Macroeconomic Theory Exam
Solutions
Course Introduction
Macroeconomic Theory provides an in-depth examination of the fundamental concepts, models, and issues that shape aggregate economic activity. The course explores topics such as national income determination, unemployment, inflation, economic growth, monetary and fiscal policies, and the role of government in influencing economic performance. Through theoretical frameworks and empirical analysis, students will learn how economies function at the broadest level and develop skills to critically evaluate current macroeconomic debates and policy decisions both domestically and globally.
Recommended Textbook
Economics Today The Macro View 5th Canadian Edition by Roger LeRoy Miller
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Chapter 1: The Nature of Economics
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Sample Questions
Q1) The opportunity cost of attending college can best be described as
A)the value of the best alternative use of the student's time.
B)the money that must be paid in order to attend college.
C)the value of the lowest-ranked alternative use of the student's time.
D)the value that the student attaches to not working.
Answer: A
Q2) Microeconomics is the part of economic analysis that studies ________.
Answer: the decision making of individuals,households and firms.
Q3) When an economist analyzes the effect of some change under the condition that all other influences remain the same
A)the results are meaningless because other things never remain the same.
B)the results are valuable because other things will not change.
C)the purpose is to find out what would happen if other influences did not change.
D)the economist expects other things to remain the same in the real word.
Answer: C
Q4) People behave rationally when they ________.
Answer: make decisions they believe will make themselves better off.
Q5) The usefulness of a model is determined by ________.
Answer: whether it yields usable predictions about the real world.
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Chapter 2: Production Possibilities and Economic Systems
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Sample Questions
Q1) Explain the meaning and importance of the law of increasing relative cost for a country's choice of what goods to produce.
Answer: The law of increasing relative cost says that,because resources are not perfectly substitutable,as more and more resources are devoted to the production of any one good,the opportunity cost of additional units (the amount of other goods that must be sacrificed to produce them)becomes higher and higher.As a result,the PPC is bowed outward.That does not men that the best result will be "in the middle" of the PPC but it does mean that the opportunity cost must be matched up with trade-offs people are willing to make in order to achieve the best use of scarce resources.
Q2) In Table 2-1,the opportunity cost of each additional computer in terms of televisions given up
A)falls as more computers are produced.
B)increases as more computers are produced.
C)is meaningless because the cost of computers cannot be expressed in terms of televisions.
D)remains constant.
Answer: B
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Page 4
Chapter 3: Demand and Supply
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Sample Questions
Q1) Which of the following is a determinant of supply?
A)tastes and preferences
B)technology
C)number of consumers
D)consumer incomes
Answer: B
Q2) The price of a new car is $20 000 while the price of a five-year old car of the same brand is $8 000.The next year the price of the new car increases to $22 000 and the price of a five-year old car of the same brand is $8 800.The relative price of the used car
A)increased by $800.
B)decreased by 10 percent.
C)increased by 10 percent.
D)remained constant at 0.4.
Answer: D
Q3) In economic terminology,an inferior good is a good or service for which ________. Answer: demand increases as income decreases.
Q4) In Table 3-3 if the price is $2 there will be a shortage of ________ units. Answer: 50
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Page 5
Chapter 4: Introduction to Macroeconomics
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Sample Questions
Q1) Prices have been rising 8 percent a year for ten years.The nominal interest rate is 12 percent.The real rate of interest is
A)20 percent.
B)12 percent.
C)8 percent.
D)4 percent.
Q2) A decrease in the labour force participation rate
A)implies that the unemployment rate must fall.
B)implies that the unemployment rate must rise.
C)means there are more discouraged workers.
D)is consistent with either a rise or a fall in the unemployment rate.
Q3) In Canada,the labour-force participation rate since 1950 has been
A)increasing for females.
B)declining for females.
C)declining for both males and females.
D)unchanged for both males and females.
Q4) Describe the pattern of business cycles.Explain fully and comment on the position of the Canadian economy at the present time.
Q5) What is a price index? How do the CPI,the PPI and the GDP deflator differ?
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Chapter 5: Measuring the Economys Performance
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Sample Questions
Q1) Which of the following is included in GDP?
A)the buying and selling of securities
B)government transfer payments
C)private transfer payments
D)none of the above
Q2) The difference between net domestic product and national income is that
A)net domestic product includes depreciation.
B)national income includes government and business transfer payments.
C)net domestic product includes indirect business taxes.
D)net domestic product doesn't include social security taxes or corporate retained earnings.
Q3) Economists consider profit to be
A)a cost of producing goods and services.
B)the same as a salary.
C)a reward for incurring losses.
D)something that should be eliminated by anticompetition laws.
Q4) Suppose the size of the underground economy is roughly 20% of GDP in Canada.Does this necessarily mean that the government is missing out on collected tax revenues?
Q5) Explain the two main methods used to measure GDP.
Page 7
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Chapter 6: Modelling Real Gdp and the Price Level in the Long Run
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Sample Questions
Q1) The aggregate demand curve
A)is like individual demand curves in that prices of other goods are held constant.
B)is like individual demand curves in that income is constant.
C)differs from individual demand curves in that the aggregate demand curve is not downward sloping.
