Honours Macroeconomic Theory Review
Questions
Course Introduction
Honours Macroeconomic Theory is an advanced course that examines the fundamental principles and models that govern aggregate economic activity. The course covers topics such as economic growth, business cycles, inflation, unemployment, and the impact of monetary and fiscal policies on the overall economy. Students will engage with dynamic general equilibrium models, analyze the roles of expectations and policy interventions, and study empirical methods for evaluating macroeconomic theories. Interconnections between macroeconomic theory and real-world policy debates are emphasized, preparing students for further academic research or professional work in economics.
Recommended Textbook
Macroeconomics 8th Canadian Edition by Andrew
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15 Chapters
1394 Verified Questions
1394 Flashcards
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B. Abel
Page 2
Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) The process of adding together individual economic variables to obtain economywide totals is called A)macroeconomics.
B)aggregation.
C)agglomeration.
D)data development.
Answer: B
Q2) In Canada,monetary policy is determined by
A)the Bank of Canada.
B)the prime minister.
C)private citizens.
D)the Department of Finance.
Answer: A
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Chapter 2: The Measurement and Structure of the Canadian Economy
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Sample Questions
Q1) Inventories are
A)included in the measurement of capital goods.
B)included in the measurements of intermediate goods.
C)fully included in annual measurements of GDP.
D)included in measurements of GDP only if they have changed from the preceding year.
Answer: D
Q2) Intermediate goods are
A)capital goods,which are used up in the production of other goods but were produced in earlier periods.
B)final goods that remain in inventories.
C)goods that are used up in the production of other goods in the same period that they were produced.
D)either capital goods or inventories.
Answer: C
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Chapter 3: Productivity, output, and Employment
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Sample Questions
Q1) The real wage is measured by
A)the difference between the nominal wage rate and the inflation rate.
B)the difference between the nominal wage rate the interest rate.
C)the ratio of nominal wage and price level.
D)the wage rate divided by the inflation rate.
Answer: C
Q2) Compare and contrast the likely income and substitution effects on labour supply of a temporary real wage increase compared to a permanent rise in the real wage.
Answer: The temporary real wage increase has little impact on permanent income,so has almost entirely a substitution effect increasing labour supply.For a permanent increase in the real wage,there is both a substitution effect increasing labour supply since the reward to working is higher,and an income effect decreasing labour supply since permanent income is higher.
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Chapter 4: Consumption, saving, and Investment
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Sample Questions
Q1) A decline in consumer confidence will lead to
A)an upward shift in the consumption function and higher current consumption.
B)a downward shift in the consumption function and lower current consumption.
C)a downward shift in the saving function and lower current saving.
D)a downward shift in the saving function and a higher interest rate.
Q2) An increase in housing prices in Canada will likely have stronger effect on the aggregate consumption than a similar increase in the stock prices,because A)there are more Canadian stockholders than Canadian homeowners.
B)stock prices are far more volatile than the housing prices.
C)changes in stock prices are seen as permanent changes in wealth.
D)housing prices are more volatile than the stock prices.
Q3) Which of the following machines has the lowest user cost? Machine A costs $15,000 and depreciates at a 25% rate,machine B costs $10,000 and depreciates at a 20% rate,machine C costs $10,000 and depreciates at a 10% rate,and machine D costs $17,000 and depreciates at an 11% rate.The expected real interest rate is 0%.
A)machine A
B)machine B
C)machine C
D)machine D
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Page 6
Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) When there are two large open economies,if desired international lending by the domestic country exceeds desired international borrowing by the foreign country,then
A)domestic saving must rise.
B)domestic saving must fall.
C)the world real interest rate must fall.
D)the world real interest rate must rise.
Q2) An economy in which output exceeds absorption
A)will send goods abroad and have a current account surplus.
B)is a net importer with a current account deficit.
C)is a net borrower in the international market.
D)will have a capital account deficit.
Q3) If Canada donates footballs to Japan,how is the transaction recorded on the Canadian balance of payments accounts?
A)debit: merchandise trade;credit: capital account
B)debit: capital account;credit: merchandise trade
C)debit: net unilateral transfers;credit: merchandise trade
D)debit: merchandise trade;credit: net unilateral transfers
Q4) Explain why the current account balance and the capital account balance of an economy must sum to zero.
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Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) Government policy can improve the long-run economic growth through A)providing an incentive for higher saving such as lower capital gain taxes.
B)encouraging more consumption and less saving.
