Introduction to Macroeconomics Study Guide Questions
Course Introduction
Introduction to Macroeconomics is a foundational course that explores the broad economic factors affecting entire economies, such as inflation, unemployment, gross domestic product (GDP), and fiscal and monetary policy. Students will learn how economic indicators are measured and interpreted, the roles of government and central banks in economic management, and the causes and consequences of economic fluctuations. Through analysis of real-world data and policy debates, the course provides students with the analytical tools and frameworks necessary to understand the functioning and challenges of modern economies at the national and global levels.
Recommended Textbook
Macroeconomics 6th Canadian Edition by Andrew B. Abel
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1206 Verified Questions
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Page 2
Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) The primary factor that caused some economists to lose their faith in the Keynesian approach to macroeconomic policy was
A) the high levels of unemployment that occurred during the Great Depression.
B) the presence of both high unemployment and high inflation during the 1970s.
C) theoretical proof that Keynes's ideas were invalid.
D) evidence that Keynes's ideas were useful during economic recessions, but not during economic booms.
Answer: B
Q2) 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
Q3) 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
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Chapter 2: The Measurement and Structure of the Canadian Economy
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Sample Questions
Q1) The real interest rate is equal to
A) nominal interest rate + inflation rate.
B) nominal interest rate - inflation rate.
C) nominal interest rate / inflation rate.
D) nominal interest rate × inflation rate.
Answer: B
Q2) You are given information on the consumer price index (CPI), where the values given are those for December 31 of each year. \[\begin{array} { c c }
\text { Year } & \text { CPI } \\
\hline 1997 & 126.1 \\
1998 & 133.8 \\ 1999 & 137.9 \\ 2000 & 141.9 \\ 2001 & 145.8
\end{array}\] In which year was the inflation rate the highest?
A) 1998
B) 1999
C) 2000
D) 2001
Answer: A
Page 4
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Chapter 3: Productivity, Output, and Employment
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Sample Questions
Q1) Technological progress is measured by
A) average labour productivity
B) marginal product of labour
C) total factor productivity
D) marginal product of capital
Answer: C
Q2) How would each of the following events affect Cheryl Shirker's supply of labour?
a. Cheryl's firm announces a reorganization plan in which she will get a big promotion and raise in six months.
b. Cheryl's speculative investment in plutonium futures pays off big, netting her a profit of $300 thousand.
c. Cheryl's father, who had planned to leave her a large bequest, must spend all his wealth on medical bills after a prolonged illness.
Answer: a. The higher future real wage reduces current labour supply.
b. Higher wealth reduces labour supply.
c. Lower wealth increases labour supply.
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Chapter 4: Consumption, Saving, and Investment
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Sample Questions
Q1) An economy has government purchases of 2000. Desired national saving and desired investment are given by S<sup>d</sup><sup> </sup>= 200 + 5000r + 0.10 Y - 20G I<sup>d</sup> = 1000 - 4000r
When the full-employment level of output equals 5000, then the real interest rate that clears the goods market will be
A) 7.78%.
B) 10.00%.
C) 14.44%.
D) 23.33%.
Q2) A firm has current and future marginal productivity of capital given by MPK = 10,000 - 2K + N, and marginal productivity of labour given by MPN = 50 - 2N + K. The price of capital is $5,000, the real interest rate is 10%, and capital depreciates at a 15% rate. The real wage is $15.
a. Calculate the user cost of capital.
b. Find the firm's optimal amount of employment and the size of the capital stock.
Q3) What are the economic consequences of reductions in defense spending by the government? What happens to national saving, the interest rate, and investment?
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Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) Show where each of the following transactions belongs on the Canadian balance of payments table, using an exchange rate of 100 Japanese yen per Canadian dollar.
a. A Japanese firm spends 5 billion yen to buy personal computers from IBM (a Canadian firm).
b. A wealthy Japanese businessman gives $100 thousand to the San Diego Zoo.
c. A Canadian firm buys 1 million Sony Walkmans at 6000 yen each (Sony is a Japanese firm).
d. A Japanese investment banking firm buys 500 million dollars worth of newly issued Canadian government Treasury bills.
e. Canadian steel firms send 2000 executives to Japan to take courses in the Japanese method of steel production and Japanese management techniques, paying 2 million yen per executive.
f. Repeat parts a. - e. for the balance of payments table of Japan.
