Principles of Macroeconomics Exam
Solutions
Course Introduction
Principles of Macroeconomics introduces students to the fundamental concepts and theories that shape the overall functioning of national and global economies. The course covers key topics such as gross domestic product (GDP), unemployment, inflation, fiscal and monetary policy, economic growth, and international trade. Students will learn how various economic indicators are used to assess economic performance, and examine the role of government and central banks in managing the economy. Through real-world examples and analytical tools, the course provides a solid foundation for understanding macroeconomic issues and their impact on societies.
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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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) Which of the statements below is primarily normative in nature?
A)There is an unequal distribution of income in Canada.
B)The distribution of income is more unequal in Canada than it is in Japan.
C)The inequality of income that exists in Canada is partly caused by an unequal distribution of wealth.
D)The distribution of income in Canada should be more equal than it is.
Answer: D
Q2) Which of the following is a topic of macroeconomics?
A)why nations have different rates of growth
B)what causes inflation and what can be done about it
C)why unemployment periodically reaches very high levels
D)all of the above
Answer: D
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Chapter 2: The Measurement and Structure of the Canadian Economy
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Sample Questions
Q1) The measurement of GDP includes
A)nonmarket goods such as homemaking and child-rearing.
B)the benefits of clean air and water.
C)estimated values of activity in the underground economy.
D)purchases and sales of goods produced in previous periods.
Answer: C
Q2) If real interest is 2 percent and the expected inflation rate is 5 percent,then the nominal interest rate is
A)7 percent.
B)3 percent.
C)2.5 percent.
D)0.4 percent.
Answer: A
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) An increase in the real wage rate will cause
A)the labour supply curve to shift to the right.
B)the labour demand curve to shift to the left.
C)both the labour supply curve and the labour demand curve to shift to the right.
D)a movement along the labour demand curve.
Answer: D
Q2) The two main characteristics of the production function are
A)it slopes downward from left to right,and the slope becomes flatter as the input increases.
B)it slopes upward from left to right,and the slope becomes steeper as the input increases.
C)it slopes upward from left to right,and the slope becomes flatter as the input increases.
D)it slopes downward from left to right,and the slope becomes steeper as the input increases.
Answer: C
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Chapter 4: Consumption, saving, and Investment
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Sample Questions
Q1) Using Tobin's q,explain how the central bank's policy affects a firm's decision on desired capital.
Q2) You have just purchased a new VCR to show videos to your customers.The VCR cost $500,and you depreciate the machine at a rate of 25% each year.You can borrow money from the bank at 10%,or receive 6% for depositing money at the bank.The expected inflation rate in the coming year is 5%.You used the company's own funds to purchase the VCR.The firm's user cost of capital for the first year is
A)$130.
B)$150.
C)$155.
D)$175.
Q3) A temporary supply shock,such as a drought,would
A)increase the marginal product of capital and increase desired investment.
B)decrease the marginal product of capital and decrease desired investment.
C)have little or no effect on desired investment.
D)decrease both the marginal product of capital and the marginal product of labour in the long-term future.
Q4) Explain why the Ricardian equivalence proposition is not supported by data.
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Page 6
Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) Real domestic interest rates would increase in a large open economy if
A)there were a temporary negative domestic supply shock.
B)the government imposed capital controls and the capital account had been in deficit.
C)foreigners were more willing to save.
D)there were a temporary negative supply shock abroad in a small open economy.
Q2) Assume that an increase in Costa Rica's government budget deficit reduced desired national saving by 10 million colon.Assuming Costa Rica is a small open economy,you would expect the government's action to
A)increase the current account balance by exactly 10 million colon.
B)increase the current account balance by less than 10 million colon.
C)reduce the current account balance by exactly 10 million colon.
D)reduce the current account balance by more than 10 million colon.
Q3) Suppose output is $35 billion,government purchases are $10 billion,desired consumption is $15 billion,and desired investment is $6 billion.Desired savings is equal to A)$2 billion.
