Principles of Macroeconomics
Exam Answer Key
Course Introduction
Principles of Macroeconomics introduces the fundamental concepts and analytical frameworks used to understand the overall functioning of national economies. The course covers topics such as gross domestic product (GDP), inflation, unemployment, economic growth, and the roles of government fiscal and monetary policy. Students will examine how aggregate demand and supply interact to determine income and employment levels, as well as how different economic policies influence the business cycle. Emphasis is placed on real-world applications and the global dimensions of macroeconomic issues.
Recommended Textbook
Macroeconomics 8th Canadian Edition by Andrew B. Abel
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15 Chapters
1394 Verified Questions
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Page 2
Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) A country has a trade surplus when
A)imports exceed exports.
B)imports equal exports.
C)exports exceed imports.
D)imports are zero.
Answer: C
Q2) A closed economy is a national economy that
A)doesn't interact economically with the rest of the world.
B)has a stock market that is not open to traders from outside the country.
C)has extensive trading and financial relationships with other national economies.
D)has not established diplomatic relations with other national economies.
Answer: A
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Chapter 2: The Measurement and Structure of the Canadian Economy
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Sample Questions
Q1) Canada's current account has recently been negative.This means that
A)investment is greater than saving in Canada.
B)saving is greater than investment in Canada.
C)Canadian trade partners also have a current account deficit.
D)the interest rate is higher in Canada compared to the United States.
Answer: A
Q2) Because government services are not sold in markets
A)they are excluded from measurements of GDP.
B)the government tries to estimate their market value and uses this to measure the government's contribution to GDP.
C)they are valued at their cost of production.
D)taxes are used to value their contribution.
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.
Page 4
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Chapter 3: Productivity, output, and Employment
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Sample Questions
Q1) A profit-maximizing firm would hire more employees if
A)marginal product of labour exceeds real wage.
B)marginal product of labour is less than real wage.
C)marginal revenue product of labour is less than real wage.
D)marginal revenue product of labour is less than nominal wage.
Answer: A
Q2) Parliament has just passed a law allowing more immigration of young workers into Canada.How would you expect this to affect the nation's labour supply curve?
A)The labour supply curve would shift to the right.
B)The labour supply curve would shift to the left.
C)The labour supply curve would be unaffected.
D)The labour demand curve would shift to the right.
Answer: A
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5
Chapter 4: Consumption, saving, and Investment
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Sample Questions
Q1) All else equal,a decrease in effective tax rate will lead to
A)a fall in the desired investment.
B)an increase in the interest rate.
C)an increase in the desired investment.
D)an increase in inventory.
Q2) In 2001 the federal government changed the withholding amounts for personal taxes.The change meant that people wouldn't have as much withheld from their paycheques.But there was no change in the tax code itself,so the amount of tax due in April 2002 was not changed.How would consumption and saving respond to this withholding change (note: you may assume a real interest rate of 0%)?
Q3) 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.
Q4) Desired national saving would unambiguously increase if there were
A)an increase in current output and expected future output.
B)an increase in expected future output and government purchases.
C)an increase in expected future output and the expected real interest rate.
D)a fall in both government purchases and expected future output.
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Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) 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?
Q2) Suppose output is $35 billion,government purchases are $10 billion,desired consumption is $15 billion,and desired investment is $6 billion.Absorption is equal to A)$25 billion.
B)$31 billion.
C)$35 billion.
D)$39 billion.
Q3) In a large open economy like the United States,an increased government budget deficit that reduces national saving
A)reduces investment and improves the current account balance.
B)reduces investment and reduces the current account balance.
C)has no effect on investment,but reduces the current account balance.
D)has no effect on either investment or the current account balance.
Q4) Discuss the main differences between the small and large open economies in the impacts of a decrease in domestic saving on the interest rate and the domestic investment.
