Introduction to Macroeconomics Test
Bank
Course Introduction
Introduction to Macroeconomics provides students with a foundational understanding of the broad economic factors that influence national and global economies. The course explores topics such as gross domestic product (GDP), inflation, unemployment, fiscal and monetary policy, economic growth, and international trade. Through the use of real-world examples and data analysis, students learn how government policy decisions affect the economy, how economies recover from recessions, and what drives long-term economic prosperity. By the end of the course, students will be equipped with the analytical tools to interpret macroeconomic trends and their implications for society.
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) If the price level is 100 in 2000 and 105 in 2001, the inflation rate is
A) 105%.
B) 100%.
C) 50%.
D) 5%.
Answer: D
Q2) Average labour productivity is
A) the amount of workers per machine.
B) the amount of machines per worker.
C) the ratio of employed to unemployed workers.
D) the amount of output per worker.
Answer: D
Q3) The critical assumptions behind the idea of Adam Smith's invisible hand are
A) wage-price flexibility and individuals pursuing their own self-interests.
B) balanced budget and balance trade.
C) zero unemployment and high economic growth.
D) high economic growth and low inflation.
Answer: A
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Chapter 2: The Measurement and Structure of the Canadian Economy
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Sample Questions
Q1) In using the expenditure approach to GDP, consumption
A) includes consumer durables, semi-durable goods, nondurable goods, and services.
B) includes houses, consumer durables, nondurable goods, and services.
C) includes residential investment, nondurable goods, and services.
D) excludes all purchases by business firms.
Answer: A
Q2) In 2001 national saving in the country of Polity was $85 billion, investment was $112 billion, and private saving was $114 billion. How much was the current account balance?
A) $35 billion
B) $27 billion
C) -$27 billion
D) -$35 billion
Answer: C
Q3) Explain why in agricultural countries the official GDP are often underestimated.
Answer: Since in agricultural countries many people grow their own food, make their own clothes, and provide services for each other within a family or village group, these non-market activities are not counted in the official GDP.
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Chapter 3: Productivity, Output, and Employment
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Sample Questions
Q1) Cyclical unemployment arises when
A) unskilled or low-skilled workers find it difficult to obtain desirable, long-term jobs.
B) labour must be reallocated from industries that are shrinking to areas that are growing.
C) workers must search for suitable jobs and firms must search for suitable workers.
D) output and employment are below full-employment levels.
Answer: D
Q2) What is the participation rate if there are 125 million people in the labour force, 100 million people employed, and 25 million not in the labour force?
A) 83%
B) 80%
C) 75%
D) 67%
Answer: A
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Chapter 4: Consumption, Saving, and Investment
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Sample Questions
Q1) An increase in the expected real interest rate tends to
A) raise desired savings only.
B) raise desired investment only.
C) raise both desired savings and desired investment.
D) raise desired savings, but lower desired investment.
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) The lesson to be learned from the Ricardian equivalence proposition is that
A) only government budget deficits generated by tax changes affect the macroeconomy.
B) government budget deficits do not affect the macroeconomy.
C) it is impossible for the government to actually reduce taxes.
D) the basic measure of the cost of government is the real resources that the government uses.
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Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) When future labour income falls in a large open economy, it causes the current account to ________ and investment to ________.
A) fall; rise
B) rise; remain unchanged
C) fall; remain unchanged
D) rise; rise
Q2) A small open economy increases its investment demand. This causes the world real interest rate to ________ and the country's current account balance to ________.
A) rise; fall
B) remain unchanged; rise
C) rise; rise
D) remain unchanged; fall
Q3) Due to a change in the regulatory structure of a small open economy, the desired capital stock becomes higher for both private investment and government investment. Increased government investment spending is financed by borrowing, not by higher taxes. If both desired investment and government spending rise at the same time, will there be "twin deficits"?
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Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) Suppose the current level of output is 5000, and the elasticity of output with respect to labour is 0.7. A 10% increase in labour would increase the current level of output to
A) 5035.
