Intermediate Macroeconomics Practice
Exam
Course Introduction
Intermediate Macroeconomics delves deeper into the core concepts and models that explain overall economic performance and fluctuations in national economies. This course examines the determinants of aggregate output, employment, inflation, and economic growth, building upon introductory macroeconomic principles. Key topics include the analysis of goods and money markets, the role of fiscal and monetary policy, the influence of expectations, business cycles, and the economics of open economies. Through mathematical modeling, empirical evidence, and policy debates, students develop a more sophisticated understanding of how macroeconomic theory applies to real-world policy challenges and economic conditions.
Recommended Textbook Macroeconomics 6th Canadian Edition by Andrew B. Abel
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Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) Canada is considered as one of the
A) low inflation countries.
B) high inflation countries.
C) countries which has experienced hyperinflation.
D) high inflation but low unemployment countries.
Answer: A
Q2) During recessions, the unemployment rate ________ and output ________.
A) rises; falls
B) rises; rises
C) falls; rises
D) falls; falls
Answer: A
Q3) Canadian imports are goods and services
A) produced abroad and sold to Canadians.
B) produced in Canada and sold to Canadians.
C) produced abroad and sold to foreigners.
D) produced in Canada and sold to foreigners.
Answer: A
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Chapter 2: The Measurement and Structure of the Canadian Economy
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Q1) A variable-weight price index
A) equals the value of current output at current prices divided by the value of current output at base-year prices.
B) equals the value of a fixed basket at current prices divided by the value of a fixed basket at base-year prices.
C) is used in the consumer price index.
D) is misleading because it cannot distinguish between nominal and real measures.
Answer: A
Q2) Explain why CPI inflation overstates increases in the cost of living.
Answer: One reason is the quality adjustment bias, which means that CPI does not fully account for the changes in the quality of goods and services. Another reason is the substitution bias. That is, CPI is based on a fixed basket of goods and services, but consumers may substitute goods and services with lower prices with those of higher prices. Therefore, higher prices may not necessary decrease the cost of living as CPI suggests.
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4
Chapter 3: Productivity, Output, and Employment
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Sample Questions
Q1) One reason that firms hire labour at the point where w = MPN is
A) if w < MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring them, so they should hire fewer workers.
B) if w > MPN, the cost (w) of hiring additional workers is less than the benefits (MPN) of hiring them, so they should hire more workers.
C) if w < MPN, the cost (w) of hiring additional workers equals the benefits (MPN) of hiring them, so they have the right number of workers.
D) if w > MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring them, so they should hire fewer workers.
Answer: D
Q2) Firms hire labour at the point where the
A) nominal wage rate equals the marginal product of labour.
B) real wage rate equals the marginal revenue product of labour.
C) nominal wage rate equals the marginal revenue product of labour.
D) real wage rate equals the marginal revenue product of capital.
Answer: C
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Chapter 4: Consumption, Saving, and Investment
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Q1) Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent increase in the tax rate on your firm's revenues now has what effect on your desired capital stock?
A) raises it, because the future marginal productivity of capital is higher B) lowers it, because the future marginal productivity of capital is lower C) raises it, because the after-tax user cost of capital is now lower D) lowers it, because the after-tax user cost of capital is now higher
Q2) The user cost of capital is given by the following formula, where P<sub>K</sub> is the real price of capital goods, d is the depreciation rate, and r is the expected real interest rate:
A) uc = (r + d)/P<sub>K</sub>
B) uc = P<sub>K</sub>/(r + d)
C) uc = dP<sub>K</sub>/r
D) uc = (r + d)P<sub>K</sub>
Q3) If the aggregate consumption function is C = 20 + 0.75 Y, the aggregate saving function will be
A) S = 20 -0.75Y
B) S = 20 +0.75 Y
C) S = -20 + 0.75 Y
D) S = -20 +0.25 Y
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Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) If a country's merchandise exports exceed its merchandise imports,
A) it has a trade surplus.
B) it has a trade deficit.
C) it has a current account surplus.
D) it has a current account deficit.
Q2) A small open economy has a current account balance of zero. A rise in the world real interest rate causes
A) a current account surplus.
B) a capital account surplus.
C) net borrowing from abroad.
D) absorption to exceed income.
