Macroeconomic Theory Exam Practice Tests
Course Introduction
Macroeconomic Theory explores the fundamental principles and models that explain the behavior of the economy as a whole. The course covers topics such as national income determination, economic growth, unemployment, inflation, monetary and fiscal policy, and the dynamics of business cycles. Emphasizing both classical and modern approaches, students will learn how aggregate demand and supply interact to shape economic outcomes, evaluate policy interventions, and use analytical tools to understand current economic issues. Through theoretical models and real-world case studies, this course provides a rigorous foundation for further study and analysis of macroeconomic phenomena.
Recommended Textbook
Macroeconomics 14th Canadian Edition by Campbell R. McConnell
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661 Verified Questions
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Chapter 1: Limits, Alternatives, and Choices
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Sample Questions
Q1) What are the key economic concepts that pertain to the individual?
Answer: The four key economic concepts that pertain to the individual are:(1)when individuals face scarce resources relative to their wants,they must incur tradeoffs; (2)the cost of a choice is what someone gives up for it or the opportunity cost; (3)decisions are usually made at the margin where a little more or a little less of something is chosen;and (4)choices are influenced by incentives.
Q2) The distinguished economist Kenneth Boulding stated: "Theories without facts may be barren,but facts without theories are meaningless".Explain what he meant. Answer: Economic theories are generalizations about the economic behaviour of individuals and institutions.As generalizations or principles,they are abstractions and may not offer specific information about a particular issue that can be obtained from facts.Economic theories are barren in the sense that they offer a framework for thinking about the economic issue without a lot of the details about it.Having a lot of facts about an economic issue,however,is not very meaningful.Facts need to be arranged and organized if they are to have meaning and give insight into the issue.Economic theory offers that framework for organizing the factual information.
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Chapter 2: The Market System and the Circular Flow
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Sample Questions
Q1) Explain the two different motives that firms have for choosing the lowest-cost production methods to produce goods and services?
The first motive is that because inefficiency drives up costs and lowers profits,any firm wishing to will make great efforts to minimize production costs.These efforts will include using the right mix of labour and capital,given the prices and productivity of those resources.They also mean locating production facilities optimally to minimize production and transportation expenses.
The second motive is due to competition,consumers strongly prefer low prices and will shift their purchases over to the firms that can produce a quality product at the lowest possible price.Any firm foolish enough to use higher-cost production methods will go bankrupt as it is undersold by its more efficient competitors who can still make a profit when selling at a lower price.In other words,competition eliminates high-cost producers,and so firms are motivated to choose the lowest-cost production methods to produce goods and services. Answer: maximize its profits
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Chapter 3: Demand, Supply, and Market Equilibrium
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Sample Questions
Q1) Define "demand."
Answer: Demand is a schedule or curve that shows the various amounts of a product buyers are willing and able to purchase at each price in a series of possible prices during a specified period of time.Demand portrays alternative price/quantity possibilities which can be set down in a table.The key point to be recognized is that demand is more than a statement of quantity purchased at a certain price;it is a schedule of quantities which will be demanded at various prices,other things being equal,for a specified period of time.
Q2) Give two explanations for the law of demand.
Answer: First,there is diminishing marginal utility:a decrease in satisfaction that results with an increase in the amounts of a good or service.The second unit of a good yields less satisfaction (or utility)than the first.Second,there are income and substitution effects.With an income effect,a lower price increases the purchasing power of money income,enabling you to buy more at lower price.With a substitution effect,a lower price for good X gives an incentive to substitute away from the now relatively high-priced good Y and replace it with the low-priced good X.
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Chapter 4: Market Failures: Public Goods and Externalities
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Sample Questions
Q1) Draw a market demand curve and indicate the following:
(a)The market price;
(b)The quantity demanded;
(c)The maximum amount that buyers are willing to pay for the quantity demanded; (d)The actual amount that buyers must pay for the quantity demanded; (e)The consumer surplus from obtaining the quantity demanded.
Q2) How do direct controls and specific taxes affect negative externalities? Briefly explain in terms of supply and demand.
Q3) Supply in a market is represented by the equation,P = 20 + .1Q<sub>S</sub>.Suppose the market price is $30.
(a)How many units do sellers wish to provide in this market?
(b)What is the minimum amount that sellers are willing to accept for this quantity of output?
(c)What is the actual amount that sellers receive for providing for this quantity of output?
(d)What is the producer surplus that sellers obtain for providing this quantity of output?