B) 5070.
C) 5350.
D) 5700.
Q2) In a steady state,
A) both consumption per worker and the capital-labour ratio are constant.
B) consumption per worker is constant, but the capital-labour ratio can change.
C) capital and labour, by definition, are inversely related to one another.
D) consumption per worker can change, but the capital-labour ratio is constant.
Q3) Suppose the rate of economic growth in Mainland was 25 percent, Capital growth 30 percent, and labour growth 20 percent. If the elasticities output with respect to capital and labour are 0.3 and 0.7 respectively, how much is the labour contribution to economic growth?
A) 2 percent
B) 6 percent
C) 9 percent
D) 14 percent
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Page 8
Chapter 7: The Asset Market, Money, and Prices
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Sample Questions
Q1) Which of the following measures is the best measure of money as a medium of exchange?
A) M1
B) M2
C) M3
D) L
Q2) Mr. Pierpont has wealth of $200,000. He wants to keep at least $80,000 in bonds at all times, and will shift $10,000 into bonds from his chequing account for each percentage point that the interest rate on bonds exceeds the interest rate on his chequing account. Currently he keeps $100,000 in bonds, which pay him 7%. What is the current interest rate on chequing accounts?
A) 5%
B) 7%
C) 9%
D) 10%
Q3) Which of the following types of money is more liquid?
A) M1
B) M2+
C) M3
D) Currency
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Chapter 8: Business Cycles
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Sample Questions
Q1) Research on the effects of recessions on the real level of GDP shows that
A) recessions cause only temporary reductions in real GDP, which are offset by growth during the expansion phase.
B) recessions cause large, permanent reductions in the real level of GDP.
C) recessions cause both temporary and permanent declines in real GDP, but most of the decline is temporary.
D) recessions cause both temporary and permanent declines in real GDP, but most of the decline is permanent.
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) A higher level of consumer confidence will lead
A) output to increase and price to decrease in the short run.
B) output to increase and price to increase in the short run.
C) output to increase and price to remain the same in the short run.
D) output to remain the same and price to increase in the short run.
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Chapter 9: The IS-LMAD-AS Model: A General Framework for
Macroeconomic Analysis
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Sample Questions
Q1) Suppose the intersection of the IS and LM curves is to the right of the FE line. What would most likely eliminate a disequilibrium among the asset, labour, and goods markets?
A) a rise in the price level, shifting the LM curve up
B) a fall in the price level, shifting the LM curve down
C) a rise in the price level, shifting the IS curve up
D) a fall in the price level, shifting the IS curve down
Q2) Classical economists believe that in the short run,
A) money neutrality exists and prices adjust rapidly.
B) money neutrality does not exist and prices adjust rapidly.
C) money neutrality exists and prices do not adjust rapidly.
D) money neutrality does not exist and prices do not adjust rapidly.
Q3) The aggregate supply curve shows the relation between
A) the real interest rate and the aggregate amount of output that firms supply.
B) the price level and the aggregate amount of output that firms supply.
C) the supply of goods by firms and the price of goods relative to the price of nonmonetary assets.
D) the inflation rate and the unemployment rate.
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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 statements is true?
A) The open-economy IS curve is derived in the same way that the closed-economy IS curve is derived.
B) The closed-economy IS curve is downward sloping, but the open-economy IS curve is upward sloping.
C) Some factors that shift the IS curve in the closed economy in one direction will shift the IS curve in the open economy in the opposite direction.
D) Factors that raise a country's current net exports, given domestic output and the domestic real interest rate, shift the open-economy IS curve up.
Q2) If the real exchange rate rises 2%, domestic inflation is 3%, and foreign inflation is 4%, what is the percent change in the nominal exchange rate?
A) 5%
B) 3%
C) 1%
D) -1%
Q3) Why are European countries planning to unify their currencies? What are the benefits of doing so? What are the potential costs?
