Principles of Macroeconomics Practice Exam
Course Introduction
Principles of Macroeconomics introduces students to the fundamental concepts and theories that describe the behavior of an economy as a whole. The course covers key topics such as national income determination, economic growth, unemployment, inflation, and the role of government fiscal and monetary policy. Students explore the measurement of economic performance using indicators like GDP, analyze aggregate demand and supply, and examine the impact of international trade and finance. Through real-world applications and current events, the course provides a solid foundation for understanding macroeconomic challenges and policy debates that affect societies globally.
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Macroeconomics 6th Canadian Edition by Andrew
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15 Chapters
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Page 2
B. Abel
Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) When national output declines, the economy is said to be in
A) an expansion.
B) a deflation.
C) a recovery.
D) a recession.
Answer: D
Q2) Which of the following statements characterizes the trend in the Canadian aggregate price level?
A) Despite fluctuations, CPI has risen significantly.
B) Canada has never experienced deflation.
C) Inflation has always been low, thanks to the Bank of Canada's policy.
D) The most recent deflation in Canada occurred in 2008.
Answer: A
Q3) 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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Page 3
Chapter 2: The Measurement and Structure of the Canadian Economy
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Sample Questions
Q1) 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
Q2) What is the difference between nominal and real economic variables? Why do economists tend to concentrate on changes in real magnitudes?
Answer: Nominal variables are in units of money, while real variables are in physical quantities of output. We measure nominal variables using current market prices and real variables using market prices in a given base year. Nominal variables may increase, but you don't know if the increase is due to higher prices and the same quantity, or a higher quantity with unchanged prices; real variables reflect just quantity changes. For the most part, real variables (consumption, investment, the capital stock) affect each other in the economy, with lesser roles played by nominal variables (money supply, price level).
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Page 4
Chapter 3: Productivity, Output, and Employment
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Sample Questions
Q1) Suppose that in 2002 Freedonia had GDP equal to 2000 million, the capital stock was equal to 1700 million, the number of employees equaled 70 million. The production function is Y = AK<sup>0.25</sup><sup>N</sup><sup>0.75</sup>. Total factor productivity of the economy in that year was approximately equal to A) 0.09.
B) 2.61.
C) 4.19.
D) 12.87.
Answer: D
Q2) An increase in the real wage will cause an individual to increase his or her supply of labour if
A) the substitution effect is greater than the income effect.
B) the income effect is greater than the substitution effect.
C) the substitution effect is equal to the income effect.
D) the substitution effect is negative and the income effect is positive.
Answer: A
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5
Chapter 4: Consumption, Saving, and Investment
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Sample Questions
Q1) An increase in expected future output while holding today's output constant would
A) increase today's desired consumption and increase desired national saving.
B) increase today's desired consumption and decrease desired national saving.
C) decrease today's desired consumption and increase desired national saving.
D) decrease today's desired consumption and decrease desired national saving.
Q2) A decrease in the real interest rate will
A) increase the desired capital stock.
B) decrease the desired capital stock.
C) have no effect on the desired capital stock.
D) have the same effect on the desired capital stock as an increase in corporate taxes.
Q3) The stock market just crashed; the Dow Jones Industrial Average fell by 750 points. You would expect the effect on aggregate consumption to be the largest if which of the following facts were true?
A) The crash had been preceded by a large run-up in the price of stocks.
B) Most stocks were owned by insurance companies.
C) Most stocks were owned by pension funds that invested in the market.
D) Many individuals had invested in the stock market immediately prior to the crash.
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Page 6
Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) 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.
Q2) The main difference between the small open economy and the large open economy is that
A) the former faces a fixed international real interest rate, but the latter can influence it.
B) the former can influence the international real interest rate, but the latter cannot.
C) the former cannot maintain a large current account deficit, but the latter can.
D) the former can maintain a large current account deficit, but the latter cannot.
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7
Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) The oil price explanation of the slowdown in economic growth after 1973 is inconsistent with which of the following facts?
