Principles of Macroeconomics Exam Preparation Guide
Course Introduction
Principles of Macroeconomics introduces students to the fundamental concepts and theories that shape economic activity at the national and global levels. The course explores topics such as gross domestic product (GDP), unemployment, inflation, fiscal and monetary policy, economic growth, and international trade. Through the analysis of aggregate economic behavior, students learn how government policies and external factors influence overall economic performance, living standards, and business cycles. Emphasis is placed on understanding key macroeconomic indicators and the interplay between the public and private sectors in achieving economic stability and growth.
Recommended Textbook
Macroeconomics 1st Canadian Edition by R. Glenn Hubbard
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16 Chapters
1250 Verified Questions
1250 Flashcards
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Page 2
Chapter 1: Introduction to Macroeconomics and the Great Recession
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68 Verified Questions
68 Flashcards
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Sample Questions
Q1) Which of the following statements would make a reasonable hypothesis to test?
A) Deflation is worse than inflation in any economy.
B) An unemployment rate below 4% is bad for the economy.
C) As tax rates increase, eventually tax revenues will decline.
D) Higher real GDP per capita figures lead to happier citizens.
Answer: C
Q2) Explain what is happening to spending on health care as the Canadian population continues to age.Why might this spending change pose problems for the Canadian economy?
Answer: Spending on programs such as health care has increased significantly to 8% of GDP,and is projected to be 13% by 2030.Since most of the money for these programs comes from taxes paid by people currently working,as the population ages,there are fewer workers paying taxes relative to the number of people receiving these payments.This results in a funding crisis that can be solved only by either reducing these government payments,reducing expenditure on other programs,or raising the taxes paid by current workers.
Q3) Explain the difference between correlation and causation.
Answer: Correlation refers to two or more events happening at the same time.Causation refers to one event being caused by another event.
Page 3
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Chapter 2: Measuring the Macroeconomy
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78 Verified Questions
78 Flashcards
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Sample Questions
Q1) Which of the following would cause the unemployment rate as measured by Statistics Canada to overstate the true degree of joblessness in the economy?
A) discouraged workers
B) unemployed persons who falsely report themselves as actively looking for a job
C) retired people who have no intention of returning to work
D) people with part-time jobs who would prefer to be working full time
Answer: B
Q2) Suppose you borrow $2000 for one year and at the end of the year you repay the $2000 plus $110 of interest.The expected inflation rate was 2.2% at the time you took out the loan,but the actual inflation rate turned out to be 3.3%.What was the actual real interest rate you paid?
A) 2.2%
B) 3.3%
C) 5.5%
D) 8.8%
Answer: A
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4
Chapter 3: The Canadian Financial System
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83 Flashcards
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Sample Questions
Q1) If you pay $4888 for a $5000 face value one-year Treasury bill,what is the rate of interest you will receive?
A) 1.02%
B) 2.29%
C) 4.46%
D) 9.78%
Answer: B
Q2) ________ is a company that provides advice to firms issuing new securities,underwrites the issuing of securities,and develops new securities.
A) A mutual fund
B) A pension fund
C) A hedge fund
D) An investment bank
Answer: D
Q3) Explain how a bank run can cause a bank to fail.
Answer: If a bank experiences a bank run,it experiences a liquidity problem because its loans cannot be easily sold off to provide funds to pay off depositors.Without funds to pay off depositors,the bank will not be able to stay in business.
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Chapter 4: Money and Inflation
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Sample Questions
Q1) Suppose banks hold no excess reserves,households and firms do not change the amount of currency they hold,and the required reserve ratio is 25%.If the Bank of Canada purchases $1 million in government bonds,what will be the changes in bank reserves and total chequing account deposits in the whole banking system?
Q2) Suppose you borrow $5000 at an interest rate of 8%.If the expected real interest rate is 3%,then the rate of inflation over the upcoming year that would be most beneficial to you would be
A) 0%.
B) greater than 0% but less than 5%.
C) equal to 5%.
D) greater than 5%.
Q3) Explain why gold,despite its value,is difficult to use as a medium of exchange.
Q4) Suppose you lend $5000 to your brother for one year at a nominal interest rate of 7%.Inflation during that year is 4%.As a result,you will receive ________ at the end of the year.
A) $5150
B) $5225
C) $5350
D) $5550
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Chapter 5: The Global Financial System and Exchange Rates
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81 Flashcards
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Sample Questions
Q1) If the nominal exchange rate between the dollar and the Thai baht (baht per dollar)is lower than the relative purchasing power between the two countries,which of the following would be true?
A) Purchasing power parity predicts that the value of the dollar will fall as traders take advantage of profit opportunities.
B) Purchasing power parity predicts that the baht is undervalued as traders take advantage of profit opportunities.
C) There are opportunities for profit by purchasing goods in Canada and selling them in Thailand.
D) There are no opportunities for profit by purchasing goods in one country and selling them in the other.