C)increasing productivity growth by improving infrastructure,investing in human capital,and supporting R&D activities.
D)subsidizing the manufacturing industries.
Q2) Assume the production function in an economy is Y = AK,where Y = output,A = productivity,and K = capital.This means that A)marginal productivity of capital is diminishing.
B)the marginal productivity of capital is increasing.
C)marginal productivity of capital is constant.
D)None of the above.
Q3) Describe the pros and cons of industrial policy.Which type of economist is more likely to support industrial policy,a Keynesian or a classical economist? Why?
Q4) Discuss what government policies can affect long-run economic growth.Do your answers depend on what growth model you use? Explain.
Q5) What are the industrial policy and market policy? Explain how they might affect long-run economic growth.
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Chapter 7: The Asset Market, money, and Prices
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Sample Questions
Q1) Suppose the money demand function is M /P = 1000 + 0.2Y - 1000i.
a.Calculate velocity if Y: 2000 and i = 0.10.
b.If the money supply (M )is 2600,what is the price level?
c.Now suppose the nominal interest rate rises to 0.15,but Y and M are unchanged.What happens to velocity and the price level? So if the nominal interest rate were to rise from 0.10 to 0.15 over the course of a year,with Y remaining at 2000,what would the inflation rate be?
Q2) For any real interest rate,an increase in the expected inflation
A)increases the nominal interest rate and reduces the demand for money.
B)increases the nominal interest rate and increases the demand for money.
C)decreases the nominal interest rate and reduces the demand for money.
D)decreases the nominal interest rate and increases the demand for money.
Q3) Money's primary role in the economy comes from the benefits of lowering transaction costs and allowing specialization.This function of money is called A)store of value.
B)medium of exchange.
C)standard of deferred payment.
D)unit of account.
Q4) Explain how growth in the money supply and inflation are related.
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Chapter 8: Business Cycles
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Sample Questions
Q1) The high point in the business cycle is referred to as the A)expansion.
B)boom.
C)peak.
D)turning point.
Q2) Describe the major features of the business cycle.Be sure to discuss what variables are affected by the cycle,a description of the key features that are apparent in the data,how variables are related to one another,how regular the cycle is,and how predictable the cycle is.
Q3) Which of the following is true about the business cycles in Canada?
A)The largest contractions were experienced in 1920 and 1929.
B)The economy grew strongly after World War II.
C)The 1991 recession was longer but shallower than the 1981 recession.
D)All of the above.
Q4) Which of the following activities is less sensitive to the business cycles?
A)car manufacturing
B)computer industry
C)insurance services
D)building material
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Chapter 9: The Is-Lm-Fe Model: a General Framework for
Macroeconomic Analysis
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Sample Questions
Q1) People have reduced their expectations of inflation from 5% to 3%,directly causing
A)a relative increase in real money demand,shifting the LM curve up.
B)a relative decrease in real money demand,shifting the LM curve down.
C)a relative increase in real money demand,shifting the LM curve down.
D)a relative decrease in real money demand,shifting the LM curve up.
Q2) For each of the following changes,what happens to the real interest rate and output in the very short run,before the price level has adjusted to restore general equilibrium?
a.Wealth declines.
b.Money supply declines.
c.The future marginal productivity of capital declines.
d.Expected inflation rises.
e.Future income rises.
Q3) Draw a saving-investment diagram to show how each of the following changes shift the IS curve.
a.Future income declines.
b.The future marginal productivity of capital declines.
c.Government purchases increase temporarily.
d.The effective corporate tax rate declines.
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Chapter 10: Exchange Rates, business Cycles, and Macroeconomic Policy
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Sample Questions
Q1) Which of the following statements best describes the movement of the Canadian dollar during the 1970s?
A)The dollar rose steadily.
B)The dollar was stable.
C)The dollar was stable until 1976 and fell thereafter.
D)The dollar fell until 1976 and rose thereafter.
Q2) Empirical evidence shows that in the short run,purchasing power parity ________,and in the long run,purchasing power parity ________.
A)holds;does not hold
B)holds;holds
C)does not hold;holds
D)does not hold;does not hold
Q3) The Bretton Woods system relied on
A)a flexible-exchange-rate system.
B)a floating-exchange-rate system.
C)a fixed-exchange-rate system.
D)an exchange-rate union.
Q4) Describe the effects of a rise in the domestic real interest rate on the exchange rate and on both domestic and foreign net exports.