Q4) How does the market demand curve for a public good differ from the market demand curve for a private good?
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Page 6
Chapter 6: An Introduction to Macroeconomics
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Sample Questions
Q1) Why do economists measure growth in an economy using real GDP rather than nominal GDP?
Q2) Suppose that we are in a condition of "stuck" prices so that the price of wooden chairs will not go above or below $125/unit.Further suppose that chair factories have been built on a business plan designed to deliver 200/month.How many chairs will be sold in a market in which demand (which includes a modest amount of inventory)is characterized by: (a)P = 425 - 1.5Q, (b)P = 530 - 1.5Q,and (c)P = 400 - 0.5Q,where P is in $/chair and Q is in chairs/month? In each case,what happens to planned inventory.
Q3) In order to compare GDP across nations,economists typically make 3 adjustments.What are these adjustments and why are they carried out?
Q4) If households are typically the source of savings and businesses the source of investments,how then are savings and investments coordinated?
Q5) If prices are "stuck" and there is an unexpected demand increase,describe what happens in the economy.
Q6) If prices are "stuck" and there is an unexpected demand decrease,describe what happens in the economy.
Q7) What roles do expectations play in macroeconomics?
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Chapter 7: Measuring the Economys Output
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Sample Questions
Q1) What are the components of net domestic income at factor cost? What is the relative share of GDP in 2011 going to: Wages,salaries and supplementary labour income;and to Profits of corporations and government enterprises before taxes?
Q2) What are the two basic ways of deriving real GDP from nominal GDP?
Q3) The expanding "underground" economy creates problems for economic policy makers.Explain.
Q4) Define GDP and its characteristics.
Q5) What is the relationship between real GDP,nominal GDP,and the price index?
Q6) Explain what is and what is not included in government purchases in GDP.
Q7) When would a fixed based price index cause GDP growth to be overstated?
Q8) Why is GDP a monetary measure?
Q9) If Canada doubled its real GDP,it would be a much less liveable society than it is today.Explain this view.
Q10) Discuss the pros and cons of GDP as a measure of the economy's output performance and as a measure of its standard of living.
Q11) Give the three categories,which comprise gross investment;and explain the difference between them.
Q12) Of what use is national income accounting to economists and to policy makers? Page 8
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Chapter 8: Economic Growth
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Sample Questions
Q1) What is meant by economies of scale and what is the importance of this concept to economic growth?
Q2) Suppose an economy's real GDP is $50,000 in year 1 and $55,000 in year 2.What is the growth rate of its GDP? Assume that population was 100 in year 1 and 105 in year 2.What is the growth rate in real GDP per capita?
Q3) Does the recent increase in the average rate of Productivity Growth mean that the downward trends of the rate of economic growth will not occur in the future?
Q4) If an economy has 9,000 workers with each working 2,000 hours per year and the average real output per worker-hour is $20,what is real GDP?
Q5) What is the efficiency factor?
Q6) Define modern economic growth.When did it seem to start?
Q7) What are some of the positive changes associated with modern economic growth?
Q8) How might poorer nations catch up to richer countries in terms of GDP per capita?
Q9) Offer a defense of economic growth.
Q10) List some of the institutional structures that economic historians believe promote and sustain modern economic growth.
Page 10
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Chapter 9: Business Cycles, Unemployment, and Inflation
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Sample Questions
Q1) The table below shows the price index in the economy at the end of four different years.
Q2) How does inflation affect the economy's real level of output and why does output change in this way?
Q3) What is hyperinflation and what are its effects?
Q4) What is Okun's law? Give an example of how it works.
Q5) According to most economists,what is the immediate cause of the business cycle? Give an example of how this causes expansion and contraction in the business cycle.
Q6) Describe cost-push inflation and its major source.
Q7) "Inflation is a harsh and arbitrary form of taxation." Do you agree? If so,who pays this tax?
Q8) In the table below are statistics showing the labour force and total employment during year 1 and year 5.Make the computations necessary to complete the table.
Q9) "The economic cost of unemployment is measured by the GDP gap." Explain this statement.
Q10) Define the "full-employment" or "natural" rate of unemployment and give its approximate percentage rate as economists currently define it.
Page 11
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Chapter 10: Basic Macroeconomic Relationships
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Sample Questions
Q1) Differentiate between the average propensity to consume and the marginal propensity to consume.
Q2) Complete the following table assuming that (a)MPS = 1/3, (b)there is no government and all saving is personal saving.