Q2) <b>Refer to Figure 5.2</b>If you choose to invest in Japanese bonds,your investment return from Scenario D will be
A) 1%.
B) 3%.
C) 7%.
D) 13%.
Q3) What determines the supply of loanable funds and the demand for loanable funds?
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Chapter 6: The Labour Market
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Sample Questions
Q1) <b>Refer to Figure 6.4.</b>Equilibrium in this market is represented by a real wage of ________ and quantity of labour ________.
A) w ; L
B) w ; L
C) w ; L
D) w ; L
Q2) If the real wage is above the equilibrium real wage,there would be a ________ of workers and the real wage would ________.
A) surplus; decline
B) surplus; rise
C) shortage; decline
D) shortage; rise
Q3) <b>Refer to Figure 6.4.</b>An efficiency wage in this economy would be represented by a real wage of ________ and an employment level of ________.
A) w ; L
B) w ; L
C) w ; L
D) w ; L
Q4) How does a real wage above the equilibrium wage cause unemployment?
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Chapter 7: The Standard of Living Over Time and Across Countries
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Sample Questions
Q1) Countries with a low standard of living have low levels of total factor productivity.List five reasons that account for the low levels of total factor productivity.
Q2) Explain the relationships between the marginal product of labour and the demand for labour,and the marginal product of capital and the demand for capital.
Q3) In Canada,economists estimate capital's share and labour's share of total income have been about ________,respectively.
A) 1/2 and 1/2
B) 4/5 and 1/5
C) 1/3 and 2/3
D) 3/4 and 1/4
Q4) The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs is called the firm's
A) total factor productivity.
B) marginal production level.
C) technological ratio.
D) production function.
Q5) What is human capital? How do workers acquire human capital?
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Chapter 8: Long-Run Economic Growth
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Sample Questions
Q1) Government policies that reduce the price of education increase ________ in the AK growth models or increase ________ in the production function for new ideas in the two-sector growth model.
A) the capital stock; the productivity of researchers
B) the efficiency index; the size of the labour force
C) the proportion of the labour force devoted to research; the capital stock
D) the productivity of researchers; the size of the labour force
Q2) Devastating damage resulting from a major earthquake and tsunami will most likely
A) initially move a country to a time path beneath its balanced growth path.
B) move a country to a lower point on its balanced growth path.
C) shift the balanced growth path for a country to a new, lower level.
D) have little to no impact on the short-term growth rate in a country.
Q3) Explain why GDP per capita varies among countries even though countries eventually converge to their balanced growth paths.
Q4) What is depreciation,and what happens to the depreciation line when the rate of depreciation increases or decreases?
Q5) Describe the steady state in the Solow growth model.
Q6) Why does growth occur in two-sector growth models?
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Chapter 9: Business Cycles
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92 Flashcards
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Sample Questions
Q1) From the classical perspective,an increase in unemployment during a recession represents
A) voluntary unemployment.
B) a roughly equal mix of voluntary and involuntary unemployment.
C) involuntary unemployment.
D) a decrease in the number of discouraged workers in an economy.
Q2) One reason why an economy may not smoothly adjust to a macroeconomic shock is that
A) prices are flexible in the long run.
B) prices are sticky in the short run.
C) wages are sticky in the long run.
D) prices and wages are sticky in the long run.
Q3) If potential GDP for the fourth quarter of 2012 = $58.5 billion,and real GDP for the fourth quarter of 2012 = $53.7 billion,then the output gap was
A) -8.9%.
B) -8.2%.
C) 8.2%.
D) 8.9%.
Q4) List three reasons why nominal wages can be sticky in the short run.
Q5) What is the business cycle and why does it occur?
Page 11
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Chapter 10: Explaining Aggregate Demand: the Is-Mp Model
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94 Flashcards
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Sample Questions
Q1) Changes in the real interest rate affect all of the following components of aggregate expenditure,except A) consumption.
B) investment.
C) government purchases.
D) net exports.
Q2) Other things equal,when the real interest rate falls,C,I,and NX ________ and the output gap will ________.
A) decrease; decrease
B) decrease; increase
C) increase; increase
D) increase; decrease
Q3) <b>Refer to Figure 10.5.</b>.A shift from MP to MP will occur if
A) the Bank of Canada decreases its target for the short-term nominal interest rate.
B) the term structure effect increases.
C) the default-risk premium decreases.
D) the expected inflation rate increases.
Q4) Explain how the AD curve can be derived from the IS-MP model.
Page 12
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Chapter 11: The Is-Mp Model: Adding Inflation and the Open Economy
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74 Flashcards
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Sample Questions
Q1) A decrease in the real interest rate in Canada will cause the dollar to ________ relative to other currencies and ________ net exports and real GDP.