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Page 7
Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) Country A has a capital-labour ratio that is initially twice as big as that of country B,but neither is yet in a steady state.Both countries have the same production function,f(k)= 6 k¹/².Country A has a 10% saving rate,10% population growth rate,and 5% depreciation rate,while country B has a 20% saving rate,10% population growth rate,and 20% depreciation rate.
a.Calculate the steady-state capital- labour ratio for each country.Does the initial capital-labour ratio affect your results?
b.Calculate output per worker and consumption per worker for each country.Which country has the highest output per worker? The highest consumption per worker?
c.In general,do all the fundamental characteristics of different countries need to be identical for convergence of output per worker?
Q2) In the very long run,the level of consumption per worker can grow continually if
A)the saving rate continually falls.
B)the population growth rate continually rises.
C)productivity continually improves.
D)the depreciation rate continually rises.
Q3) What is market policy? How does it affect the long-run economic growth in an economy?
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Chapter 7: The Asset Market, money, and Prices
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Sample Questions
Q1) If the income elasticity of money demand is 3/4 and income increases 8%,by about how much does the price level change?
A)falls 6%
B)unchanged
C)rises 6%
D)rises 8%
Q2) Between 1992 and 2002,Mr.Junius Morgan's real income increased from $100,000 to $200,000.All else being equal,his real demand for money probably A)decreased.
B)increased,but by less than the increase in real income.
C)increased proportionately to the increase in real income.
D)increased by more than the increase in real income.
Q3) Suppose the real money demand function is M /P = 2000 + 0.2Y - 10,000 (ii ).Assume M = 4000,P = 2.0,i = .04, = .03,and Y = 5000.The real interest rate that clears the asset market is
A)3%.
B)6%.
C)11%.
D)14%.
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Page 9
Chapter 8: Business Cycles
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Sample Questions
Q1) Turning points in business cycles occur when
A)a new business cycle is initiated at the trough.
B)the economy hits the peak or trough in the business cycle.
C)the business cycle begins to follow a new pattern that differs from previous business cycles.
D)a new business cycle is initiated at the peak.
Q2) One of the reasons for less volatility in the economy is
A)better monetary policy.
B)increasing financial market activities.
C)higher productivity.
D)advances in technology.
Q3) How has the severity and duration of business cycles changed over time in Canada?
Q4) The high point in the business cycle is referred to as the A)expansion.
B)boom.
C)peak.
D)turning point.
Q5) List five macroeconomic variables which are procyclical and indicate whether they are leading,lagging,or coincident variables.
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Chapter 9: The Is-Lm-Fe Model: a General Framework for
Macroeconomic Analysis
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Sample Questions
Q1) 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
Q2) Suppose the economy is initially in long-run equilibrium.For each of the shocks listed below,explain the short-run effects on output and the price level.
a.A stock market crash reduces consumers' wealth.
b.Businesses decide to hold larger inventories.
c.The government cuts defense spending.
d.Foreign countries buy more Canadian goods.
Q3) A change that increases real money demand relative to the real money supply causes
A)the LM curve to shift down.
B)the LM curve to shift up.
C)the IS curve to shift down.
D)the IS curve to shift 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.
Page 11
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Chapter 10: Exchange Rates, business Cycles, and Macroeconomic Policy
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110 Verified Questions
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Sample Questions
Q1) According to the "beachhead effect," in order to undo the effects of a strong-dollar period,the real value of the dollar
A)must fall to at least half of its value before appreciation of the dollar began.
B)must fall to the value it had before appreciation of the dollar began.
C)must fall to a much lower level than it had before appreciation of the dollar began.
D)must actually appreciate before it depreciates to undo the effects of a strong-dollar period.
Q2) Which of the following statements best describes the movement of the Canadian dollar during the 1970s?
A)The dollar rose steadily.
B)The dollar was stable.
C)The dollar was stable until 1976 and fell thereafter.
D)The dollar fell until 1976 and rose thereafter.
Q3) Describe the effects of contractionary monetary policy by the domestic Central Bank on output,the real interest rate,and net exports in both the domestic and foreign country,using a Keynesian model in the short run.What happens in the long run?
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Page 12
Chapter 11: Classical Business Cycle Analysis:
Market-Clearing Macroeconomics
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Sample Questions
Q1) An adverse supply shock would directly ________ labour productivity by changing the amount of output that can be produced with any given amount of capital and labour.It would also indirectly ________ average labour productivity through changes in the level of employment.