Q3) Explain the economic impact of an increase in the multiplier.
Q4) Complete the following table assuming that (a)MPS = 1/5, (b)there is no government and all saving is personal saving.
Q5) Describe the relationship between the Great Recession of 2008-2009 and the Investment Riddle.
Q6) What is the effect of increase in wealth on the consumption and saving schedules?
Q7) State four factors that explain why investment spending tends to be unstable.
Q8) Define the consumption and saving schedules.
Q9) List six events that could cause a shift in the investment demand curve to the right.
Q10) Explain the difference between a movement along the consumption schedule and a shift in the consumption schedule.
Q11) Complete the accompanying table.
Q12) Complete the accompanying table.
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Chapter 11: The Aggregate Expenditures Model
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Sample Questions
Q1) Explain the difference between an equilibrium level of GDP and a level of GDP that is in disequilibrium.
Q2) Refer to the following table to answer the questions.
Q3) What is the difference between the investment-demand curve and the investment schedule for the economy?
Q4) How does the fact that imports vary directly with GDP affect the stability of the domestic economy?
Q5) Define the equilibrium level of output.
Q6) Assume that investment,net exports,government expenditures,and taxes do not change with changes in real GDP and the MPC is .75.
(a)Suppose government spending increases by $20 billion.What is the impact on real GDP?
(b)Suppose that instead lump-sum taxes increase by $20 billion.What is the impact on real GDP?
(c)How would the results in (a)and (b)be different if imports and taxes increase as real GDP increases?
Q7) Whenever there is a shift in the investment schedule and/or the consumption-saving schedules,there will be a new equilibrium level of GDP.Explain why this is so.
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Chapter 12: Aggregate Demand and Aggregate Supply
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Sample Questions
Q1) Some economists argue that it is easier to resolve demand-pull inflation than cost-push inflation.Use the aggregate demand-aggregate supply (short-run)model to explain this assertion.
Q2) Using the aggregate demand-aggregate supply (short-run)model,explain how a reduction in business taxes would affect the economy.
Q3) What is the difference in the explanation of the shape of the aggregate demand curve and a single product demand curve? After all,both demand curves show an inverse relationship between price and quantity.
Q4) How can the aggregate demand curve be derived from the aggregate expenditures model?
Q5) Suppose that a hypothetical economy has the following relationship between its real domestic output and the input quantities necessary for producing that level of output.
Q6) Using the aggregate demand-aggregate supply (short-run)model,explain the impact of the public's expectations of severe inflation on real GDP and the price level.
Q7) What is the effect on the multiplier when an increase in aggregate demand also causes the price level to rise?
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Chapter 13: Fiscal Policy, Deficits, Surpluses, and Debt
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Sample Questions
Q1) Why do some economists,who favour government intervention to address high unemployment or demand-pull inflation,nonetheless reject the use of fiscal policy?
Q2) Complete the table below by stating whether the direction of discretionary fiscal policy was contractionary (C),expansionary (E),or neither (N),given the hypothetical budget data for an economy.
Q3) Give two examples of expansionary fiscal policy.What will be the effect on government surplus/deficit?
Q4) How does the public debt contribute to income inequality?
Q5) What fiscal policy is most likely to be invoked during a period of rapid inflation? A period of severe unemployment? What political,investment,and international problems might the government encounter in enacting these policies and putting them into effect?
Q6) Identify five problems or complications that arise in the implementation of fiscal policy.
Q7) "The more progressive a tax system,the greater is the economy's built-in stability." Explain this statement for both recessionary and peak phases of the business cycle.
Q8) How can the effect of an expansionary fiscal policy be weakened?
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Chapter 14: Money, Banking, and Money Creation
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Sample Questions
Q1) The following is the consolidated balance sheet for the chartered banking system.Assume the desired reserve ratio is 10%.Show the new consolidated balance sheet after maximum loan contraction has occurred.
Q2) What happens to the money supply when a bank accepts deposits of currency from the public and places it in demand deposits?
Q3) Give an equation that shows the relationship between actual,desired,and excess reserves.
Q4) Provide three key reasons why money has value.
Q5) How does the problem of Moral Hazard relate to financial investments?
Q6) Banks pursue two conflicting goals.Explain what they are and why the conflict.
Q7) What is a chartered bank (in Canada)?
Q8) How does deterioration in the quality of borrowers affect multiple-deposit expansion?
Q9) Why is the intrinsic value of token money less than its face value?
Q10) Are credit cards money? Explain.