A) appreciate; increase B) appreciate; reduce C) depreciate; increase
D) depreciate; reduce
Q2) <b>Refer to Figure 11.2.</b>.Assume the economy is in equilibrium at ,where real GDP equals potential GDP.The economy experiences a positive demand shock,and the Bank of Canada responds by increasing real interest rates to bring real GDP and inflation back to their original levels.Other things equal,the Bank of Canada's response following the positive demand shock is best represented by a(n)
A) movement up along the Phillips curve.
B) movement down along the Phillips curve.
C) upward shift of the Phillips curve.
D) downward shift of the Phillips curve.
Q3) Explain three shocks that the Canadian economy experienced during the Great Recession,and how these shocks affect the IS curve,the MP curve,and the Phillips curve.
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Page 13
Chapter 12: Monetary Policy in the Short Run
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83 Flashcards
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Sample Questions
Q1) In general,if the Bank of Canada increases its target for the overnight rate,
A) short-term nominal interest rates will increase and long-term nominal interest rates will not change.
B) short-term nominal interest rates will not change and long-term nominal interest rates increase.
C) short-term nominal interest rates will increase and long-term nominal interest rates will also increase.
D) short-term nominal interest rates will not change and long-term nominal interest rates will also not change.
Q2) If the Bank of Canada is facing ________,the bank lending channel provides one explanation for why monetary policy may still be effective even when short-term nominal interest rates equal 0%.
A) an upward-shifting Phillips curve
B) stagflation
C) the zero bound constraint
D) an economy where real GDP has surpassed potential GDP
Q3) What are the effects of an expansionary monetary policy on interest rates and output in an open economy with floating exchange rates?
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Chapter 13: Fiscal Policy in the Short Run
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77 Flashcards
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Sample Questions
Q1) If the economy is in a recession,the inflation rate is ________ it would be at potential GDP.Other things equal,if the government implemented an expansionary fiscal policy,the inflation rate would ________.
A) greater than; remain constant
B) greater than; decrease
C) less than; increase
D) less than; remain constant
Q2) If the MPC is 0.9 and the tax rate is 15%,a $100 increase in autonomous investment will increase equilibrium income by
A) $131.
B) $426.
C) $599.
D) $850.
Q3) A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.
A) increase; rise; falls
B) decrease; rise; falls
C) increase; fall; rises
D) decrease; fall; rises
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Page 15
Chapter 14: Aggregate Demand, aggregate Supply, and Monetary Policy
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75 Verified Questions
75 Flashcards
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Sample Questions
Q1) <b>Refer to Figure 14.3.</b>Suppose the economy is initially at long-run equilibrium and the Bank of Canada increases the target inflation rate,and to hit this rate,it must reduce the real interest rate.This is best represented by an initial movement from
A) point A to point B.
B) point A to point D.
C) point A to point C.
D) point B to point C.
Q2) Suppose the Bank of Canada has a target inflation rate of 3%,always hits its target,and the inflation rate has been 3% for several years.Furthermore,assume Amazon sets the price of its Kindle Fire at $140 in 2012 and wants to keep the real price of the Kindle constant in order to maximize profits.Now suppose that the Bank of Canada announces on January 1,2013 that it will decrease its target rate for inflation to 1%.If Amazon has rational expectations,it will set its price for the Kindle in 2013 at
A) $137.20.
B) $140.00.
C) $141.40.
D) $144.20.
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Page 16
Chapter 15: Fiscal Policy and the Government Budget in the
Long Run
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Sample Questions
Q1) Of the primary tax sources of revenue for the Canadian federal government,which of the following has increased the most as a percentage of GDP since 1981?
A) corporate income taxes
B) social insurance taxes
C) sales and excise taxes
D) individual income taxes
Q2) <b>Refer to Table 15.1.</b>The primary budget deficit for Arugula in 2012 is
A) $135 million.
B) $195 million.
C) $380 million.
D) $600 million.
Q3) Assume that seigniorage and the government's primary deficit are both zero.If the real interest rate is greater than the growth rate of real GDP,the debt-to-GDP ratio
A) will increase.
B) will decrease.
C) will either decrease or not change.
D) will either increase or not change.
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Page 17
Chapter 16: Consumption and Investment
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Sample Questions
Q1) According to the life-cycle hypothesis,
A) the present value of lifetime consumption equals the future value of lifetime income.
B) the income earned in a lifetime will be evenly divided between consumption and saving.
C) household consumption depends on income that households expect to receive each year, and financial markets are used to smooth consumption in response to changes in transitory income.
D) households use financial markets to transfer funds from periods when income is high to periods when income is low.
Q2) The Vuvuza Corporation currently has 10 million shares of stock outstanding,the stock is trading for $42 per share,and its stock of capital goods is valued at $70 million.The Tobin's q value for the Vuvuza Corporation is
A) 0.14.
B) 1.7.
C) 6.
D) 7.
Q3) Explain how changes in corporate taxes affect the investment decisions of firms.
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