Q2) Suppose the government of a large open economy announces a major expansion of government spending to dig a tunnel to the earth's core, to be financed entirely by borrowing. What effect does this have on the world real interest rate, national saving, investment, and the current account balance in equilibrium?
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Page 7
Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) A decline in population growth will lead to a ________ in the steady-state capital-labour ratio and a ________ in output per worker.
A) fall; fall
B) fall; rise
C) rise; rise
D) rise; fall
Q2) If in an economy the human capital increases with the increase in the physical capital,
A) there will be a diminishing marginal productivity of physical capital.
B) there will be no change in marginal productivity of physical capital.
C) the economy's growth rate will depend on its saving rate.
D) Both B and C are correct.
Q3) Which of the following statements does not describe the steady state of an economy, when technology is constant?
A) Investment per worker is equal to the requirement (break-even) investment.
B) Output per worker and consumption per worker are constant.
C) The growth rate of the output per worker is zero.
D) The capital per worker grows at a constant rate.
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Chapter 7: The Asset Market, Money, and Prices
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Sample Questions
Q1) Although rapid money growth causes inflation, some countries keep increasing their money growth. We can explain this by noting that
A) inflation in those countries is low enough to be ignored by the policy makers.
B) printing money is the only and easy way to finance the government expenditures in those countries.
C) in rich countries inflation does not hurt the economy.
D) policy makers do not know the relationship between inflation and money growth.
Q2) What happens to M1 and M2+ due to each of the following changes?
a. You take $500 out of your chequing account and put it into a passbook savings account.
b. You take $1000 out of your chequing account and put it into a current account.
c. You take $1500 out of your money-market mutual fund and deposit into your chequing account.
d. You cash in $2000 in savings bonds and invest the money in a certificate of deposit.
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Chapter 8: Business Cycles
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Sample Questions
Q1) Christina Romer's estimates of the business cycles prior to World War II showed that A) the business cycles had greater fluctuations before World War II than previous estimates had shown.
B) the business cycles had smaller fluctuations before World War II than previously estimated, but still larger fluctuations than after World War I.
C) the business cycles had smaller fluctuations before World War II.
D) there was no difference in the size of business fluctuations prior to and after World War II.
Q2) The deepest contraction in Canadian history occurred
A) during the 1870s.
B) in the years right before World War I began.
C) during the 1930s.
D) during the 1970s.
Q3) When aggregate economic activity is increasing, the economy is said to be in A) an expansion.
B) a contraction.
C) a peak.
D) a turning point.
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Chapter 9: The IS-LMAD-AS Model: A General Framework for
Macroeconomic Analysis
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Sample Questions
Q1) After a temporary adverse supply shock hits the economy, general equilibrium is restored by
A) a downward shift of the IS curve.
B) a shift to the left of the FE line.
C) an upward shift of the LM curve.
D) a downward shift of the LM curve.
Q2) A temporary decline in government purchases would shift the IS curve ________ and the LM curve ________.
A) down; is unchanged
B) down; left
C) up; is unchanged
D) up; left
Q3) A temporary supply shock, such as a bumper crop, would
A) shift the FE line to the right and leave the IS curve unchanged.
B) shift the FE line to the left and shift the IS curve up.
C) shift the FE line to the left and leave the IS curve unchanged.
D) have no effect on the FE line.
Q4) Describe the effects, in both the short run and the long run, of a decline in the money supply. Explain what happens to real output and the price level.
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) Which of the following statement best describes the movement of the Canadian dollar against the US dollar in the period 2002-2008?
A) The Canadian dollar appreciated because demand for natural resources such as oil increased.
B) The Canadian dollar depreciated because demand for commodity decreased.
C) The Canadian dollar appreciated because the US exports to Canada increased.
D) The Canadian dollar depreciated because the interest rate in Canada was lower than US.
Q2) Why are European countries planning to unify their currencies? What are the benefits of doing so? What are the potential costs?
Q3) 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.