Q11) Describe the basic features of a chartered bank's balance sheet.
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Q12) Suppose depositors at chartered banks transfer $10 billion from their savings deposits to their deposits in non-bank institutions.What impact does this have on M1,M2,and M2+?
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Chapter 15: Interest Rates and Monetary Policy
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Q1) Following are the consolidated balance sheets of the chartered banks.Assume that the desired reserve ratio for banks is 10%.The figures in column 1 show the balance sheets' condition prior to each of the following five transactions.Place the new balance-sheet figures in the appropriate columns and complete A,B,C,D,and E for each column.Start each part (2-4)with the figures in column 1.All figures are in billions of dollars.
Q2) What are the five functions of the Bank of Canada? Which one is most important?
Q3) What are the two strengths that monetary policy has over fiscal policy?
Q4) What is the net export effect of a tight monetary policy? Explain.
Q5) Both the Bank of Canada and chartered banks buy and sell government securities,but for substantially different reasons.Explain.
Q6) The Bank of Canada is the bankers' bank.Explain.
Q7) How does an increase in the price level affect the equilibrium rate of interest?
Q8) What are the two instruments the Bank of Canada has for influencing the money supply? Which instrument is more important?
Q9) Use the graph below to answer the following questions.D<sub>t</sub> is the transactions demand for money,D<sub>m</sub> is the total demand for money,and S<sub>m</sub> is the supply of money.
Page 18
Q10) Trace the cause-effect chain that results from a tight money policy.
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Chapter 16: Long-Run Macroeconomic Adjustments
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Q1) If the long-run supply curve is fixed in place,can there be persistent inflation?
Q2) What are three severe criticisms of the Laffer Curve?
Q3) Answer the questions based on the following diagram.
Q4) Explain the Phillips Curve concept and construct an example of the curve on the below graph.
Q5) Describe the characteristics of the short-run aggregate supply curve.Explain what happens to: (1)nominal wages; (2)real wages profits as the price level increases from the full-employment level of output.Then explain what happens to these variables as the price level decreases from the full-employment-level of output.
Q6) What contributed to stagflation's demise between 1982 and 1989? How did these events affect aggregate supply and the Phillips Curve?
Q7) Differentiate between "demand-pull" and "cost-push" inflation using the aggregate demand-aggregate supply model.
Q8) Use the following diagram to answer the next three questions.
Q9) Why is the difference between the actual and expected rates of inflation important for explaining falling inflation?
Q10) What is the long-run equilibrium in the aggregate demand-aggregate supply model?
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Chapter 17: International Trade
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Sample Questions
Q1) How does relaxing the assumption of constant costs affect the comparative advantage argument for trade?
Q2) What are the economic benefits of free trade?
Q3) Who gains and who loses from a protective tariff? Explain.
Q4) Evaluate this argument for a trade barrier: "Canada needs protection from cheap foreign labour."
Q5) What are the net costs of tariffs and quotas on consumption and income distribution?
Q6) In 2010,what were the top five exporting nations (measured in dollars)?
Q7) What is the problem with protecting industries in Canada from the dumping of foreign products on the domestic market?
Q8) Evaluate the validity of the argument that a new industry in a nation needs protection from foreign competition if it is to prosper.
Q9) Cite three important reasons why nations trade.
Q10) Evaluate the statement: "Tariffs and quotas are needed to protect Canadian products from dumping."
Page 20
Q11) How do protectionist policies affect consumers,workers,producers,and the government? Explain.
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Chapter 18: Exchange Rates and the Balance of Payments
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Q1) How does a fixed exchange rate system work? How can a nation maintain its fixed exchange rate?
Q2) What happens in the foreign exchange market when there is a Canadian import transaction?
Q3) What is the "managed float"?
Q4) Answer the next five questions on the basis of the following hypothetical data for a hypothetical nation Economia.All numbers are in billions of dollars.Assume that there is no Statistical Discrepancy.
Q5) The table below contains hypothetical international balance of payments data for Canada.All figures are in billions.Assume that there is no Statistical Discrepancy.Compute with the appropriate sign (+ or -)and enter in the table the eight missing items.What is the condition of the balance of payments in Canada?
Q6) What happens in the foreign exchange market when there is a Canadian export transaction?
Q7) Explain how the dollar price of an imported good may change even though the foreign production cost of that product remains unchanged.
Q8) What is the difference between a fixed exchange rate system and a flexible (floating)exchange rate system?
Page 21
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