Macroeconomic Theory Final
Exam
Course Introduction
Macroeconomic Theory examines the aggregate behavior of economies, focusing on the determination of national income, output, and employment. The course explores fundamental concepts such as economic growth, inflation, unemployment, monetary and fiscal policy, and international trade and finance. Through the analysis of various macroeconomic models including classical, Keynesian, and modern frameworks students develop a deeper understanding of the factors that shape economic trends and fluctuations. Emphasis is placed on the formulation and evaluation of policies designed to promote economic stability and growth in both domestic and global contexts.
Recommended Textbook
Macroeconomics 6th Canadian Edition by Andrew B. Abel
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15 Chapters
1206 Verified Questions
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Page 2
Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) The two major reasons for the tremendous growth in output in the Canadian economy over the last 125 years are
A) population growth and budget deficit.
B) population growth and increased productivity.
C) low unemployment and budget surplus.
D) low budget deficit and low trade deficits.
Answer: B
Q2) Before World War II the average level of prices in Canada usually
A) fell during wartime and rose during peacetime.
B) fell during wartime and fell during peacetime.
C) rose during wartime and fell during peacetime.
D) rose during wartime and rose during peacetime.
Answer: C
Q3) During recessions, the unemployment rate ________ and output ________.
A) rises; falls
B) rises; rises
C) falls; rises
D) falls; falls
Answer: A
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Page 3
Chapter 2: The Measurement and Structure of the Canadian Economy
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Sample Questions
Q1) If GDP in an economy is greater than its GNP, it means that
A) net factor payment from abroad is positive.
B) net factor payment from abroad is negative.
C) net factor payment from abroad is zero.
D) there is a measurement error.
Answer: B
Q2) The uses-of-saving identity says that an economy's private saving is used for
A) investment, interest expenses, and the government budget deficit.
B) investment, the government budget deficit, and the current account.
C) investment, interest expenses, the government budget deficit, and the current account.
D) investment, interest expenses, the government budget deficit, transfer payments, and the current account.
Answer: B
Q3) Saving is a ________ variable, and wealth is a ________ variable.
A) stock; flow
B) stock; stock
C) flow; flow
D) flow; stock
Answer: D
Page 4
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Chapter 3: Productivity, Output, and Employment
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Sample Questions
Q1) The more permanent an employee perceives an increase in her real wages to be,
A) the larger the income effect is and the more likely it is that the quantity of labour supplied will be increased.
B) the larger the income effect is and the more likely it is that the quantity of labour supplied will be reduced.
C) the larger the substitution effect is and the more likely it is that the quantity of labour supplied will be increased.
D) the larger the substitution effect is and the more likely it is that the quantity of labour supplied will be reduced.
Answer: B
Q2) One's supply of labour depends primarily on
A) one's marginal productivity.
B) the quantity of capital one can work with.
C) the amount of human capital one can supply on the job.
D) the trade-off between labour income and leisure.
Answer: D
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Chapter 4: Consumption, Saving, and Investment
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Sample Questions
Q1) The housing price in Canada nearly doubled in the period 1995-2006. This implies that
A) Canadian homeowners income has increased, leading to more consumption.
B) Canadian homeowners wealth has increased, leading to more consumption.
C) Canadian homeowners wealth has decreased, leading to lower consumption.
D) Canadian homeowners income has decreased, leading to less consumption.
Q2) In 2001 your firm's capital stock equaled $10 million, and in 2002 it equaled $15 million. The average depreciation rate on your capital stock is 20%. Net investment in 2002 equaled
A) $3 million.
B) $4 million.
C) $5 million.
D) $7 million.
Q3) The nominal interest rate on taxable bonds is 8%, while on municipal bonds (which aren't taxable) it is 5%. The expected inflation rate is 3% and the tax rate on interest income is 40%. Calculate the expected after-tax real interest rate on both bonds. Which would be the better investment? Now suppose the actual inflation rate turned out to be 6%. Which bond was the better investment? Would your answer change if inflation had turned out to be 0%?
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Page 6
Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) Suppose a wealthy Saudi Arabian prince donates 2000 camels to the San Diego Zoo. The Canadian trade balance ________ and the current account balance ________.
A) falls; rises
B) rises; rises
C) is unchanged; is unchanged
D) falls; is unchanged
Q2) The term "twin deficits" refers to a situation in which there exists
A) a budget deficit as well as a current account deficit.
