Macroeconomic Theory Review
Questions
Course Introduction
Macroeconomic Theory explores the fundamental principles and models that govern the behavior of economies as a whole. The course covers topics such as national income determination, economic growth, unemployment, inflation, fiscal and monetary policy, and the dynamics of aggregate demand and supply. Students will develop analytical skills to interpret macroeconomic data, understand policy debates, and assess the effectiveness of government interventions in promoting economic stability and growth. Theoretical frameworks such as the IS-LM model, the Phillips curve, and the Solow growth model are examined in depth, providing students with the tools needed to navigate complex real-world economic scenarios.
Recommended Textbook
Macroeconomics 6th Canadian Edition by Andrew B. Abel
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15 Chapters
1206 Verified Questions
1206 Flashcards
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Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) Why were the Canadian government budget deficits of the 1980s and 1990s so unusual from a historical point of view?
A) It was the first time the Canadian government had ever run deficits.
B) In the past, deficits were usually that large only in wartime.
C) It was the first time that deficits were accompanied by very high rates of inflation.
D) It was the first time that deficits diverted funds from other productive uses, such as investment in modern equipment.
Answer: B
Q2) A country has a trade deficit when
A) imports exceed exports.
B) imports equal exports.
C) exports exceed imports.
D) exports are zero.
Answer: A
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Chapter 2: The Measurement and Structure of the Canadian Economy
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Sample Questions
Q1) What is the difference between nominal and real economic variables? Why do economists tend to concentrate on changes in real magnitudes?
Answer: Nominal variables are in units of money, while real variables are in physical quantities of output. We measure nominal variables using current market prices and real variables using market prices in a given base year. Nominal variables may increase, but you don't know if the increase is due to higher prices and the same quantity, or a higher quantity with unchanged prices; real variables reflect just quantity changes. For the most part, real variables (consumption, investment, the capital stock) affect each other in the economy, with lesser roles played by nominal variables (money supply, price level).
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
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Page 4
Chapter 3: Productivity, Output, and Employment
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Sample Questions
Q1) The marginal product of labour
A) is measured by the slope of the production function relating capital to employment.
B) is larger when the labour supply is relatively larger.
C) is smaller when the labour supply is relatively smaller.
D) decreases as the number of workers already employed increases.
Answer: D
Q2) An individual's labour supply curve slopes upward because
A) an increase in the future real wage leads to an increase in the amount of labour supplied.
B) an increase in the current real wage leads to a decrease in the amount of labour supplied.
C) an increase in the future real wage leads to a decrease in the amount of labour supplied.
D) an increase in the current real wage leads to an increase in the amount of labour supplied.
Answer: D
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Chapter 4: Consumption, Saving, and Investment
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Sample Questions
Q1) 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.
Q2) According to Tobin's q,
A) when the stock market is high, firms do not change their investment.
B) when the stock market is low, firms increase their investment.
C) when the stock market is high, firms increase their investment.
D) firms' decisions on investment do not depend on the stock market.
Q3) If the aggregate consumption function is C = 20 + 0.75 Y, the aggregate saving function will be
A) S = 20 -0.75Y
B) S = 20 +0.75 Y
C) S = -20 + 0.75 Y
D) S = -20 +0.25 Y
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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) If a Canadian company imports 10 Toyotas from Japan at $15,000 each, and the Japanese company buys airline tickets on a Canadian airline with the money, how does this affect the Canadian balance of payments accounts?
A) debit: merchandise trade; credit: capital account
B) debit: capital account; credit: merchandise trade
C) debit: merchandise trade; credit: services
D) debit: services; credit: merchandise trade
Q3) When future labour income falls in a small 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
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Page 7
Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) If f(k) = 6k<sup>0.5</sup>, s = 0.1, n = 0.1, and d = 0.2, what is the value of c (consumption) at equilibrium?
A) 10
B) 12
C) 10.8
D) 11.2
Q2) Which of the following arguments would you make against a policy that discourages population growth?
A) It means less total output in the economy, reducing the country's ability to defend itself or influence world events.
B) It means less output per worker in the economy, reducing the country's ability to defend itself or influence world events.
C) It means more total output in the economy, increasing the country's ability to defend itself or influence world events.
D) It means more output per worker in the economy, increasing the country's ability to defend itself or influence world events.
Q3) What is the empirical evidence on whether or not rich and poor countries converge?
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Chapter 7: The Asset Market, Money, and Prices
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Sample Questions
Q1) The use of money is more efficient than barter because the introduction of money
A) reduces the need for economic specialization.
B) reduces the need to exchange goods.
C) reduces the need for other stores of value.
D) reduces transaction costs.
Q2) A developing country does not have enough taxes to cover its expenditures and is unable to borrow. This government would be most likely to cover its deficit by
A) purchasing government bonds from the public.
B) selling government bonds to the public.
C) selling newly issued government bonds directly to the Central Bank.
D) buying newly issued government bonds directly from the Central Bank.
Q3) Which of the following is true about the asset market equilibrium?
A) The asset market is in equilibrium only if the labour market is in equilibrium.
B) The asset market is in equilibrium when the money market is in equilibrium.
C) The money market is in equilibrium only if the non-monetary asset market is in equilibrium.
D) The asset market is in equilibrium, even if the money market is not.
