Intermediate Macroeconomics Practice Exam
Course Introduction
Intermediate Macroeconomics explores the fundamental theories and models that describe the functioning of an economy at an aggregate level. The course covers topics such as national income determination, economic growth, unemployment, inflation, monetary and fiscal policy, and the role of government in stabilizing the economy. Students will analyze real-world economic issues using frameworks such as the IS-LM model, the AD-AS model, and the Solow growth model, building on foundational concepts learned in introductory macroeconomics. Emphasis is placed on applying theoretical models to interpret current economic events and evaluate policy decisions.
Recommended Textbook
Macroeconomics 1st Canadian Edition by R. Glenn Hubbard
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Chapter 1: Introduction to Macroeconomics and the Great Recession
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Sample Questions
Q1) Explain what is happening to spending on health care as the Canadian population continues to age.Why might this spending change pose problems for the Canadian economy?
Answer: Spending on programs such as health care has increased significantly to 8% of GDP,and is projected to be 13% by 2030.Since most of the money for these programs comes from taxes paid by people currently working,as the population ages,there are fewer workers paying taxes relative to the number of people receiving these payments.This results in a funding crisis that can be solved only by either reducing these government payments,reducing expenditure on other programs,or raising the taxes paid by current workers.
Q2) Changes in government taxes and purchases that are intended to achieve macroeconomic policy objectives refer to
A) fiscal policy.
B) monetary policy.
C) quantitative analysis.
D) government transparency.
Answer: A
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Chapter 2: Measuring the Macroeconomy
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Q1) Which of the following would cause the unemployment rate as measured by Statistics Canada to overstate the true degree of joblessness in the economy?
A) discouraged workers
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: B
Q2) Which of the following could cause nominal GDP to increase and real GDP to decrease?
A) The price level falls and the quantity of final goods and services produced falls.
B) The price level falls and the quantity of final goods and services produced rises.
C) The price level rises and the quantity of final goods and services produced falls.
D) The price level rises and the quantity of final goods and services produced rises.
Answer: C
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Chapter 3: The Canadian Financial System
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Sample Questions
Q1) Ramona has decided that she will only purchase a one-year Treasury bill with a face value of $15 000 if she receives an interest rate of 4.125%.How much will Ramona end up paying for this Treasury bill?
A) $12 447.66
B) $14 381.25
C) $14 405.76
D) $15 618.75
Answer: C
Q2) Sammy is willing to lend Oscar $625 today so Oscar can purchase a new set of tires for his pick-up truck.Oscar agrees to pay the loan back plus 5% interest in one year.What is the future value of this loan?
A) $595.24
B) $656.25
C) $750.00
D) $812.50
Answer: B
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Chapter 4: Money and Inflation
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Sample Questions
Q1) Explain how inflation can be costly even if it is expected.
Q2) Assume that the growth rate of real GDP in Astoria is 7.5%.Assume the growth rate of velocity is 0%.If Astoria's current annual inflation rate is 5.99%,the growth rate of the money supply will be
A) -1.51%.
B) 1.51%.
C) 5.99%.
D) 13.49%.
Q3) The growth rate of real GDP in Astoria is 7.5%.Assume the growth rate of velocity is constant at a rate of 5%.If Astoria wishes to decrease the inflation rate from the annual rate of 5.99% to a target rate of 4.5% and maintain its current growth rate of real GDP,what will the growth rate of the money supply need to be?
A) 6.49%
B) 7%
C) 8%
D) 8.49%
Q4) During the 1990s,Japan experienced periods of deflation and nominal interest rates that approached zero percent.Why would anyone lending money agree to a nominal interest rate of almost zero percent?
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Chapter 5: The Global Financial System and Exchange Rates
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Sample
Questions
Q1) <b>Refer to Figure 5.2</b>.If you choose to invest in Japanese bonds,your investment return from Scenario C will be
A) -3%.
B) -1%.
C) 2%.
D) 5%.
Q2) <b>Refer to Figure 5.4.</b>The international capital market will be in equilibrium when the real interest rate in Canada is ________ and the real interest rate in the rest of the world is ________.
A) 7%; 3%
B) 5%; 7%
C) 9%; 3%
D) 5%; 5%
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 corporate taxes
C) an increase in tax credits for savings
D) a decrease in the desire of households to consume today
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Chapter 6: The Labour Market
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Sample Questions
Q1) Changes in all of the following will shift the demand curve for labour,except
A) the real wage rate.