Q3) You just read that forecasters predict Canada will run a current account deficit in 2004. From this you would infer that Canada will also
A) run a capital account deficit in 2004.
B) decrease its official reserve assets.
C) run a balance of payments surplus.
D) decrease its holding of net foreign assets.
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Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) A country has the per-worker production function y<sub>t</sub> = 3k<sub>t</sub><sup>2/3, </sup>where y<sub>t</sub> is output per worker and k<sub>t</sub> is the capital-labour ratio. The depreciation rate is 0.1 and the population growth rate is 0.05. The saving function is S<sub>t</sub><sub> </sub>= 0.2Y<sub>t</sub>, where St is total national saving and Yt is total output.
a. What is the steady-state value of capital-labour ratio?
b. What is the steady-state value of output per worker?
c. What is the steady-state value of consumption per worker?
Q2) The per-worker production function in the Solow model assumes
A) constant returns to scale and increasing marginal productivity of capital.
B) constant returns to scale and diminishing marginal productivity of capital.
C) increasing returns to scale and diminishing marginal productivity of capital.
D) decreasing returns to scale and diminishing marginal productivity of capital.
Q3) The idea that measurement problems could explain the productivity slowdown since 1973 is based on the fact that
A) official output measures make no adjustment for quality.
B) output can't be measured.
C) capital can't be measured.
D) quality improvements aren't fully accounted for in the data.
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Page 8
Chapter 7: The Asset Market, Money, and Prices
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Sample Questions
Q1) The opportunity cost of holding currency decreases when A) income decreases.
B) the interest rate on bonds decreases.
C) the interest rate on money decreases.
D) wealth decreases.
Q2) Higher interest rates lower the real quantity of money demanded
A) by making alternative nonmonetary assets look relatively more attractive to wealth holders.
B) by causing an increase in the issuance of corporate debt.
C) by changing the distribution of wealth toward the poor who have a lower demand for money.
D) by increasing government interest payments, which in turn increase taxes, lowering disposable income.
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.
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Page 9
Chapter 8: Business Cycles
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Sample Questions
Q1) Industries that are extremely sensitive to the business cycle are the
A) durable goods and service sectors.
B) nondurable goods and service sectors.
C) capital goods and nondurable goods sectors.
D) capital goods and durable goods sectors.
Q2) When plotted with the aggregate price level on the vertical axis and output on the horizontal axis, the long-run aggregate supply curve
A) slopes upward.
B) slopes downward.
C) is vertical.
D) is horizontal.
Q3) Which of the following macroeconomic variables is not seasonally procyclical?
A) the nominal money stock
B) average labour productivity
C) the unemployment rate
D) government spending
Q4) When a recession occurs, do economists expect it to be a temporary phenomenon? Or is there some degree of permanence? What is the empirical evidence?
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Chapter 9: The IS-LMAD-AS Model: A General Framework for
Macroeconomic Analysis
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Sample Questions
Q1) You have just read that Australia has suffered a drought, destroying its wheat crop for this year. The effect of this adverse supply shock on Australia would probably be
A) an increase in prices and an increase in real interest rates.
B) an increase in prices, an increase in nominal interest rates, but a decrease in real interest rates.
C) a decrease in prices and an decrease in real interest rates.
D) a decrease in prices, a decrease in nominal interest rates, but an increase in real interest rates.
Q2) A change that increases real money demand relative to the real money supply causes
A) the LM curve to shift down.
B) the LM curve to shift up.
C) the IS curve to shift down.
D) the IS curve to shift up.
Q3) A rise in the price of a bond causes the yield of the bond to A) rise.
B) fall.
C) remain unchanged.
D) rise if it's a short-term bond and fall if it's a long-term bond.
Page 11
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Chapter 10: Exchange Rates, Business Cycles, and Macroeconomic Policy in
the Open Economy
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Sample Questions
Q1) 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.
Q2) What happens to the exchange rate and net exports in each of the following cases?
a. The foreign real interest rate rises.
b. Foreign output falls.
c. Foreign demand for domestic goods falls.
d. Domestic output falls.
e. The domestic real interest rate rises.
Q3) Using the IS-LM model for a small open economy, analyze the effects of the following events on output and the real interest rate in the short run and the long run. In each case, discuss the differences between the classical and the Keynesian models.
a. A rise in taxes.
b. A boom in the economy of the major trading partner.
c. The central bank follows a contractionary monetary policy.
