they want at the going price.
C) in any given month,buyers can buy all that they want and sellers can sell all that they want at the going price.
D) at any given instant,buyers can buy all that they want and sellers can sell all that they want at the going price.
Answer: D
Q2) Real GDP ______ over the long run and the growth rate of real GDP ______ in the short run.
A) grows; fluctuates
B) is steady; is steady
C) grows; is steady
D) is steady; fluctuates
Answer: A
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3
Chapter 2: The Data of Macroeconomics
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116 Verified Questions
116 Flashcards
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Sample Questions
Q1) In the national income accounts,the purchase of durables,nondurables,and services by households are classified as:
A) consumption.
B) investment.
C) government purchases.
D) net exports.
Answer: A
Q2) In 2012 in Canada,the percentage of GDP that was spent on consumption was approximately:
A) 56 percent.
B) 50 percent.
C) 33 percent.
D) 16 percent.
Answer: A
Q3) The economic statistic used to measure the level of prices is the:
A) GDP.
B) CPI.
C) GNP.
D) real GDP.
Answer: B
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Chapter 5: The Open Economy
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124 Verified Questions
124 Flashcards
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Sample Questions
Q1) Based on a Cobb-Douglas production function and perfect capital mobility,capital should flow to economies where:
A) capital is relatively scarce.
B) capital is relatively abundant.
C) technological production capabilities are inferior.
D) labour is relatively scarce.
Q2) (Exhibit: Policies Influence Real Exchange Rate)Which of the graphs illustrates the impact on the real exchange rate of an increase in household saving in the basic version of the small open economy model?
A) (A)
B) (B)
C) (C)
D) (D)
Q3) Protectionist policies in a small open economy do not alter the trade balance because the:
A) quantity of imports and exports is fixed.
B) interest rate adjusts to offset any reductions in imports.
C) exchange rate appreciates to offset the increase in net exports.
D) level of net capital outflow is fixed by the world interest rate.
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Page 5
Chapter 6: Unemployment
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112 Verified Questions
112 Flashcards
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Sample Questions
Q1) If s is the rate of job separation,f is the rate of job finding,and both rates are constant,then the unemployment rate is approximately:
A) f/(f + s).
B) (f + s)/f.
C) s/(s + f).
D) (s + f)/s.
Q2) All of the following policies were adopted by government in an attempt to reduce the natural rate of unemployment except:
A) employment insurance.
B) government employment agencies.
C) public retraining programs.
D) bonus programs for employment insurance claimants who found jobs quickly.
Q3) Most spells of unemployment are ______ term and most weeks of unemployment are attributable to ______-term unemployment.
A) short; short
B) short; long
C) long; long
D) long; short
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Chapter 7: Economic Growth I
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114 Verified Questions
114 Flashcards
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Sample Questions
Q1) In the Solow growth model,with a given production function,depreciation rate,no technological change,and no population growth,a higher saving rate produces a:
A) higher marginal product of capital in the new steady-state.
B) higher steady-state growth rate of output per worker.
C) higher steady-state growth rate of total output.
D) higher steady-state level of output per worker.
Q2) If a war destroys a large portion of a country's capital stock but the saving rate is unchanged,the Solow model predicts output will grow and that the new steady state will approach:
A) a higher output level than before.
B) the same output level as before.
C) a lower output level than before.
D) the Golden Rule output level.
Q3) When f(k)is drawn on a graph with increases in k noted along the horizontal axis,the:
A) graph is a straight line.
B) slope of the line eventually gets flatter and flatter.
C) slope of the line eventually becomes negative.
D) slope of the line eventually becomes steeper and steeper.
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Chapter 8: Economic Growth II
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94 Verified Questions
94 Flashcards
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Sample Questions
Q1) In the two-sector endogenous growth model,the fraction of labour in universities (u)affects the steady-state:
A) level of income.
B) growth rate of income.
C) level of income and growth rate of income.
D) level of income,growth rate of income,and growth rate of the stock of knowledge.
Q2) The endogenous growth model's assumption of constant returns to capital is more plausible if capital is defined to include:
A) plant and equipment.
B) knowledge.
C) depreciation.
D) technology.
Q3) In the Solow growth model,capital exhibits ______ returns.In a basic endogenous growth model,capital exhibits ______ returns.
A) constant; diminishing
B) constant; constant
C) diminishing; constant
D) diminishing; diminishing
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8
Chapter 9: Introduction to Economic Fluctuations
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106 Verified Questions
106 Flashcards
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Sample Questions
Q1) When the French money supply was reduced by 45 percent in 1724,only ______ fell immediately.
A) prices
B) output
C) exchange rates
D) interest rates
Q2) Throughout much of the 1990s,North America experienced declining energy prices.Assume that the Canadian economy was in long-run equilibrium before these declines began.a.Use the aggregate demand-aggregate supply model to illustrate graphically the short-run and long-run impact of this decline on output and prices.b.If the Bank of Canada attempted to offset this deviation from the natural rate in the short run,should the money supply be increased or decreased?
Q3) If the short-run aggregate supply curve is horizontal,then a change in the money supply will change ______ in the short run and change ______ in the long run.
A) only prices; only output
B) only output; only prices
C) both prices and output; only prices
D) both prices and output; both prices and output
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9
Chapter 10: Aggregate Demand I
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142 Verified Questions
142 Flashcards
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Sample Questions
Q1) In the Keynesian-cross model,a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
Q2) A given increase in taxes shifts the IS curve more to the left the:
A) larger the marginal propensity to consume.
B) smaller the marginal propensity to consume.
C) larger the government spending.
D) smaller the government spending.
Q3) In the basic Keynesian-cross model,actual expenditures equal: A) GDP.
