Principles of Macroeconomics
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Course Introduction
Principles of Macroeconomics introduces students to the foundational concepts and tools used to analyze the economy as a whole. The course covers topics such as national income, gross domestic product (GDP), inflation, unemployment, monetary and fiscal policy, economic growth, and international trade. Through examining how aggregate demand and supply determine output and prices, students learn to evaluate economic performance and assess policy responses to business cycles and long-term growth challenges. Emphasis is placed on understanding the roles of government institutions, central banks, and global economic forces in shaping macroeconomic outcomes.
Recommended Textbook
Macroeconomics 14th Canadian Edition by
Campbell R. McConnell
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Chapter 1: Limits, Alternatives, and Choices
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Sample Questions
Q1) Differentiate between the independent and dependent variables in an economic relationship.
Answer: The dependent variable changes as a consequence of the change in the independent variable.By specifying one variable as the dependent variable,a causal relationship is implied with changes in the independent variable causing changes in the dependent variable.The dependent variable is the "effect" or outcome.
Q2) Why have the last few years been an exciting time to study macroeconomics?
Answer: Since macroeconomics deals with the economy as a whole,the global financial crisis that spread to Canada in late 2008 resulted in a deep recession,which has been dubbed the Great Recession which has impacted major aggregates including households,businesses,and governmental sectors for the Canadian economy.
Q3) Describe the slope of a direct and an inverse relationship.
Answer: The ratio of the vertical change (the rise or fall)to the horizontal change (the run)in moving between two points on the line is called the slope of the line.The slope of an upward sloping line is positive,reflecting a direct relationship between two variables;the slope of a downward sloping line is negative,reflecting an inverse relationship.
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Chapter 2: The Market System and the Circular Flow
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Q1) How can technological advance result in creative destruction?
Answer: Rival firms must follow the lead of innovative firms that are making economic profits.If the rival firms fail to do so,they can suffer economic losses and eventually fail or be bought by other firms.Sometimes technological advance actually destroys industries because an old product is no longer needed with a new innovation put on the market,a situation referred to as creative destruction.The innovation creates a new product,but in the process of doing so it effectively destroys an industry.One example would be the automobile,which eventually destroyed the market for horse-drawn carriages.
Q2) How does the use of money differ from the use of barter in the exchange of goods and services?
Answer: Barter requires a coincidence of wants.In order for exchange to take place both parties have to want what the other is offering.Money,on the other hand,acts as a medium of exchange in that the appropriate quantity of it is generally acceptable in exchange for any good or service.
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Chapter 3: Demand, Supply, and Market Equilibrium
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Q1) List five basic determinants of market demand that could cause demand to decrease.
Answer: (a)Consumers' tastes become less favourable toward the item.
(b)The number of buyers decreases.
(c)Incomes fall and the item is a normal good or incomes rise and the item is an inferior good.
(d)A decrease in the price of a substitute product or an increase in the price of a complementary product.
(e)Consumers expect lower prices in the future.
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) What are the basic differences between a public good and a private good?
Q2) Draw a supply and demand graph on the below diagram that illustrates the market for pollution rights.Label the axes and curves.Then show what happens to price and quantity when the demand for pollution rights increases in the market.
Q3) Demand is represented by the equation,P = 200 - 2Q<sub>D</sub> and supply by the equation P = 25 + 3Q<sub>S</sub>.
(a)Suppose this market produces 30 units of output.What price would this output be sold at if consumers we going to buy all goods? What is the marginal benefit to society of the 30<sup>th</sup> unit? What is the marginal cost of the 30<sup>th</sup> unit?
(b)What is consumer surplus if the market produces 30 units of output? What is producer surplus? What is the sum of consumer and producer surplus?
(c)What are the equilibrium price and quantity?
(d)What is consumer surplus at equilibrium? What is producer surplus? What is the sum of consumer and producer surplus?
(e)Is allocative efficiency achieved when the market produces 30 units of output? Explain in three different ways.
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Chapter 6: An Introduction to Macroeconomics
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Q1) What are two reasons why prices might be sticky?
Q2) Why do economists worry about unemployment?