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Chapter 11: Classical Business Cycle Analysis:
Market-Clearing Macroeconomics
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Sample Questions
Q1) 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.
Q2) According to classical economists, unemployment rises in recessions due to an increase in ________ unemployment, not ________ unemployment.
A) cyclical; frictional and structural
B) frictional and cyclical; structural
C) structural; frictional and cyclical
D) frictional and structural; cyclical
Q3) According to rational expectations,
A) people never make mistake when forecast future.
B) people never make systematic mistake when forecast future.
C) people always overestimate the inflation rate.
D) people always underestimate the money supply effects.
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Chapter 12: Keynesian Business Cycle Analysis:
Non-Market-Clearing Macroeconomics
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Q1) According to the Keynesian IS-LM model, what is the effect of each of the following on output, the real interest rate, employment, and the price level? Distinguish between the short run and the long run.
a. expected inflation declines
b. wealth declines
c. labour supply increases due to a change in demographics
d. the future marginal product of capital increases
Q2) In the Keynesian model, money is
A) neutral in both the short run and the long run.
B) neutral in neither the short run nor the long run.
C) neutral in the short run, but not in the long run.
D) neutral in the long run, but not in the short run.
Q3) The crowing-out effect occurs because of
A) higher prices induced by the expansionary fiscal policy.
B) higher interest rates induced by the expansionary fiscal policy.
C) higher inflation induced by the expansionary fiscal policy.
D) higher output induced by the expansionary fiscal policy.
Q4) Describe the effects of an oil price shock in a Keynesian model; why are such supply shocks difficult to handle using macroeconomic stabilization policies?
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Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) Which of the following best explains economic theory behind the Phillips curve?
A) If inflation rate is lower than expected inflation rate, real money balance will increase leading to a lower interest rate and a higher aggregate demand and output.
B) If inflation rate is lower than expected inflation rate, real money balance will decrease leading to a higher interest rate and a lower aggregate demand and output.
C) If there is an unanticipated inflation rate, real wage will increase leading to a lower output and employment.
D) If there is an unanticipated inflation rate, real wage will decrease leading to a lower output and employment.
Q2) The reduction of the inflation rate is called
A) deflation.
B) disinflation.
C) unflation.
D) reflation.
Q3) Describe the principal costs of unemployment. Are there any benefits to unemployment?
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Chapter 14: Monetary Policy and the Bank of Canada
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Sample Questions
Q1) Suppose that in Mysore the reserve-deposit ratio is res = 0.5 - 2i, where i is the nominal interest rate. The currency-deposit ratio is 0.2 and the monetary base equals 100. The real quantity of money demanded is given by the money demand function L(Y, i) = 0.5Y - 10i, where Y is real output. Currently, the real interest rate is 5% and the economy expects an inflation rate of 5%. Assume that the price level P is equal to 1. The value of output Y that clears the asset market is A) 240.
B) 460.
C) 480.
D) 482.
Q2) Money multiplier is
A) the number of dollars of money supply that can be created from each dollar of monetary base.
B) the number of dollars of monetary base that can be created from each dollar of currency held by public.
C) the ratio of number of dollars of money demand that can be created from each dollar of monetary base.
D) the number of dollars of money supply that can be created from each dollar of reserves.
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Chapter 15: Government Spending and Its Financing
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Q1) Given a stable primary deficit to GDP ratio, Canada can reduce its dept-GDP ratio, if
A) the economic growth is higher than the interest rate paid on debt.
B) the economic growth is lower than the interest rate paid on debt.
C) the economic growth is the same as the interest rate paid on debt.
D) the economic growth is higher than the inflation rate.
Q2) An example of tax smoothing is provided by evidence of
A) temporary changes in defense expenditures by the government.
B) reductions in tax rates prior to elections.
C) Keynesian tax cuts designed to help the economy recover from a recession.
D) reliance on debt financing rather than taxation during World War II.
Q3) Taxes distort economic behaviour because
A) they change the composition of income and spending.
B) they cause deviations in economic behaviour from the efficient, free-market outcome.
C) they change the balance between private and public expenditures.
D) they change the composition of consumption, investment, government spending, and net exports.
Q4) Why should government smooth tax rates? If they do so, what happens to deficits over the business cycle?
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