A) Prices of used capital goods that were dependent on oil did not drop sharply when oil prices increased.
B) The productivity slowdown began just as oil prices were quadrupled in 1973.
C) The productivity slowdown occurred in all industrial countries.
D) Industry-by-industry analysis of the impact on oil prices bears out the damage done by the oil price increases.
Q2) Describe the pros and cons of industrial policy. Which type of economist is more likely to support industrial policy, a Keynesian or a classical economist? Why?
Q3) If in an economy the human capital increases with the increase in the physical capital,
A) there will be a diminishing marginal productivity of physical capital.
B) there will be no change in marginal productivity of physical capital.
C) the economy's growth rate will depend on its saving rate.
D) Both B and C are correct.
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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Page 8
Chapter 7: The Asset Market, Money, and Prices
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Sample Questions
Q1) Calculate the appropriate (income or interest) elasticity of money demand for each of the following cases:
a. Income rises 2% while real money demand rises 1%
b. Interest rate rises from 4% to 5% while real money demand falls 1%
c. Income rises 3% and the interest rate rises from 5% to 6%, while real money demand rises 1% during one year; in another year, income falls 3.5%, the interest rate falls from 4% to 3%, while real money demand falls 1%
Q2) An increase in the real interest rate would cause an increase in the real demand for money
A) no matter what the change in expected inflation.
B) if expected inflation fell by less than the rise in the real interest rate.
C) if expected inflation fell by the same amount as the rise in the real interest rate.
D) if expected inflation fell by more than the rise in the real interest rate.
Q3) The use of money is more efficient than barter because the introduction of money
A) reduces the need for economic specialization.
B) reduces the need to exchange goods.
C) reduces the need for other stores of value.
D) reduces transaction costs.
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9
Chapter 8: Business Cycles
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Sample Questions
Q1) Which of the following is not included in the index of leading indicators calculated by Statistic Canada?
A) US composite leading index
B) GDP
C) Money supply
D) Employment in business and personal services
Q2) During the Iraq war, the Iraqis' infrastructure and capital were destroyed. This means that
A) the Iraqis' long-run aggregate supply has shifted rightward.
B) the Iraqis' long-run aggregate supply has shifted leftward.
C) the Iraqis' aggregate demand has shifted leftward.
D) the Iraqis' aggregate demand has shifted rightward.
Q3) Which of the following is not a component of the Index of Leading Economic Indicators?
A) an index of 300 common stock prices
B) employment in business and personal services
C) an index of consumer imports from industrial countries
D) average work week in manufacturing
Q4) How has the severity and duration of business cycles changed over time in Canada?
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Chapter 9: The IS-LMAD-AS Model: A General Framework for
Macroeconomic Analysis
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Sample Questions
Q1) Desired consumption is C<sup>d</sup> = 2000 + 0.9Y - 100,000 r - G, and desired investment is I<sup>d</sup> = 1000 - 45,000r. Real money demand is M<sup>d</sup>/P = Y - 6000i. Other variables are <sup>e</sup> = 0.03, G = 500, Y = 1000, and M = 2100.
a. Find the equilibrium values of the real interest rate, consumption, investment, and the price level.
b. Suppose government purchases decline to 400. What happens to the variables listed in part (a)?
c. Suppose government purchases rise to 600. What happens to the variables listed in part (a)?
d. What feature in this example leads to the result that you don't need to know the amount of taxes collected by the government to find the equilibrium?
Q2) 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.
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Chapter 10: Exchange Rates, Business Cycles, and
Macroeconomic Policy in the Open Economy
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Sample Questions
Q1) The Canadian real interest rate rises relative to the British real interest rate. British net exports ________ and the British exchange rate ________.
A) increase; rises
B) increase; falls
C) decrease; rises
D) decrease; falls
Q2) International businesses like a fixed-exchange-rate system because
A) they like large swings in currency values when devaluation or revaluation occur.
B) they profit by speculating on devaluation or revaluation.