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Page 9
Chapter 8: Business Cycles
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Sample Questions
Q1) A variable that tends to move later than aggregate economic activity is called
A) a leading variable.
B) a coincident variable.
C) a lagging variable.
D) an acyclical variable.
Q2) In the AD-AS model, when the short-run aggregate supply (SAS) curve is horizontal, it means that
A) in the short run, aggregate supply is equal to the aggregate demand.
B) in the short run, producers produce whatever quantity is demanded.
C) in the short run, output is fixed.
D) in the short run, price will rise as output increases.
Q3) Which of the following macroeconomic variables is not seasonally procyclical?
A) the nominal money stock
B) average labour productivity
C) the unemployment rate
D) government spending
Q4) Describe briefly what are the major differences between the classical economists and the Keynesian economists with regard to causes of business cycles, long-run adjustments to shock, and the government policies in restoring the full employment.
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Chapter 9: The IS-LMAD-AS Model: A General Framework for
Macroeconomic Analysis
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Sample Questions
Q1) Which market adjusts the most quickly in response to shocks to the economy?
A) the asset market
B) the labour market
C) the goods market
D) The asset, labour, and goods markets adjust at about the same speed to eliminate a disequilibrium in the macroeconomy.
Q2) A temporary adverse supply shock directly causes
A) a downward shift of the IS curve.
B) a shift to the left of the FE line.
C) a downward shift of the LM curve.
D) an upward shift of the IS curve.
Q3) Which of the following would shift the LM curve up?
A) an increase in consumer spending
B) an increases in taxes
C) a decrease in supply of money
D) a decrease in taxes
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) Using the IS-LM model for a small open economy, analyze the effects of the following events on output and the real interest rate in the short run and the long run. In each case, discuss the differences between the classical and the Keynesian models.
a. A rise in taxes.
b. A boom in the economy of the major trading partner.
c. The central bank follows a contractionary monetary policy.
Q2) Under a system of fixed exchange rates, what happens if a country's currency is undervalued?
A) The Central Bank loses official reserve assets.
B) The Central Bank gains official reserve assets.
C) The currency depreciates.
D) The exchange rate falls.
Q3) Describe the effects of contractionary fiscal policy by the domestic government on output, the real interest rate, and net exports in both the domestic and foreign country, using a Keynesian model.
Q4) 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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Chapter 11: Classical Business Cycle Analysis:
Market-Clearing Macroeconomics
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Sample Questions
Q1) According to the misperceptions theory, short-lived shocks may have long-term effects on the economy because of
A) multiplier effects.
B) propagation mechanisms.
C) accelerator effects.
D) automatic stabilizers.
Q2) According to the misperceptions theory, an anticipated decline in the money supply leads to a shift of the AD curve to the ________ and a shift of the SRAS curve to the
A) left; right
B) left; left
C) right; right
D) right; left
Q3) By real shock, economists mean
A) shocks to money supply.
B) shocks to money demand.
C) shock to real side of the economy.
D) shocks the shift LM curve.
Q4) Why doesn't stabilization policy work, according to economists using the misperceptions theory?
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Chapter 12: Keynesian Business Cycle Analysis:
Non-Market-Clearing Macroeconomics
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Q1) The Keynesian theory is consistent with the business cycle fact that inflation is
A) procyclical and leading.
B) procyclical and lagging.
C) countercyclical and leading.
D) countercyclical and lagging.
Q2) 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
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.
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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) The Phillips curve appeared to fit the data well for Canada in the
A) 1960s.
B) 1970s.
C) 1980s.
D) 1990s.
Q3) The main determinant of how quickly expected inflation adjusts to changes in monetary policy is
A) the slope of the Phillips curve.
B) the slope of the short-run aggregate supply curve.
C) the credibility of the Central Bank.
D) the degree of indexation in the economy.
Q4) If you were prime minister, what would you do to reduce the natural rate of unemployment? Propose at least three different methods.
Q5) Describe the principal costs of unemployment. Are there any benefits to unemployment?
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Chapter 14: Monetary Policy and the Bank of Canada
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Sample Questions
Q1) The governor of the Bank of Canada
A) is elected by the government.
B) is appointed by the government.
C) is appointed by the senate.
D) is chosen by the Bank itself.
Q2) 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
Q3) Suppose that in Mysore the reserve-deposit ratio is res = 0.5 - 2i, where i is the nominal interest rate. The currency-deposit ratio is 0.2 and the monetary base equals 100. The real quantity of money demanded is given by the money demand function L(Y, i) = 0.5Y - 10i, where Y is real output. Currently, the real interest rate is 5% and the economy expects an inflation rate of 5%. The reserve-deposit ratio equals
A) 0.1.
B) 0.2.
C) 0.3.
D) 0.4.
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Page 16
Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) Assume that the lost output due to tax distortions is proportional to the square of the tax rate. If the government increased the tax rate from 25% to 40%, the lost output would increase by a factor of
A) 1.56.
B) 1.60.
C) 1.96.
D) 2.56.
Q2) The SPENDLAND's GDP and debt last year was $4000 billion and $2000 billion, respectively. This year, the government revenue is $800 billion and the government expenditure is $1000 billion. Suppose the interest rate payable on government debt is 10 percent.
a. What is the debt-GDP ratio for last year? This year?
b. How much did the debt-GDP ratio change?
c. Explain why the debt-GDP ratio changed?
Q3) 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.
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