B) a budget deficit as well as a capital account deficit.
C) a budget deficit as well as a balance of payment deficit.
D) a current account deficit as well as a capital account deficit.
Q3) An economy in which output exceeds absorption
A) will send goods abroad and have a current account surplus.
B) is a net importer with a current account deficit.
C) is a net borrower in the international market.
D) will have a capital account deficit.
Q4) Briefly discuss the idea of "twin deficit." In your answer, include historical evidence, if any, and explain why some economists do not agree with the idea. Is Ricardian equivalence proposition consistent with the idea of twin deficit? Why?
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Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) a. Draw figures showing the relationship in the Solow model between the capital-labour ratio and (1) output per worker and steady-state investment per worker, (2) consumption per worker, and (3) steady-state investment per worker and saving per worker
b. Show what happens to each of your figures in part (a) when each of the following changes occur, and explain what happens to the capital-labour ratio, output per worker, and consumption per worker.
(1) population growth rises
(2) the depreciation rate falls
(3) the saving rate rises
(4) productivity declines
Q2) How does the possibility of international trade and finance affect the convergence conclusions of the Solow model?
A) Capital should flow from rich to poor countries.
B) Capital should flow from poor to rich countries.
C) Labour should flow from rich to poor countries.
D) Capital will flow to countries with low tariffs.
Q3) Describe the main ideas of the endogenous growth theory. What does it have to say about the role of government in economic growth?
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Page 8
Chapter 7: The Asset Market, Money, and Prices
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Sample Questions
Q1) Suppose you read in the paper that the Central Bank of Canada plans to expand the money supply. The Central Bank is most likely to do this by
A) printing more currency and distributing it.
B) purchasing government bonds from the public.
C) selling government bonds to the public.
D) buying newly issued government bonds directly from the government itself.
Q2) AAA Company stock has a higher expected rate of return than ZZZ Company stock. All else being equal, you would expect that relative to ZZZ, AAA company stock provides A) less risk and less liquidity.
B) less risk and more liquidity.
C) more risk and less liquidity.
D) more risk and more liquidity.
Q3) Which of the following measures is the best measure of money as a medium of exchange?
A) M1
B) M2
C) M3
D) L
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9
Chapter 8: Business Cycles
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Sample Questions
Q1) When aggregate economic activity is declining, the economy is said to be in A) a contraction.
B) an expansion.
C) a trough.
D) a turning point.
Q2) Some economists contend that the economywide average real wage may not be a good indicator of the real wage because
A) when previously unemployed workers enter the work force, the average real wage could decline even if all workers' wages have increased.
B) it fails to reflect productivity changes.
C) it fails to reflect qualitative changes in goods.
D) data used to calculate the average real wage is not collected from all sectors of the economy.
Q3) Wars, new inventions, harvest failures, and changes in government policy are examples of
A) the business cycle.
B) economic models.
C) shocks.
D) opportunity costs.
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Page 10
Chapter 9: The IS-LMAD-AS Model: A General Framework for
Macroeconomic Analysis
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Sample Questions
Q1) An expansionary fiscal policy will lead to
A) an increase in output and an increase in the interest rate.
B) an increase in output and a decrease in the interest rate.
C) a decrease in output and an increase in the interest rate.
D) a decrease in output and a decrease in the interest rate.
Q2) Which of the following would shift the FE line to the right?
A) an adverse supply shock
B) a decrease in labour supply
C) an increase in the capital stock
D) an increase in the future marginal productivity of capital
Q3) People have increased their expectations of inflation from 3% to 5%, directly causing
A) a relative increase in real money demand, shifting the LM curve up.
B) a relative decrease in real money demand, shifting the LM curve down.
C) a relative increase in real money demand, shifting the LM curve down.
D) a relative decrease in real money demand, shifting the LM curve up.
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.
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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 changes would cause Canadian net exports to increase?
A) an increase in the real value of the dollar
B) an increase in Canadian income
C) an increase in foreign income
D) a shift in demand by Canadian consumers away from domestically produced goods
Q2) In the short run in the Keynesian model, an increase in the domestic money supply would cause domestic output to ________ and the domestic real interest rate to
A) rise; rise
B) fall; rise
C) rise; fall
D) fall; fall
Q3) The Canada-US nominal exchange and Canadian-dollar effective exchange rate are expected to move together because
A) most of Canada's trade is with the US.
