Principles of Macroeconomics Final
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Course Introduction
Principles of Macroeconomics introduces students to the fundamental concepts and theories that explain the functioning of an economy as a whole. The course covers topics such as national income, economic growth, unemployment, inflation, fiscal and monetary policy, and the role of government in stabilizing the economy. Students will explore how economic indicators are measured, the factors that influence economic performance, and how policy decisions impact both domestic and international markets. By the end of the course, students will develop a foundational understanding of macroeconomic principles and gain analytical skills for evaluating current economic issues and policies.
Recommended Textbook
Macroeconomics 8th Canadian Edition by Andrew B. Abel
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Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) Classical economists who assume the "invisible hand" works reasonably well do NOT argue that
A)the government should have a limited role in the economy.
B)government policies will be ineffective and counterproductive.
C)the government should actively intervene in the economy to eliminate business cycles.
D)wages and prices adjust quickly to bring the economy back to equilibrium.
Answer: C
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 uses-of-saving identity shows that if the government budget deficit rises,then which of the following must happen?
A)Private saving must rise,investment must fall,and/or the current account must fall.
B)Private saving must rise,investment must fall,and/or the current account must rise.
C)Private saving must rise,investment must rise,and/or the current account must fall.
D)Private saving must rise,investment must rise,and/or the current account must rise.
Answer: A
Q2) Capital goods are
A)not counted in the GDP as final goods.
B)not used to produce other goods.
C)used up in the same period that they are produced.
D)goods used to produce other goods.
Answer: D
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Chapter 3: Productivity, output, and Employment
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Sample Questions
Q1) The mathematical expression relating the amount of output produced to quantities of capital and labour utilized is called
A)Factors of production
B)Production function
C)Total factor productivity
D)Productivity
Answer: B
Q2) An adverse supply shock would
A)shift the production function up and decrease marginal products at every level of employment.
B)shift the production function down and decrease marginal products at every level of employment.
C)shift the production function down and increase marginal products at every level of employment.
D)shift the production function up and increase marginal products at every level of employment.
Answer: B
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Chapter 4: Consumption, saving, and Investment
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Sample Questions
Q1) An increase in expected real interest rates would probably cause desired national saving to rise because
A)less must be saved to reach a given saving target.
B)the increased return makes saving more attractive.
C)the government would respond by increasing expenditures.
D)current interest rates would fall in response to higher expected real interest rates in the future.
Q2) A decline in consumer confidence will lead to
A)an upward shift in the consumption function and higher current consumption.
B)a downward shift in the consumption function and lower current consumption.
C)a downward shift in the saving function and lower current saving.
D)a downward shift in the saving function and a higher interest rate.
Q3) A firm has current and future marginal productivity of capital given by MPK = 10,000 - 2K + N,and marginal productivity of labour given by MPN = 50 - 2N + K.The price of capital is $5,000,the real interest rate is 10%,and capital depreciates at a 15% rate.The real wage is $15.
a.Calculate the user cost of capital.
b.Find the firm's optimal amount of employment and the size of the capital stock.
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Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) If Ricardian equivalence proposition is true,a budget deficit resulting from a tax cut will have
A)no effect on government expenditures.
B)no effect on current account because it does not affect national saving.
C)no effect on current account because people expect to pay lower taxes in the future.
D)no effect on current account because people expect to increase their consumption.
Q2) You just read that forecasters predict Canada will run a current account deficit in 2004.From this you would infer that Canada will also
A)run a capital account deficit in 2004.
B)decrease its official reserve assets.
C)run a balance of payments surplus.
D)decrease its holding of net foreign assets.
Q3) Explain why the current account balance and the capital account balance of an economy must sum to zero.
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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Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) Assume the production function in an economy is Y = AK,where Y = output,A = productivity,and K = capital.This means that
A)marginal productivity of capital is diminishing.
B)the marginal productivity of capital is increasing.
C)marginal productivity of capital is constant.
D)None of the above.
Q2) The endogenous growth theory attempts to
A)replace the Solow model with a model in which money growth plays a key role.