D)differs from individual demand curves in that the aggregate demand curve looks at the entire circular flow of income and product while the individual demand curve looks at only one good.
Q2) Describe what happens in the economy when there is an increase in the level of the factors of production (the endowment)in the short run and long run.
Q3) When a change in the price level causes a change in the purchasing power of currency,which then changes the desired rate of consumption at all income levels,it is called
A)the real-balance effect.
B)the substitution effect.
C)the open-economy effect.
D)the interest rate effect.
Q4) What is the real-balance effect of an increase in the price level?
Page 8
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Chapter 7: Economic Growth and Development
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Sample Questions
Q1) What is labour productivity,and why is it important to economic growth?
Q2) By dividing the value of total domestic output (GDP)by the number of workers,economists derive
A)the net domestic product.
B)labour productivity.
C)the size of the labour force.
D)the rate of capital accumulation.
Q3) New growth theory argues that
A)growth is due to the proper government policies concerning interest rates.
B)growth relies on maintaining lower growth rates of population,especially in less developed countries.
C)technology cannot be looked at as an outside factor without an explanation of what drives it.
D)technology is the key factor that explains growth but technology is beyond economic explanation itself.
Q4) In Canada,a patent lasts
A)7 years.
B)14 years.
C)20 years.
D)24 years.
Page 9
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Chapter 8: Modelling Real Gdp and the Price Level in the
Short Run
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Sample Questions
Q1) The long-run aggregate supply curve will shift to the left when A)population decreases.
B)the price level increases.
C)technology improves.
D)new sources of oil are discovered.
Q2) OPEC's oil embargo of Canada in the 1970s was an example of
A)a demand shock that increased price levels.
B)a demand shock that decreased price levels.
C)a supply shock that increased price levels.
D)a supply shock that decreased price levels.
Q3) With respect to slope,the short-run aggregate supply function is normally A)vertical.
B)positively sloped.
C)negatively sloped.
D)horizontal.
Q4) Explain the problem of "sticky wages" and the implications for the long-run equilibrium.Can something be done to eliminate this problem?
Q5) Suppose real GDP is equal to potential GDP.Explain what happens if the aggregate demand curve shifts either rightward or leftward.
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Chapter 9: Consumption, investment, and the Multiplier
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Sample Questions
Q1) Saving equals
A)disposable income minus taxes.
B)disposable income minus consumption spending.
C)disposable income minus savings.
D)consumption spending minus savings.
Q2) The MPC can best be defined as
A)that fraction of real disposable income that is consumed.
B)that fraction of real disposable income that is not consumed.
C)that fraction of a change in real disposable income that is spent.
D)that fraction of a change in real disposable income that is saved.
Q3) Other things constant,if the MPS is 0.1,and private investment spending falls by $100 million,then national income
A)decreases by $10 million.
B)increases by $90 million.
C)decreases by $1 billion.
D)increases by $1 billion.
Q4) Suppose the marginal propensity to consume is 0.75.What does this mean? What do we know about the marginal propensity to save? What do we know about the average propensity to consume?
Q5) What are the simplifying assumptions that are made in the Keynesian Model?
Page 11
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Chapter 10: The Public Sector
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Sample Questions
Q1) Which of the following does NOT involve transfers in kind?
A)salaries of government employees
B)public education
C)Canadian health care
D)public housing
Q2) The distribution of tax burdens among various groups in society is known as
A)tax incidence.
B)tax avoidance.
C)capital gains.
D)double taxation.
Q3) The marginal tax rate applies to
A)the income received by people above the national average.
B)all income earned by a family.
C)the income in the highest tax bracket reached.
D)the income of the richest Canadians.
Q4) The distinguishing characteristic of private goods is that
A)they can be sold but not rented.
B)their use is exclusive to the people who purchase them.
C)they can be sold or rented,but not borrowed.
D)the principle of rival consumption does not apply to them.
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Chapter 11: Fiscal Policy and the Public Debt
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Sample Questions
Q1) When the economy is operating on the LRAS curve,then expansionary fiscal policy will A)generate higher prices in the short run,but will induce aggregate supply to increase in the long run.
B)generate an increase in real national income and higher prices in both the short run and the long run.
C)generate an increase in real national income without higher prices in the short run,but then real national income will return to its long-run level and the price level will increase.
D)generate an increase in real national income and higher prices in the short run,but then real national income will decrease to its long-run level and the price level will increase some more.
Q2) Suppose the government believes the economy is operating beyond the full-employment real GDP.What kind of fiscal policy would it pursue? Would it matter if the belief was correct or not? How?
Q3) Suppose the government pursues expansionary fiscal policy by lowering tax rates.What are the expected demand-side effects? What are the possible offsets to the demand-side effect? How might supply-side effects change these results?
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Chapter 12: Money and the Banking System
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Sample Questions
Q1) Given the list of assets below,which is the most liquid?
A)$500 worth of General Motors common stock
B)$500 worth of General Motors bonds
C)a $500 traveler's cheque
D)a one-ounce gold coin
Q2) Suppose a new customer opens a checking account and a savings account in a commercial bank,placing $100,000 in each.Later,the bank loans the customer $100,000.For this bank,
A)assets increased by $200,000 and liabilities increased by $100,000.