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Chapter 11: Classical Business Cycle Analysis:
Market-Clearing Macroeconomics
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Sample Questions
Q1) A temporary adverse productivity shock would not
A) shift the labour demand curve downward.
B) shift the labour supply curve upward.
C) reduce the level of employment.
D) reduce the amount of output that can be produced at any level of employment.
Q2) 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.
Q3) Real business cycle theorists think that most business cycle fluctuations are caused by shocks to
A) the production function.
B) the size of the labour force.
C) the real quantity of government purchases.
D) the spending and saving decisions of consumers.
Q4) Why doesn't stabilization policy work, according to economists using the misperceptions theory?
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Q5) Why do many economists believe that money affects output? What is the empirical evidence in support of that belief?
Chapter 12: Keynesian Business Cycle Analysis:
Non-Market-Clearing Macroeconomics
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Sample Questions
Q1) A monopolistically competitive firm prices its product using the markup pricing formula P = 1.25MC, where MC is the marginal cost of producing an additional unit. Suppose the demand for the firm's product is given by Q = 2000 - 0.1P, so the revenue from selling Q units of the product is PQ = 2000P - 0.1P<sup>2</sup>.
a. If the marginal cost of producing each unit of the product is $10,000, calculate the price of the product, the quantity produced, and the firm's revenues, costs, and profits. b. Now suppose the marginal cost rises to $11,000. The firm can keep the price of the product unchanged, or it can change the product's price at a total cost of $700,000. Calculate the price, quantity, revenues, costs, and profits as in part (a) both for changing the price and leaving the price unchanged. Should the firm change the price of its product?
Q2) In the Keynesian model in the long run, an increase in the money supply will cause
A) an increase in output and a decrease in the real interest rate.
B) a decrease in the real interest rate but no change in output.
C) an increase in the real interest rate and an increase in output.
D) no change in either the real interest rate or output.
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Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) Suppose most people had anticipated that inflation would increase by 10% in the coming year because the Central Bank would increase the money supply by 10%. Instead, the Central Bank increases the money supply by only 5%. In the short run, this would cause actual output to be ________ full-employment output and prices to increase by ________ 5%.
A) above; more than B) above; less than C) below; more than D) below; less than
Q2) In the extended classical model, an anticipated increase in the money supply would cause output to ________ and the price level to ________ in the short run.
A) increase; increase B) increase; not change
C) not change; increase D) decrease; increase
Q3) What is the Lucas critique, and why was it so important to macroeconomists in the 1970s?
Q4) What are the pros and cons of using cold turkey disinflation compared to a policy of gradualism?
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Chapter 14: Monetary Policy and the Bank of Canada
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Sample Questions
Q1) Suppose the Bank of Canada reduces the Bank rate. This will cause
A) the interest rate to fall, the exchange rate to depreciate, and lending by banks to increase.
B) the interest rate to fall, the exchange rate to appreciate, and lending by banks to increase.
C) the interest rate to rise, the exchange rate to appreciate, and lending by banks to decrease.
D) the interest rate to rise, the exchange rate to depreciate, and lending by banks to decrease.
Q2) Which of the following is not a policy instrument of the Bank?
A) open-market operations
B) overnight rates operating board
C) changes in reserve requirements
D) changes in the government deficit
Q3) When Canadian banks borrow from one another, they must pay the
A) bank rate.
B) prime rate.
C) overnight rate.
D) Interbank Offer Rate.
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Page 16
Chapter 15: Government Spending and Its Financing
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Q1) Assume that the real interest rate is 4%, the expected rate of inflation is 8%, and the nominal interest rate is 12%. The monetary base equals $50 billion. The real seignorage revenue collected by the government would equal
A) $4 billion.
B) $6 billion.
C) $8 billion.
D) $12 billion.
Q2) An increased government deficit created by a lump-sum tax cut will reduce national saving if
A) the value of government bonds outstanding grows faster than the public's wealth. B) it causes consumption to rise.
C) the government runs a primary deficit as a result.
D) the real interest rate is greater than the growth rate of real GNP.
Q3) All of the following are government capital except A) roads.
B) schools.
C) Treasury securities.
D) mass-transit systems.
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