B)explain how societies can more easily reach the "Golden Rule."
C)show how population growth reduces capital and output.
D)explain why productivity changes.
Q3) Government policy can improve the long-run economic growth through
A)providing an incentive for higher saving such as lower capital gain taxes.
B)encouraging more consumption and less saving.
C)increasing productivity growth by improving infrastructure,investing in human capital,and supporting R&D activities.
D)subsidizing the manufacturing industries.
Q4) Describe the main ideas of the endogenous growth theory.What does it have to say about the role of government in economic growth?
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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,income increases 8%,and real money supply increases 10%,by about how much does the price level change?
A)falls 4%
B)unchanged
C)rises 4%
D)rises 6%
Q2) Which of the following statements about M1 and M2 is NOT true?
A)Current accounts are part of M1.
B)M2 is more liquid than M1.
C)M2 is larger than M1.
D)Savings accounts are part of M2.
Q3) If the quantity of money demanded exceeds the quantity of money supplied,then
A)the quantity of nonmonetary assets demanded exceeds the quantity supplied.
B)the quantity of nonmonetary assets supplied exceeds the quantity demanded.
C)the quantity of nonmonetary assets demanded will still equal the quantity supplied,all else being equal.
D)you can make no conclusions about the relative supply and demand of nonmonetary assets.
Q4) Explain how growth in the money supply and inflation are related.
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Chapter 8: Business Cycles
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Sample Questions
Q1) Which of the following statements is NOT true about the Canadian business cycle?
A)In the early 20th century,there were almost as many months of contraction as months of expansion.
B)From 1945 to 2001,the number of months of expansion outnumbered the months of contraction by more than five to one.
C)The worst economic contraction in the history of Canada was the Great Recession of 2008.
D)Strong economic recoveries were associated with World War I and World War II.
Q2) Wars,new inventions,harvest failures,and changes in government policy are examples of
A)the business cycle.
B)economic models.
C)shocks.
D)opportunity costs.
Q3) What are some of the problems with using the leading indicators to forecast recessions? If you were a policymaker,would you rely on them?
Q4) Explain how nominal money growth varies across the business cycles and why it is volatile.
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Chapter 9: The Is-Lm-Fe Model: a General Framework for
Macroeconomic Analysis
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Q1) The multiplier effect arises because
A)the IS curve is downward sloping.
B)the LM curve is upward sloping.
C)prices are flexible.
D)the initial increase in government purchases increases the number of transactions over time.
Q2) Any change that reduces desired saving relative to desired investment (for a given level of output)causes the real interest rate to ________ and shifts the IS curve
A)increase;down
B)increase;up
C)decrease;down
D)decrease;up
Q3) Which of the following changes shifts the AD curve to the right?
A)a temporary decrease in government purchases
B)a decline in the nominal money supply
C)an increase in corporate taxes
D)an increase in consumer confidence
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Chapter 10: Exchange Rates, business Cycles, and Macroeconomic Policy
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Sample Questions
Q1) The nominal exchange rate between the Canadian dollar and the Japanese yen is 80.It means that
A)a dollar can buy 80 yen in the foreign exchange market.
B)a yen can buy 80 cents in the foreign exchange market.
C)a dollar cay buy about 0.012 yen in the foreign exchange market.
D)a yen can buy 0.20 cents in the foreign exchange market.
Q2) An overvalued currency arises when
A)the demand for the currency exceeds the supply.
B)the Central Bank gains reserves while maintaining the exchange rate.
C)the Central Bank keeps the official rate above the fundamental value.
D)the Central Bank keeps the official rate below the fundamental value.
Q3) Because of the rising level of debt in the United States after the 2008 recession,the nominal interest rate is expected to rise in the United States more than in Canada.According to the interest rate parity theorem,
A)the Canadian nominal exchange rate is expected to depreciate.
B)the Canadian nominal exchange rate is expected to appreciate.
C)U)S.inflation is expected to rise slower than Canadian inflation.
D)the rate of return on financial assets is expected to be higher in the United States than in Canada.