B) the money supply.
C) the supply of real balances.
D) unplanned inventory investment.
Q4) Compare how equilibrium is attained in the market for goods and services versus the market for real-money balances. (Hint: Explain what force moves the market back to equilibrium if the market is initially in disequilibrium.)
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Chapter 13: Aggregate Supply and the Short-Run
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112 Verified Questions
112 Flashcards
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Sample Questions
Q1) If the hypothesis of hysteresis is correct and output is lost even after a period of disinflation,the sacrifice ratio for an economy will:
A) increase.
B) decrease.
C) remain unchanged.
D) be zero.
Q2) The Phillips curve expresses a short-run link:
A) among nominal variables.
B) among real variables.
C) among unexpected variables.
D) between nominal and real variables.
Q3) (Exhibit: Short-run Phillips Curve)As the short-run Phillips curve shifts from A to B to C to D,policymakers face:
A) the same tradeoff between inflation and unemployment.
B) a lower rate of inflation for any level of unemployment.
C) a higher rate of inflation for any level of unemployment.
D) higher than expected inflation rates and lower unemployment rates.
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11
Chapter 15: Stabilization Policy
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98 Verified Questions
98 Flashcards
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Sample Questions
Q1) A monetary policy rule that targets nominal GDP would ______ money growth when nominal GDP rises above the target and ______ money growth when nominal GDP falls below the target.
A) reduce; raise
B) raise; reduce
C) reduce; reduce
D) raise; raise
Q2) Policy is conducted by discretion if policymakers:
A) announce in advance how policy will respond to various situations and commit themselves to following through on this announcement.
B) are free to size up the situation case by case and choose whatever policy seems appropriate at the time.
C) announce and maintain a constant growth rate of the money supply.
D) announce and achieve a balanced government budget.
Q3) Because monetary and fiscal lags are long and variable:
A) stronger policies must be used.
B) successful stabilization policy is completely impossible.
C) attempts to stabilize the economy are often destabilizing.
D) policy must be completely passive.
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Page 12
Chapter 16: Government Debt and Budget Deficits
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91 Verified Questions
91 Flashcards
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Sample Questions
Q1) According to the theory of Ricardian equivalence,tax cuts that have no plans to reduce government spending ______ public saving and ______ private saving.
A) reduce; reduce
B) reduce; increase
C) increase; increase
D) increase; reduce
Q2) Inflation-indexed government bonds have all of the following benefits except:
A) eliminating inflation.
B) reducing the government's incentive to produce surprise inflation.
C) encouraging financial innovation.
D) eliminating inflation risk.
Q3) The real value of government debt is reduced by:
A) expected inflation.
B) expected deflation.
C) unexpected inflation.
D) unexpected deflation.
Q4) Explain how tax cuts can affect both aggregate demand and aggregate supply.
Q5) What is Ricardian equivalence? Explain at least three reasons why Ricardian equivalence might not correctly describe an economy.
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Chapter 18: Investment
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103 Verified Questions
103 Flashcards
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Sample Questions
Q1) The inventories as a factor of production motive for holding inventories suggests that:
A) firms hold inventories in order to produce more output.
B) when sales are low,firms produce more than they sell and put the extra goods in inventories.
C) firms hold inventories to avoid losing sales.
D) when a product is only partly completed,its components are counted as part of the firm's inventory.
Q2) When banks make rules on maximum permissible mortgage payments for borrowers,they use:
A) nominal interest rates,and economists feel that this practice is appropriate.
B) real interest rates,and economists feel that this practice is appropriate.
C) real interest rates,but economists feel that this practice is inappropriate.
D) nominal interest rates,but economists feel that this practice is inappropriate.
Q3) According to the efficient-market hypothesis,changes in stock prices:
A) follow a random walk.
B) can be predicted from available information.
C) are driven by irrational waves of optimism and pessimism.
D) are based on what investors expect other investors to pay.
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Page 14
Chapter 19: Money Supply and Money Demand
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102 Verified Questions
102 Flashcards
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Sample Questions
Q1) To increase the money supply,the Bank of Canada can:
A) conduct open-market sales.
B) switch government deposits away from the Bank of Canada.
C) raise the required reserve ratio.
D) lower the required reserve ratio.
Q2) As the 2008-2009 financial crisis unfolded,one major U.S.bank had a leverage ratio of 54.In Canada regulators put a ceiling on bank leverage ratios of 20.Compare the change in asset values that would push the capital in the U.S.bank to zero,compared with the change required to eliminate capital in a Canadian bank at the ceiling leverage ratio.What is the implication of the differences in maximum leverage ratios for the stability of the banking system?
Q3) If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1,then the money multiplier equals:
A) 0.6.
B) 1.67.
C) 2.0.
D) 2.5.
Q4) Why does the Bank of Canada not have complete control over the size of the money supply? Give at least two reasons.
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Chapter 20: The Financial System
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108 Verified Questions
108 Flashcards
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Sample Questions
Q1) Obtaining funds for a business by borrowing,such as through the bond market,is called _____ finance.
A) money
B) liability
C) debt
D) equity
Q2) When the central bank lends to financial institutions in the midst of a liquidity crisis,the central bank is acting as a:
A) lender of last resort.
B) shadow bank.
C) investment bank.
D) mutual fund.
Q3) One avenue by which a loss of confidence in one financial institution spreads to another financial institution is through:
A) a steep decline in asset prices driven by fire sales to restore liquidity.
B) a sharp decline in interest rates to compensate for added risk.
C) an increase in government deposit-insurance coverage.
D) a rapid slowdown in the withdrawal of deposits.
Q4) How do deposit insurance and the "too big to fail" policy increase moral hazard?
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