Q3) Define macroeconomics and provide two key concerns it studies.
Q4) What is the difference between financial investment and economic investment?
Q5) Why do economists use the term "sticky" prices rather than "stuck" prices?
Q6) What is the difference between nominal and real GDP?
Q7) What will happen to prices and output levels if there is an unexpected demand increase and prices are fully flexible?
Q8) Suppose that we are in a condition of fully flexible prices,but production of nails will not go above 6,000 kg/week.What price will nails sell for if market demand is characterized by: (a)P = 5 - 0.5Q, (b)P = 6 - 0.5Q,and (c)P = 4 - 0.5Q,where P is in $/kg and Q is in thousands of kg/week?
Q9) Suppose that we are in a condition of "stuck" prices so that the price of nails will not go above or below $2/kg.Further suppose that nail factories have been built on a business plan designed to deliver 6,000 kg/week.How many nails will be sold in a market in which demand (which includes a modest amount of inventory)is characterized by: (a)P = 5 - 0.5Q, (b)P = 6 - 0.5Q,and (c)P = 4 - 0.5Q,where P is in $/kg and Q is in thousands of kg/week? In each case,what happens to inventory.
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Chapter 7: Measuring the Economys Output
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Q1) Identify at least four transactions and other variables,which are not included in the GDP.
Q2) How is a price index computed?
Q3) What adjustments need to be made to go from net domestic income at factor cost to GDP?
Q4) Net investment can be positive,negative,or zero,but gross investment can never be less than zero.Explain.
Q5) Explain what is and what is not included in government purchases in GDP.
Q6) The following is a list of figures for a given year in billions of dollars.Using this data,compute: (a)GDP by the Expenditure Method; (b)GDP by the Income Method; (c)Net exports;and (d)Net Investment.
Q7) What is the relationship between real GDP,nominal GDP,and the price index?
Q8) The following table shows the price of a specific stereo receiver for a five-year period.Using Year 3 as the base year,calculate the price index for each year.
Q9) Differentiate between nominal and real GDP.
Q10) What is the definition of GDP? How would the value of output produced at a Canadian-owned factory in Canada and a foreign-owned factory in Canada be treated in GDP accounting?
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Chapter 8: Economic Growth
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Q1) Summarize the four supply factors in economic growth.
Q2) List some of the institutional structures that economic historians believe promote and sustain modern economic growth.
Q3) Why is economic growth desirable?
Q4) Explain the demand factor in economic growth.
Q5) Summarize the historical growth record of Canada between 1961 and 2011 in terms of real GDP growth and in terms of real GDP per capita growth.
Q6) Summarize the anti-growth view of economic growth.
Q7) Is growth felt evenly across society and around the world?
Q8) What is the relevance of productive and allocative efficiency to the growth process?
Q9) Canada's economy has realized significant economic growth in the last 50 or so years.Still,there are some items missing in our growth calculations that might impact our standard of living.List three of them and describe how their inclusion might modify our interpretation of economic growth statistics.
Q10) Explain why even small changes in the rate of economic growth are significant.Use the "rule of 70" to demonstrate the point.
Q11) Are economic growth and progress synonymous? How might they differ?
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Chapter 9: Business Cycles, Unemployment, and Inflation
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Q1) What is "demand-pull" inflation?
Q2) How does inflation affect the economy's real level of output and why does output change in this way?
Q3) What is inflation and how is it measured?
Q4) Why might the unemployment rate increase when the economy moves into its recovery phase?
Q5) "The increasing importance of durable goods has made our economy more vulnerable to cyclical fluctuations." Explain and evaluate.
Q6) What phase of the business cycle is the Canadian and your provincial economy experiencing at the present time? Justify your answer.
Q7) Describe cost-push inflation and its major source.
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) Evaluate the statement: "Anticipated inflation is not too much a problem."
Page 10
Q11) How has the rate of inflation in Canada changed in the past five decades?
Q12) What are the economic and non-economic costs of unemployment?
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Chapter 10: Basic Macroeconomic Relationships
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Q1) Complete the accompanying table.
Q2) Explain the economic impact of an increase in the multiplier.