B) the quantity of capital.
C) the technology of production.
D) the skill level of workers.
Q2) The natural rate of unemployment consists of
A) frictional unemployment plus structural unemployment.
B) frictional unemployment plus cyclical unemployment.
C) structural unemployment plus cyclical unemployment.
D) frictional unemployment plus structural unemployment plus cyclical unemployment.
Q3) If the rate of job separation equals 2%,and the natural rate of unemployment is 10%,then the rate of job finding equals A) 5%.
B) 16.7%.
C) 18%.
D) 20%.
Q4) What factors can cause the natural rate of unemployment to change?
Q5) How does a real wage above the equilibrium wage cause unemployment?
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Chapter 7: The Standard of Living Over Time and Across Countries
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Q1) All else equal,continued increases in the labour supply in an economy will lead to A) continued increases in the capital stock.
B) higher levels of total factor productivity.
C) smaller increases in real GDP.
D) an increase in labour's share of income.
Q2) <b>Refer to Figure 7.1</b>.All else equal,an increase in the capital stock will cause a A) shift from PF to PF .
B) shift from PF to PF .
C) movement up and to the right along PF .
D) movement down and to the left along PF .
Q3) What two factors determine output per worker? Explain which of the two is more important.
Q4) Along the per worker production function,as the capital-labour ratio ________,increases in output per worker become progressively ________. A) increases; larger B) increases; smaller C) decreases; larger D) decreases; smaller
Page 9
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Chapter 8: Long-Run Economic Growth
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Sample Questions
Q1) In the Solow growth model,the steady state occurs when A) investment = depreciation.
B) depreciation = 0.
C) the capital-labour ratio = 1.
D) saving = investment.
Q2) By comparing ________ and ________,we will be able to determine what happens with capital stock over time.
A) investment; spending
B) consumption; spending
C) investment; depreciation
D) consumption; depreciation
Q3) What is depreciation,and what happens to the depreciation line when the rate of depreciation increases or decreases?
Q4) Countries that have experienced sustained increases in their standard of living have achieved them because of
A) higher rates of saving and investment.
B) higher rates of population growth.
C) sustained technological change.
D) All of the above are correct.
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Chapter 9: Business Cycles
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Sample Questions
Q1) Explain why price and wage stickiness in the short run are reasons that macroeconomic shocks can result in fluctuations in total employment and total production.
Q2) When economists address the concept of price and wage stickiness in relation to the business cycle,they are referring to
A) nominal prices and nominal wages.
B) real prices and real wages.
C) both nominal and real prices and wages.
D) both nominal and real prices, but only real wages.
Q3) If households spend $0.40 of each additional dollar of increased income,the expenditure multiplier will be
A) 1.67.
B) 2.5.
C) 4.
D) 6.
Q4) Explain the differences between aggregate demand shocks and aggregate supply shocks.
Q5) List three reasons why nominal wages can be sticky in the short run.
Q6) What is the business cycle and why does it occur?
Q7) What is the multiplier effect and when do multiplier effects occur?
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Chapter 10: Explaining Aggregate Demand: the Is-Mp
Model
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Sample Questions
Q1) <b>Refer to Figure 10.2.</b>Assume the economy is initially at equilibrium at potential GDP of $500 billion.If the MPC = 0.80 ,and real GDP falls to Y = $400 billion,the vertical distance between AE and AE must be
A) $8 billion.
B) $20 billion.
C) $80 billion.
D) $100 billion.
Q2) <b>Refer to Figure 10.4.</b>.Suppose the economy's equilibrium starts out with an output gap of \(\hat{Y}\) ,and real GDP increases so the output gap increases to \(\hat{Y}\) .If the Bank of Canada wants to keep the interest rate at the target,the money demand curve will ________ and the money supply curve will ________.
A) shift from MD to MD ; shift from MS to MS
B) shift from MD to MD ; shift from MS to MS
C) remain at MD ; remain at MS
D) remain at MD ; remain at MS
Q3) Assume that the economy is initially in equilibrium and the Bank of Canada keeps the nominal money supply constant.Construct a money market graph and an LM curve and use them to explain what happens if the economy experiences a negative demand shock.
Page 12
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Chapter 11: The Is-Mp Model: Adding Inflation and the Open Economy
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Q1) Under a fixed exchange rate system,at low domestic real interest rates the demand for domestic currency ________,so the central bank ________ foreign-exchange reserves.