B)assets increased by $100,000 because the loan is an asset and liabilities increased by $100,000 because the checking deposit is a liability.The savings deposit is neither an asset nor a liability.
C)liabilities increased by $200,000 since the checking account and the savings account are liabilities while it generated no new assets.
D)assets increased by $100,000 because the loan is an asset and liabilities increased by $200,000 because both the checking deposit and the savings deposit are liabilities to the bank.
Q3) What are the functions of money?
Q4) Explain the structure of the Canadian Banking system.
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Chapter 13: Money Creation and Deposit Insurance
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Sample Questions
Q1) Desired reserves consist of
A)deposits in the Bank of Canada plus vault currency cash.
B)deposits in the Bank of Canada only.
C)vault cash only.
D)savings and chequing accounts only.
Q2) If banks have zero excess reserves,then the net effect of any check writing and depositing on the money supply is
A)positive since the required reserve ratio is less than one.
B)positive as long as no one takes cash out of the system.
C)zero,since the gain in excess reserves at one bank are exactly offset by a reduction in excess reserves at another bank.
D)negative since one bank loses more in total reserves than the other bank gets in excess reserves.
Q3) Using T-accounts,create an example of your own to show how banks create deposits and thus increase the money supply.
Q4) What forces can make the money multiplier smaller than the reciprocal of the required reserve ratio?
Q5) Comment on deposit insurance and flawed bank regulation.
Q6) Explain the process by which the banking system creates money
Page 15
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Chapter 14: The Bank of Canada and Monetary Policy
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Sample Questions
Q1) One of the economic costs of holding currency is that
A)it is cumbersome to carry.
B)it requires constant attention.
C)it earns no interest income.
D)its real value always increases.
Q2) With respect to the nation's money supply,the Bank of Canada
A)has no ability to influence its magnitude or its rate of growth.
B)precisely sets the amount of money in circulation in consultation with Parliament.
C)can influence its future growth.
D)has disavowed any intention to influence the money supply.
Q3) The income velocity of money is
A)the time it takes to produce money.
B)the time lag from when the Bank of Canada decides to increase the money supply until the effect takes place.
C)the number of times per year a dollar is spent on final goods and services.
D)the time it takes for monetary policy to have an effect on world financial markets.
Q4) What are three reasons people want to hold money balances?
Q5) Discuss the Bank of canada and its organizational structure.
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Chapter 15: Issues in Stabilization Policy
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Q1) Economist A.W.Phillips,looking at British data,concluded that A)there is no trade-off between inflation and unemployment.
B)high inflation rates were associated with low unemployment rates,and vice-versa.
C)unemployment could be effectively combated by raising wages.
D)higher rates of inflation are associated with higher rates of unemployment.
Q2) When the Phillips curve was first used in economics,many economists believed that A)the government could fine-tune the economy and generate both the natural rate of unemployment and zero inflation.
B)the government could fine-tune the economy and pick the most preferred combination of unemployment and inflation.
C)low unemployment could be obtained only by generating rapidly increasing inflation.
D)there was no relationship between inflation and unemployment,at least in the long run.
Q3) What are the criticisms of supply-side economics?
Q4) What is the main tenet(s)of the Real Business Cycle Theory?
Q5) Explain the rational expectations hypothesis.
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Chapter 16: Comparative Advantage and the Open Economy
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Sample Questions
Q1) For the infant-industry argument for tariffs to be appropriate,it is necessary that A)the industry be deemed essential by the government.
B)the government can identify which industries will eventually be able to compete with more established foreign producers.
C)only industries that currently are operating efficiently will be protected.
D)the country has access to the most modern production techniques.
Q2) One economic truism is that any nation's restriction of imports ultimately leads to A)a increase in exports.
B)a reduction in exports.
C)an economic upswing.
D)an increase in GDP.
Q3) The infant industry argument suggests that
A)a country needs tariff protection since it has no comparative advantage in the production of any good.
B)a country needs protection against unfair trade practices.
C)an industry may need temporary tariff protection until the industry matures.
D)the industry has no potential and must be protected to survive.
Q4) What are the effects of a tariff on a good?
Page 18
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Chapter 17: Exchange Rates and the Balance of Payments
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Sample Questions
Q1) Special drawing rights (SDRs)are
A)a reserve asset created by the International Monetary Fund that countries can use to settle international payments.
B)a liability payment from a branch bank to a nation's central bank.
C)a country's surpluses in their fiscal budgets.
D)exchanges of gold between nations.
Q2) The value of goods and services bought and sold in the world market is often referred to as .
A)the terms of trade.
B)the asset balance sheet.
C)the balance of trade.
D)the official balance
Q3) An increase in a country's rate of inflation is apt to
A)reduce its imports and improve its trade balance.
B)lower its nominal rate of interest and encourage an inflow of capital.
C)worsen its balance of trade and payments.
D)decrease demand for the country's currency.
Q4) Explain the difference between a flexible exchange rate system,a fixed exchange rate system,a dirty float,and the use of target zones.
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