Q3) Use the graphs below to answer the following questions:
Q4) Describe the relationship between the size of the MPC and the multiplier.How does it compare to the relationship between the size of the MPS and the multiplier?
Q5) Describe the relationship between the Great Recession of 2008-2009 and the Investment Riddle.
Q6) Explain the difference between a movement along the consumption schedule and a shift in the consumption schedule.
Q7) Define the multiplier.How is it related to real GDP and the initial change in spending? How can the multiplier have a negative effect?
Q8) Most economists regard investment demand as being less stable than the income-consumption relationship.Looking at the determinants of the two relationships,support this contention.
Q9) What are the marginal propensity to consume (MPC)and marginal propensity to save (MPS)? How are the two concepts related? How are the two concepts related to the consumption and saving functions?
Q10) Explain how consumption and saving are related to disposable income.
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Chapter 11: The Aggregate Expenditures Model
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Q1) Evaluate the statement that "for an open economy the equilibrium GDP always corresponds with an equality of exports and imports."
Q2) What is the relationship between actual investment,planned investment,and saving in an economy? What conditions among these concepts produce equilibrium?
Q3) Compare and contrast the recessionary gap and the inflationary gap.
Q4) Assume the level of investment is $12 billion and independent of the level of total output.Complete the following table and answer the following questions about this private closed economy.
Q5) Other things being constant,what will be the effect of each of the following upon the equilibrium level of GDP?
(a)An increase in the amount of liquid assets consumers are holding;
(b)A sharp rise in stock prices;
(c)A rapid upsurge in the rate of technological advance;and
(d)A sharp increase in the interest rate.
Q6) In a graph relating private spending (C + I<sub>g</sub>)to real gross domestic product (GDP),what does the 45-degree line represent?
Q7) What is the effect of net exports,either positive or negative,on equilibrium GDP?
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Chapter 12: Aggregate Demand and Aggregate Supply
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Q1) Why does aggregate demand shift outward by a greater amount than the initial change in spending?
Q2) How is the short-run aggregate supply curve sloped and why is it sloped this way?
Q3) Differentiate between "demand-pull" and "cost-push" inflation using the aggregate demand-aggregate supply (short-run)model.
Q4) Suppose the aggregate demand and short-run aggregate supply schedules for a hypothetical economy are as shown below:
Q5) What determines the equilibrium price level and the level of real GDP in the aggregate demand-aggregate supply (short-run)model?
Q6) How can an economy already at full-employment expand without igniting inflation? Explain.
Q7) 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.
Q8) Suppose the aggregate demand and short-run aggregate supply schedules for a hypothetical economy are as shown below:
Q9) In the table below are aggregate demand and aggregate supply schedules.
Page 14
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Chapter 13: Fiscal Policy, Deficits, Surpluses, and Debt
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Q1) Explain the aspects of expansionary and contractionary fiscal policy.During which phases of the business cycle would each be appropriate?
Q2) The following table shows government spending and tax revenue for a hypothetical economy over a five-year period.All figures are in billions.
Q3) Using the below graph,illustrate the possible impact of a crowding-out effect of a fiscal policy by drawing in the relevant aggregate demand shifts.Label and explain any shifts in the demand curve shown.
Q4) Describe Canada's Economic Action Plan to combat the Great Recession of 2009.
Q5) Explain how the below graph illustrates the built-in stability of the tax structure.
Q6) 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?
Q7) Explain how the net-export effect would reduce the effectiveness of fiscal policy.
Q8) Is it possible to impose a burden on future generations by increasing the public debt?
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Chapter 14: Money, Banking, and Money Creation
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Q1) What is fiat money?
Q2) Banks pursue two conflicting goals.Explain what they are and why the conflict.
Q3) Give an equation that shows the relationship between actual,desired,and excess reserves.
Q4) Some government bonds can be redeemed for currency or a cheque at banks.Why,then,isn't it universally agreed that government bonds are part of the money supply?
Q5) Arrange the following items in the form of a chartered bank's balance sheet,and explain how each might come into being. Capital stock,$300,000;Cash Reserves,$60,000;Property,$290,000;Demand deposits,$150,000;Securities,$40,000;Loans,$60,000
Q6) Why is money considered to be debt?