Page 12
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Chapter 11: Classical Business Cycle Analysis:
Market-Clearing Macroeconomics
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Sample Questions
Q1) Classical economists oppose government intervention in the economy for all the reasons below except that
A)policies to smooth out the business cycle are undesirable in principle.
B)increased government expenditures will lower the real wages of workers.
C)government policy is incapable of smoothing out the business cycle.
D)increases in government spending cannot increase the level of output and employment in the economy.
Q2) Which of the following is NOT part of calibration method used by the RBC theorists to analyze the business cycles?
A)Write a specific classical model of the economy.
B)Use the previous studies to assign the parameters of the model.
C)Examine the effects of random shocks on the main variables of the model.
D)Estimate the parameters of the model to predict the future values of the model.
Q3) How is the Solow residual measured? What problems arise in its measurement when resource utilization varies over the business cycle? What implications do these measurement issues have for evidence supporting the RBC model?
Q4) Why doesn't stabilization policy work,according to economists using the misperceptions theory?
Page 13
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Chapter 12: Keynesian Business Cycle Analysis: Non Market
Clearing Macroeconomics
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Sample Questions
Q1) a.Draw a figure,using the Keynesian IS-LM framework,of an economy in recession. b.Now suppose the IS curve shifts to the right far enough that if the real interest rate is unchanged,output will increase beyond full employment.If the Central Bank's goal is to move output to its full-employment level,what must happen to the real interest rate? What is the effect on the price level?
c.Suppose,before the Bank can act,that the government announces a restrictive fiscal policy,shifting the IS curve to the left relative to its position in part (b).What is the Bank likely to do (relative to what it would do if fiscal policy wasn't restrictive)if its goal is to target full-employment output? What happens to the real interest rate relative to what it is in part (b)?
Q2) The recent experience in Japan was characterized by ________ monetary policy and ________ fiscal policy.
A)tight;easy
B)tight;tight
C)easy;easy
D)easy;tight
Q3) Keynesian models rely on the sticky-wage assumption.Explain the rationale for this assumption.
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Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) The relationship between inflation and unemployment is given by = - 3(u - .06).
a.Graph the short-run and long-run Phillips curves.
b.What is the value of the natural rate of unemployment?
c.If actual inflation is .02 and expected inflation is .05,what is the unemployment rate?
d.If actual inflation is .08 and expected inflation is .05,what is the unemployment rate?
Q2) The Bank of Canada announces that it will increase the money supply by 5 percent for the next five years.This will cause
A)the expected inflation to increase and the Phillips curve to shift right.
B)the expected inflation to decrease and the Phillips curve to shift right.
C)the natural rate of unemployment to decrease and the Phillips curve to shift left. D)the natural rate of unemployment to increase and the Phillips curve to shift left.
Q3) 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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Chapter 14: Monetary Policy and the Bank of Canada
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Sample Questions
Q1) 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 money multiplier equals A)2.00.
B)2.40.
C)3.00.
D)4.00.
Q2) The liabilities of the Central Bank that are usable as money are called A)the demand deposits. B)M2.
C)high-power money. D)M1.
Q3) What types of rules for monetary policy may be sensible for policymakers to consider? What is the advantage of using rules over discretion? What problems might there be with rules?
Q4) What is quantitative easing and how does it work? Give an example of a case when it was used and how effective was.
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) Which of the following is NOT an argument against the Ricardian equivalence theorem?
A)the lack of the central bank's independency
B)failure to leave bequests
C)non-lump-sum taxes
D)shortsightedness
Q2) The real seignorage collected by the government is the product of
A)the rate of inflation and the real supply of government bonds.
B)the rate of inflation and the real money supply.
C)the debt/GDP ratio and the real money supply.
D)the debt/GDP ratio and the rate of inflation.
Q3) In Canada,the government spending as a percentage of GDP has A)increased.
B)been stable.
C)decreased.
D)been less than that in the U.S.
Q4) What are the main reasons (give at least three)that Ricardian equivalence might not hold?
Q5) Why should government smooth tax rates? If they do so,what happens to deficits over the business cycle?
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