B)$10 billion.
C)$14 billion.
D)$16 billion.
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Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) One effect of the Gulf War was the destruction of a good portion of Kuwait's capital stock.How would you expect this to affect Kuwait's capital-labour ratio in the long run? There would be
A)a rightward movement along the saving-per-worker curve and an increase in the capital-labour ratio.
B)no change in the long-run capital-labour ratio.
C)a downward shift in the saving-per-worker curve and a decrease in the capital-labour ratio.
D)a leftward movement along the saving-per-worker curve and a decrease in the capital-labour ratio.
Q2) Suppose the rate of economic growth in Mainland was 25 percent,capital growth 30 percent,and labour growth 20 percent.If the elasticities output with respect to capital and labour are 0.3 and 0.7 respectively,how much is the labour contribution to economic growth?
A)2 percent
B)6 percent
C)9 percent
D)14 percent
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Chapter 7: The Asset Market, money, and Prices
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Sample Questions
Q1) During the past year,Lotusland saw an increase in the price level and increase in interest rates on financial assets,but a fall in personal incomes.The overall demand for money fell.Which of the following factors was most likely to have contributed to this fall in the demand for money?
A)changes in the price level and in interest rates
B)changes in interest rates and personal incomes
C)changes in the price level and personal incomes
D)changes in personal incomes only
Q2) If real money demand increases 5% and real money supply increases 10%,by about how much does the price level change?
A)falls 5%
B)unchanged
C)rises 2%
D)rises 5%
Q3) Which of the following is true about velocity?
A)Velocity is constant.
B)M1 velocity is more stable than M2 velocity.
C)M2 velocity is more stable than M1 velocity.
D)All else equal,velocity increases as demand for money rises.
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Page 9
Chapter 8: Business Cycles
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Sample Questions
Q1) Which of the following macroeconomic variables is procyclical and coincident with the business cycle?
A)residential investment
B)nominal interest rates
C)industrial production
D)unemployment
Q2) 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.
Q3) Explain how nominal money growth varies across the business cycles and why it is volatile.
Q4) The low point in the business cycle is referred to as the A)contraction.
B)recession.
C)trough.
D)depression.
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Chapter 9: The Is-Lm-Fe Model: a General Framework for
Macroeconomic Analysis
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Sample Questions
Q1) Suppose the Bank of Canada's short-run response to any change in the economy is to change the money supply to maintain the existing real interest rate.What would happen to money supply if there were a reduction in government purchases? Given the Bank of Canada's policy,what would happen in the very short run (before general equilibrium is restored)to output and the real interest rate? What must happen to the LM curve and the price level to restore general equilibrium?
Q2) The FE line is vertical because the level of output at full employment doesn't depend on the
A)real wage rate.
B)level of employment.
C)marginal product of labour.
D)real interest rate.
Q3) When demand for money increases,interest rate rises.This can be shown by
A)moving along the LM curve.
B)shifting the LM curve.
C)moving along the IS curve.
D)shifting the IS curve.
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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Sample Questions
Q1) When a group of countries agree to share a common currency,they are said to have formed a
A)currency union.
B)welfare state.
C)monetary alliance.
D)monetary cartel.
Q2) The idea that similar foreign and domestic goods,or baskets of goods,should have the same price when priced in terms of the same currency is called A)equity.
B)purchasing power parity.
C)efficiency.
D)the tragedy of the commons.
Q3) Compared to a system of fixed exchange rates,currency unions are beneficial because they
A)restrict what countries can do with fiscal policy.
B)allow exchange rates to float.
C)allow every country to have an independent monetary policy.
D)eliminate the possibility of speculative attacks.
Q4) Describe the pros and cons of the fixed exchange rate system.
Page 12
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Chapter 11: Classical Business Cycle Analysis:
Market-Clearing Macroeconomics
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Sample Questions
Q1) Briefly explain the rational expectation hypothesis.What are the basic assumptions of the hypothesis? What are the implications of the rational expectation hypothesis for the monetary policy effects on output? Do empirical studies support the idea of rational expectations?