A)increase;increase
B)increase;decrease C)decrease;increase
D)decrease;decrease
Q2) According to the RBC theorists,
A)an increase in money supply cause output to grow.
B)an expected increase in money supply cause current level of output to grow.
C)an expected change in output causes the current money supply to change.
D)an increase in money supply cause output to decline.
Q3) Assuming money neutrality in the classical model,a 10% increase in the nominal money supply would cause
A)a 10% increase in the real money supply.
B)a 10% decrease in the real money supply.
C)no change in the real money supply.
D)a less than 10% change in the price level due to a shift in the aggregate supply curve.
Page 13
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Chapter 12: Keynesian Business Cycle Analysis: Non Market Clearing Macroeconomics
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91 Flashcards
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Sample Questions
Q1) If the menu cost theory is true,then firms that change prices less frequently than other firms are likely to be in
A)more competitive industries.
B)service,rather than manufacturing,industries.
C)growing,rather than declining,industries.
D)less competitive industries.
Q2) Which of the following is true about the Keynesian aggregate supply (AS)curve?
A)The short-run AS is flat,but the long-run AS is vertical.
B)The short-run AS is upward sloping but the long-run AS is flat.
C)The short-run AS is upward sloping but the long-run AS is vertical.
D)The short-run and the long-run AS are upward sloping.
Q3) A model in which individual producers act as price setters,because there are only a few sellers and the product they sell is not standardized,is called
A)imperfect competition.
B)perfect competition.
C)monopoly.
D)monopsony.
Q4) Explain how the Keynesian model of business cycles is consistent with the business cycles facts.
Page 14
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Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) An increase in the expected rate of inflation would
A)shift the Phillips curve upward.
B)shift the Phillips curve downward.
C)shift the long-run Phillips curve to the right.
D)shift the long-run Phillips curve to the left.
Q2) Describe the principal costs of unemployment.Are there any benefits to unemployment?
Q3) Phillips's research looked at British data on A)unemployment and inflation.
B)unemployment and nominal wage growth.
C)inflation and nominal wage growth.
D)unemployment and output.
Q4) Discuss different costs imposed on an economy by high unemployment rates.What are the offsetting factors?
Q5) Keynesians prefer a disinflation policy of A)cold turkey.
B)stabilization.
C)gradualism.
D)aggregate demand management.
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Chapter 14: Monetary Policy and the Bank of Canada
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90 Verified Questions
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Sample Questions
Q1) Describe,in general terms,the strategy of monetary-policy,explaining how monetary-policy tools are used to achieve the goals of monetary policy.What intermediate stages are important in going from tools to goals? What are the links between the different stages? How does the Bank of Canada use this strategy today?
Q2) Suppose that in Mysore,the reserve-deposit ratio is res = 0.5 - 2i,where i is the nominal interest rate.The current-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 money supply equals A)200.
B)240.
C)300.
D)400.
Q3) Open-market operations directly and immediately affect A)the monetary base.
B)banks' holdings of securities.
C)the Bank's holdings of foreign exchange.
D)the money multiplier.
Q4) What is inflation targeting policy? Discuss its advantages and disadvantages.
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) Last year,you paid $2000 income tax and the marginal tax rate was 25 percent for income over $10,000.How much was your income?
A)$25000
B)$10,000
C)$18,000
D)$20,000
Q2) In 2013,the government of Debtland purchased $2 billion of goods and services,transferred $20 billion to provinces and social accounts,and collected $18 billion in tax revenues.GDP is $700 billion,and government bonds outstanding in the previous year were $100 billion.Given the 2 percent economic growth and 1 percent interest on government bonds,how much of the debt-GDP ratio is expected to change in 2014?
Q3) The type of tax receipts that has shown the slowest growth since World War II has been
A)direct taxes from persons.
B)investment income.
C)indirect taxes.
D)direct taxes from enterprises.
Q4) What are the main reasons (give at least three)that Ricardian equivalence might not hold?
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