Page 12
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Chapter 11: Classical Business Cycle Analysis:
Market-Clearing Macroeconomics
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Sample Questions
Q1) According to rational expectations,
A)people never make mistakes when they forecast the future.
B)people never make systematic mistakes when they forecast the future.
C)people always overestimate the inflation rate.
D)people always underestimate the money supply effects.
Q2) The distinction between real and nominal shocks is that
A)real shocks directly affect only the IS curve,but not the FE line or LM curve.
B)real shocks directly affect only the FE line,but not the LM curve.
C)real shocks directly affect only the IS curve or the FE line,but not the LM curve.
D)real shocks have a large direct effect on the IS curve and the FE line,but only a small direct effect on the LM curve.
Q3) Which of the following is NOT true about the effects of the utilization of inputs on the business cycles?
A)Even though technology remains constant,utilization of labour and capital leads to business cycles.
B)Utilization of production input is procyclical.
C)Labour hoarding occurs during recessions.
D)Capital utilization is procyclical,but labour utilization is countercyclical.
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Chapter 12: Keynesian Business Cycle Analysis: Non Market
Clearing Macroeconomics
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Sample Questions
Q1) In the Keynesian model in the long run,a decrease in taxes causes the price level to ________ and the real interest rate to ________.
A)fall;rise
B)fall;fall
C)rise;rise
D)rise;fall
Q2) You are the governor of the Central Bank of Atlantis.You believe in a Keynesian model of the economy,and your goal is to keep the economy at the full-employment level of output.How would you respond (tightening or easing policy)in each of the following cases?
a.Government purchases increase.
b.Corporate tax rates increase.
c.Expected inflation increases.
d.There's a beneficial oil price shock (and the LM curve shifts more to the right than the FE line).
Q3) Explain the effects of an anticipated fiscal policy on the long-run output and price level.Discuss how Keynesian and the Classical models differ in analyzing the effect.
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Page 14
Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) Describe the principal costs of unemployment.Are there any benefits to unemployment?
Q2) According to the expectations-augmented Phillips curve,if the cyclical unemployment rate is zero,
A)the inflation rate will be equal to the anticipated inflation rate.
B)the anticipated inflation rate will be negative.
C)the anticipated inflation rate will be positive.
D)the unanticipated inflation rate will be zero.
Q3) Hysteresis in unemployment means
A)many people counted as employed are really underemployed.
B)the natural rate of unemployment changes in response to the actual rate of unemployment.
C)there is no natural rate of unemployment;there is a natural rate of inflation instead.
D)the actual unemployment rises when the natural rate of unemployment rises.
Q4) Milton Friedman and Edmund Phelps questioned
A)the use of expectations in the Phillips curve.
B)the stability of the relationship between inflation and unemployment.
C)the existence of a natural rate of unemployment.
D)the existence of a full-employment level of output.
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Chapter 14: Monetary Policy and the Bank of Canada
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Sample Questions
Q1) What types of rules for monetary policy may be sensible for policymakers to consider? What is the advantage of using rules over discretion? What problems might there be with rules?
Q2) Which of the following statements would Milton Friedman agree with concerning the conduct of monetary policy?
A)Information lags are short,enabling the Central Bank to respond quickly to changes in the economy.
B)There is little uncertainty over the effect of a change in the money supply on the economy.
C)There are long and variable lags between monetary policy actions and their economic results.
D)Wage and price adjustments are relatively slow,so changing the money supply will have a minimal impact on the real economy.
Q3) The Bank of Canada is
A)on the north shore of the Ottawa river.
B)a Toronto fast-food outlet.
C)a money laundering service.
D)the Central Bank of Canada.
Q4) What is inflation targeting policy? Discuss its advantages and disadvantages.
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) Which of the following is true about the actual and structural budget surplus in Canada?
A)The actual budget surplus was significantly less than the structural budget surplus during the last three recessions reflecting the importance of automatic stabilizers.
B)The actual budget surplus was significantly larger than the structural budget surplus during the last three recessions reflecting the importance of automatic stabilizers.
C)The actual budget surplus was not significantly different than the structural budget surplus during the last three recessions indicating that the automatic stabilizers were not important.
D)The actual budget surplus was not significantly different than the full-employment budget surplus during the last three recessions indicating that the automatic stabilizers were not important.
Q2) According to the Ricardian equivalence proposition,current deficits
A)will not affect consumption or national saving.
B)will affect consumption but not national saving.
C)will affect national saving but not consumption.
D)will affect both consumption and national saving.
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