A) increases; acquires B) increases; loses C) decreases; acquires D) decreases; loses
Q2) Suppose the economy is in equilibrium with an output gap equal to zero and the actual inflation rate equals the expected inflation rate.If the economy experiences a positive demand shock,the output gap will ________ and the inflation rate will
A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease
Q3) How does the open-economy IS-MP model incorporate net exports with a fixed exchange rate system?
Q4) Explain three shocks that the Canadian economy experienced during the Great Recession,and how these shocks affect the IS curve,the MP curve,and the Phillips curve.
Page 13
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Chapter 12: Monetary Policy in the Short Run
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Sample Questions
Q1) Assume that the term structure effect and the default-risk premium remain unchanged and that households and firms have adaptive expectations.At the beginning of 2013,a bank is offering car loans at a nominal interest rate of 7% and the expected rate of inflation is 2 %,and at the beginning of 2014,the bank decreases the nominal interest rate to 5%.The real interest rate at the beginning of 2014 is A) 2%.
B) 3%.
C) 5%.
D) This cannot be determined without being given the expected inflation rate for 2014.
Q2) If the Bank of Canada decides to increase interest rates to fight off potential inflation,and their policy action keeps the inflation rate stable,then other things equal,this would result in
A) the IS curve shifting to the right.
B) the IS curve shifting to the left.
C) the MP curve shifting up.
D) the MP curve shifting down.
Q3) Explain the dilemma that supply shocks pose when the Bank of Canada chooses to use monetary policy to achieve its goals.
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Chapter 13: Fiscal Policy in the Short Run
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Sample Questions
Q1) Suppose the federal budget deficit for the year was $500 billion and the economy were in a recession.If the economy had been at potential GDP,it is estimated that tax revenue would have been $350 billion higher and government spending on transfer payments would have been $200 billion lower.Using these estimates,the cyclically adjusted budget
A) deficit was $1050 billion.
B) deficit was $650 billion.
C) surplus was $50 billion.
D) surplus was $650 billion.
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) What is a cyclically adjusted budget deficit or surplus,and how is it used to determine whether discretionary fiscal policy is expansionary or contractionary?
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Chapter 14: Aggregate Demand, aggregate Supply, and Monetary Policy
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Sample Questions
Q1) Other things equal,a decrease in the price level will
A) shift the AS curve to the left.
B) shift the AS curve to the right.
C) cause a movement up the AS curve.
D) cause a movement down the AS curve.
Q2) <b>Refer to Figure 14.1.</b>Other things equal,an increase in the Bank of Canada's concern about deviations of inflation from the target inflation rate is best represented as a movement from
A) point X to point Z.
B) point Z to point X.
C) point Z to point Y.
D) point Y to point X.
Q3) <b>Refer to Figure 14.2.</b>Other things equal,a movement from point C to point B would be caused by
A) an increase in the price level.
B) a decrease in the price level.
C) a positive supply shock.
D) a negative supply shock.
Q4) 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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Sample Questions
Q1) An increase in the inflation rate will lead to a ________ nominal interest rate,which will ________ the debt-to-GDP ratio.
A) higher; raise
B) higher; reduce
C) lower; raise
D) lower; reduce
Q2) The value of bonds outstanding
A) increases when the government runs a budget deficit and decreases when the government runs a budget surplus.
B) decreases when the government runs a budget deficit and increases when the government runs a budget surplus.
C) is independent of the government running either a budget deficit or a budget surplus.
D) changes only when the government runs a budget deficit or surplus if the federal debt is zero.
Q3) What is necessary for fiscal policy to be sustainable? Why is fiscal policy in countries like Greece,Ireland,Spain,Italy,and Portugal not considered sustainable?
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Chapter 16: Consumption and Investment
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Q1) <b>Refer to Figure 16.1.</b>If a firm expects that consumer preference for its product will increase in the future,this is best represented by a movement from
A) point A to point C.
B) point B to point A.
C) point A to point B.
D) point C to point A.
Q2) Economists assume that households and firms share two important characteristics.One of these characteristics is that
A) they usually smooth spending during expansions but rarely do during recessions.
B) the growth rate in spending by each always decreases during recessions.
C) they only consider the future when making decisions.
D) they are forward looking.
Q3) Consumption smoothing is a consequence of the
A) increasing marginal utility of consumption.
B) constant marginal utility of consumption.
C) intertemporal budget constraint.
D) decreasing marginal utility of consumption.
Q4) Explain how changes in corporate taxes affect the investment decisions of firms.
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