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Page 12
Chapter 11: Classical Business Cycle Analysis:
Market-Clearing Macroeconomics
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Sample Questions
Q1) The theory of rational expectations suggests that
A) people never make forecast errors.
B) people make intelligent use of available information.
C) people make systematic forecast errors.
D) people are slow to incorporate new information into their forecasts.
Q2) Critics of the RBC approach argue that it's hard to find productivity shocks large enough to cause business cycles. What is the RBC counterargument to this criticism?
A) Business cycles are always and everywhere a monetary phenomenon.
B) Wars and military buildups could be considered productivity shocks.
C) Business cycles could be caused by the accumulation of small productivity shocks.
D) Business cycles are often caused by unobservable productivity shocks, which aren't apparent at the time they occur.
Q3) According to the misperceptions theory, when the price level falls below the expected price level,
A) the economy's SRAS curve shifts to the left.
B) the economy moves along its AD curve.
C) the economy moves along its LRAS curve.
D) the economy moves along its SRAS curve.
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Chapter 12: Keynesian Business Cycle Analysis:
Non-Market-Clearing
Macroeconomics
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Sample Questions
Q1) In the long run in the Keynesian model, a beneficial supply shock would leave the economy with a higher level of output, but also a ________ real interest rate and a ________ price level.
A) higher; lower
B) lower; higher
C) lower; lower
D) higher; higher
Q2) Using the Keynesian model, the effect of a government-imposed ceiling on interest rates paid on personal chequing accounts that is lower than the current market interest rate would be to cause ________ in the real interest rate and ________ in output in the short run.
A) a decrease; a decrease
B) a decrease; no change
C) a decrease; an increase
D) an increase; a decrease
Q3) According to Keynesians, the primary source of business cycle fluctuations is
A) aggregate demand shocks.
B) productivity shocks.
C) oil price shocks.
D) consumer confidence shocks.
Page 14
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Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) Shoe leather costs refer to A) the costs of changing prices during inflation.
B) income redistribution cost of inflation.
C) resources used by people to reduce their holdings of currency.
D) resources used by people to reduce their risk.
Q2) When there is a hyperinflation, all of the following occur except A) people spend a lot of time and energy getting rid of currency as fast as possible. B) the government finds it difficult to collect taxes.
C) markets become inefficient because prices are no longer reliable signals.
D) people make fixed rate loans to protect themselves against inflation.
Q3) The origin of the idea of a trade-off between inflation and unemployment was a 1958 article by A) A.W. Phillips.
B) Edmund Phelps.
C) Milton Friedman.
D) Robert Gordon.
Q4) How is the sacrifice ratio measured? How big is the sacrifice ratio in Canada? In other countries? What problems are there in measuring the sacrifice ratio?
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Chapter 14: Monetary Policy and the Bank of Canada
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Sample Questions
Q1) Which of the following variables is likely to serve as an intermediate target for monetary policy?
A) money supply
B) inflation rate
C) open-market operations
D) unemployment rate
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) Why is it important to policymakers that people believe them when they say they are going to reduce inflation? How can they increase their credibility?
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) The political process by which fiscal policy is made
A) is relatively rapid, contributing to the effectiveness of fiscal policy.
B) requires only that the prime minister approve changes to the budget, a decision that takes several months.
C) is efficient in reaching a decision within a year.
D) is slow and results in a long time lag for fiscal policy.
Q2) Which of the following statements about the structural surplus or cyclically adjusted surplus is true?
A) An expansionary fiscal policy lowers the structural surplus.
B) An increase in tax rates raises the structural surplus.
C) A contractionary fiscal policy raises the structural surplus.
D) A and C.
Q3) All else constant, if the interest rate paid on government debt falls short of the GDP growth rate,
A) the debt-GDP ratio will rise from one year to the next.
B) the debt-GDP ratio will fall from one year to the next.
C) the debt-GDP ratio will remain unchanged from one year to the next.
D) the debt will rise more than the GDP growth rate from one year to the next.
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