B) the trade deficit between the US and Canada is not significant.
C) the US dollar and Canadian dollar are closely related to each other.
D) the trade deficits between Canada and its trading partners are not significant.
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Chapter 11: Classical Business Cycle Analysis:
Market-Clearing
Macroeconomics
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Sample Questions
Q1) According to classical economists, the government should increase government purchases when
A) the benefits of the spending exceed the costs.
B) the economy is in a recession.
C) the economy is likely to go into a recession in the next six months to a year.
D) inflation is lower than its targeted level.
Q2) What do RBC economists mean by the term calibration?
A) modifying the structure of an economic theory to strengthen its logic
B) changing a theory as the economy changes
C) working out a detailed numerical example of a more general theory
D) writing out the implication of a theory for all the main economic variables
Q3) Which of the following is not a primary cause of business cycle fluctuations, according to real business cycle theory?
A) a change in the production function
B) a change in the size of the labour force
C) a change in the money supply
D) a change in the real quantity of government purchases
Q4) Why doesn't stabilization policy work, according to economists using the misperceptions theory?
Page 13
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Chapter 12: Keynesian Business Cycle Analysis:
Non-Market-Clearing
Macroeconomics
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Sample Questions
Q1) Suppose the government decided to ease monetary policy, then increase taxes. In the short run in the Keynesian model, the effect of these policies would be to ________ the real interest rate and ________ the level of output.
A) lower; increase
B) lower; decrease
C) lower; have an ambiguous effect on
D) have an ambiguous effect on; increase
Q2) When consumption and investment is reduced because of the higher interest rates induced by the government expansionary fiscal policy, the effect is called
A) the crowding-in effect.
B) the crowding-out effect.
C) the multiplier effect.
D) the budget effect.
Q3) Which of the following is true in the Keynesian model?
A) An easy fiscal policy affects output despite the effect of fiscal policy on the interest rates.
B) An easy monetary policy is associated with an increase in interest rates.
C) An easy fiscal policy is associated with a decrease in interest rates.
D) An easy monetary policy will lead to crowding-out effect.
Page 14
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Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) Which of the following forms of unemployment probably imposes the greatest personal costs?
A) frictional unemployment
B) structural unemployment
C) cyclical unemployment
D) voluntary unemployment
Q2) Hysteresis in unemployment means
A) many people counted as employed are really underemployed.
B) the natural rate of unemployment changes in response to the actual rate of unemployment.
C) there is no natural rate of unemployment; there is a natural rate of inflation instead.
D) the actual unemployment rises when the natural rate of unemployment rises.
Q3) Hyperinflation occurs when the inflation rate
A) rises.
B) declines.
C) is extremely high.
D) is extremely low.
Q4) Describe the major costs of inflation, being sure to distinguish between anticipated and unanticipated inflation.
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Chapter 14: Monetary Policy and the Bank of Canada
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Q1) 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
Q2) The money supply is $12 million, currency held by the public is $2 million, and the reserve-deposit ratio is 0.2.
a. What is the quantity of bank deposits?
b. What is the quantity of bank reserves?
c. What is the quantity of the monetary base?
d. What is the money multiplier (give a number)?
Q3) Which of the following will increase the money supply?
A) open-market purchases
B) higher reserve requirements
C) less discount lending
D) tighter credit controls
Q4) What types of rules for monetary policy may be sensible for policymakers to consider? What is the advantage of using rules over discretion? What problems might there be with rules?
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) Which of the following would not act as an automatic stabilizer?
A) unemployment insurance
B) government purchases
C) personal income taxes
D) corporate income taxes
Q2) The primary deficit is
A) the amount by which government purchases, transfers, and net interest exceed tax revenues.
B) the amount by which government purchases and transfers exceed tax revenues.
C) the deficit plus net interest payments.
D) total tax revenues minus net interest minus government expenditures.
Q3) The real seignorage collected by the government is the product of
A) the rate of inflation and the real supply of government bonds.
B) the rate of inflation and the real money supply.
C) the debt/GDP ratio and the real money supply.
D) the debt/GDP ratio and the rate of inflation.
Q4) What are the main reasons (give at least three) that Ricardian equivalence might not hold?
Q5) Who bears the burden of the government debt? Explain why. Under what circumstances is there no burden to be borne?
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