Q2) To support the RBC approach according which productivity shocks generate inflation and recession at the same time,the RBC theorists argue that A)the conventional approach that inflation is procyclical is consistent with the pre-World War II economy.
B)the structure of the economy and the types of shocks have changed since the Great Depression.
C)the oil supply shocks in the 1970s caused the price level to rise while output fell. D)all of the above.
Q3) In the classical model,a temporary increase in government purchases causes
A)a decrease in output and the real interest rate.
B)a decrease in output and an increase in the real interest rate.
C)an increase in output and a decrease in the real interest rate.
D)an increase in output and the real interest rate.
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Page 13
Chapter 12: Keynesian Business Cycle Analysis: Non Market
Clearing Macroeconomics
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Sample Questions
Q1) In the Keynesian model in the short run,the amount of employment is determined by the effective labour demand curve and the level of A)prices.
B)output.
C)the real interest rate.
D)the supply of labour.
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) An unanticipated increase in the money supply would
A)shift the LM curve to the right and the AD curve up and to the right.
B)shift the LM curve to the left and the AD curve up and to the right.
C)shift the LM curve to the right and the AD curve down and to the left.
D)shift the IS curve to the right and the AD curve up and to the right.
Q4) Discuss the major problems that arise in practice in attempting to use aggregate demand management to stabilize the economy.
Page 14
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Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) 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.
Q2) Ball's research showed that the sacrifice ratio
A)was the same for all countries.
B)was nearly zero for most countries.
C)was about 10 for all countries except Canada,where it was about 1.5.
D)varied considerably across countries.
Q3) The negative relationship between unemployment and inflation is known as the A)aggregate supply curve.
B)aggregate demand curve.
C)Phillips curve.
D)efficiency wage line.
Q4) How is the sacrifice ratio measured? How big is the sacrifice ratio in Canada? In other countries? What problems are there in measuring the sacrifice ratio?
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15
Chapter 14: Monetary Policy and the Bank of Canada
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90 Verified Questions
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Sample Questions
Q1) Which of the following is true about the Bank of Canada?
A)The Bank of Canada is a private corporation established in 1938.
B)The Bank of Canada's governor is appointed by Parliament.
C)The Bank of Canada sets the Canadian interest rate.
D)The Bank of Canada seems to be an arm of the government but is,rather,an independent institution.
Q2) In Winterland,currency outside banks is $65 billion,bank reserves are $25 billion,and deposits are $603 billion.What is the monetary base in Winterland?
A)$90 billion
B)$40 billion
C)$693 billion
D)$628 billion
Q3) The Bank of Canada is
A)on the north shore of the Ottawa river.
B)a Toronto fast-food outlet.
C)a money laundering service.
D)the Central Bank of Canada.
Q4) If you could determine the goals of the Bank of Canada,what goals would you choose? Should the Bank's policy be activist? Discuss the pros and cons.
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) The main difference between the Keynesian and classical economists in fiscal policy is
A)the effect of government purchases on GDP.
B)the effect of money supply on GDP.
C)the effect of taxes on income distribution.
D)the effect of taxes on aggregate demand.
Q2) The DEBTLAND's economic growth is 5 percent and the interest rate paid on debt is also 5 percent.If the primary deficit to GDP ratio is 2 percent,the DEBTLAND's debt-GDP ratio will change by
A)3 percent.
B)5 percent.
C)7 percent.
D)2 percent.
Q3) The average cost of the distortion created by taxes
A)increases proportionately with the tax rate.
B)is lower when the tax rate is constant than when it fluctuates.
C)is higher when the tax rate is constant than when it fluctuates.
D)equals the square root of the tax rate.
Q4) Who bears the burden of the government debt? Explain why.Under what circumstances is there no burden to be borne?
Page 17
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