Q7) What is Securitization and what are its supposed benefits as per government regulators?
Q8) What is the effect on the money supply when a chartered bank sells government securities to the public?
Q9) What is the function of the Canadian Payments Association (CPA)?
Q11) Define the desired reserve ratio. Page 16
Q10) Describe the nature,causes,and effects of the U.S Mortgage Default Crisis.
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Chapter 15: Interest Rates and Monetary Policy
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Q1) Use the below graphs to answer the following questions assuming the nominal GDP in the economy is given.
Q2) Explain how the two principal tools of monetary policy are used.
Q3) How is the overnight lending rate established? What role does the Bank of Canada play?
Q4) Discuss the relative effectiveness of monetary policy in dealing with demand-pull inflation or recession.
Q5) Both the Bank of Canada and chartered banks buy and sell government securities,but for substantially different reasons.Explain.
Q6) What is the difference between the Bank of Canada's purchases of securities from the chartered banking system and those from the public? Give an example.
Q7) What are the two reasons that people want to hold money? In other words,what are the two types of demand for money?
Q8) How does an increase in the price level affect the equilibrium rate of interest?
Q9) What is meant by the Liquidity Trap? Provide an example.
Q10) Why is it important for the Bank of Canada to be an independent agency?
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Q11) Explain what is meant by cyclical asymmetry with regard to monetary policy effects.
Chapter 16: Long-Run Macroeconomic Adjustments
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Q1) What is the basic difference between the short run and long run as these terms relate to macroeconomics? Why does this difference occur?
Q2) (a)Using a graph showing aggregate demand,short-run aggregate supply,and long-run aggregate supply,illustrate an economy that faces a recessionary gap.
Q3) Answer the questions based on the following diagram.
Q4) Suppose the potential level of real GDP for a hypothetical economy is $250 and the price level (P)initially is 100.Use the following short-run aggregate supply schedules below to answer the questions.
Q5) What is the long-run equilibrium in the aggregate demand-aggregate supply model?
Q6) If the long-run supply curve is fixed in place,can there be persistent inflation?
Q7) Explain the Phillips Curve concept and construct an example of the curve on the below graph.
Q8) Describe cost-push inflation in the long-run aggregate demand-aggregate supply model.Explain the policy dilemma for government policy if no action is taken and if monetary and fiscal policies are used to counter the cost-push inflation.Assume that the economy is initially at the full-employment level of real GDP.
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Chapter 17: International Trade
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Q1) Suppose that by devoting all of its resources to the production of X,nation L can produce 40 X.By devoting all of its resources to Y it can produce 20 Y.Comparable figures for nation M are 15 X and 15 Y.According to the principle of comparative advantage,which nation will specialize in which product? What are the limits to the terms of trade?
Q2) Of all the reason for protests against the WTO,which are most substantive?
Q3) What are Canada's top four exports and imports?
Q4) What are the limitations to the diversification for stability argument for trade protection?
Q5) Evaluate the statement: "Tariffs and quotas are needed to protect Canadian products from dumping."
Q6) How do protectionist policies affect consumers,workers,producers,and the government? Explain.
Q7) What is the problem associated with the importing of goods by high-income nations from low-income nations? Explain how consumer organisations in high-income nations have tried to circumvent this problem.
Q8) Evaluate the validity of the argument that a new industry in a nation needs protection from foreign competition if it is to prosper.
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Chapter 18: Exchange Rates and the Balance of Payments
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Q1) 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?
Q2) What is the "managed float"?
Q3) What were the Current Account Balance,the Capital Account Balance,and the Official Settlement Accounts Balance in Canada for the year 2011?
Q4) 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?
Q5) The graph below shows a change in the demand for Swiss francs from D<sub>1</sub> to D<sub>2</sub>.What would happen when D<sub>1</sub> shifted to D<sub>2</sub> under a flexible exchange rate system compared to a fixed exchange rate system?
Q6) How are flexible exchange rates used to eliminate a balance of payments deficit or surplus?
Q7) Describe the three major disadvantages of flexible exchange rates.
Page 21
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