C) they can plan better if they know what the exchange rate will be.
D) fixed exchange rates are economically efficient.
Q3) The Bretton Woods system relied on
A) a flexible-exchange-rate system.
B) a floating-exchange-rate system.
C) a fixed-exchange-rate system.
D) an exchange-rate union.
Q4) Describe the effects of a rise in the domestic real interest rate on the exchange rate and on both domestic and foreign net exports.
Page 12
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Chapter 11: Classical Business Cycle Analysis:
Market-Clearing Macroeconomics
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Sample Questions
Q1) Critics of the RBC approach argue that it's hard to find productivity shocks large enough to cause business cycles. What is the RBC counterargument to this criticism?
A) Business cycles are always and everywhere a monetary phenomenon.
B) Wars and military buildups could be considered productivity shocks.
C) Business cycles could be caused by the accumulation of small productivity shocks.
D) Business cycles are often caused by unobservable productivity shocks, which aren't apparent at the time they occur.
Q2) Labour hoarding occurs
A) when firms keep good workers so other firms can't hire them.
B) when the unemployment rate exceeds the natural rate of unemployment.
C) when involuntary unemployment exceeds voluntary unemployment.
D) when, because of hiring and firing costs, firms retain workers in a recession that they would otherwise lay off.
Q3) Why doesn't stabilization policy work, according to economists using the misperceptions theory?
Q4) Why do many economists believe that money affects output? What is the empirical evidence in support of that belief?
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Chapter 12: Keynesian Business Cycle Analysis:
Non-Market-Clearing Macroeconomics
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Sample Questions
Q1) The crowding-out effect refers to a situation where
A) an easy fiscal policy reduces interest rate and increases investment.
B) an easy monetary policy reduces interest rate and increases investment.
C) an easy fiscal policy increases interest rate and decreases investment.
D) an easy monetary policy increases interest rate and decreases investment.
Q2) Unanticipated increase in the government expenditures would
A) shift the LM curve to the right, and the AD curve up and to the right.
B) shift the IS curve to the right, and the AD curve up and to the right.
C) shift the IS curve to the left, and the AD curve up and to the right.
D) shift the IS curve to the right, and the AD curve down and to the left.
Q3) In the Keynesian model, wages and prices are
A) sticky in the short run, but flexible in the long run.
B) sticky in the long run, but flexible in the short run.
C) forecast accurately by both employees and employers.
D) flexible in the short run and the long run.
Q4) In the Keynesian model in the long run, an increase in the money supply will
A) raise the price level but not the level of output.
B) raise the level of output but not the price level.
C) raise both the level of output and the price level.
D) raise neither the level of output nor the price level.
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Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) If a rapid disinflation has a lower sacrifice ratio than a slow disinflation, then reducing inflation is best accomplished by
A) gradualism.
B) increasing money growth.
C) reducing interest rates.
D) a cold-turkey approach.
Q2) What are the pros and cons of using cold turkey disinflation compared to a policy of gradualism?
Q3) Countries in which wages adjust rapidly to changes in the supply and demand for labour are likely to have ________ sacrifice ratio.
A) an infinite
B) a high
C) a low
D) a negative
Q4) One cost of a perfectly anticipated inflation is that it
A) transfers wealth from lenders to borrowers.
B) transfers wealth from borrowers to lenders.
C) erodes the value of currency.
D) damages the role of prices as signals in the economy.
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Chapter 14: Monetary Policy and the Bank of Canada
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Sample Questions
Q1) Assume that the currency-deposit ratio is 0.5 and the reserve-deposit ratio is 0.2. The Bank of Canada carries out open-market operations, purchasing $1,000,000 worth of bonds from banks. This action will increase the money supply by
A) $1,428,571.
B) $1,714,285.
C) $2,142,857.
D) $2,400,000.
Q2) Vault cash is equal to $2 million, deposits by depository institutions at the Central Bank are $3 million, the monetary base is $10 million, and bank deposits are $25 million. Bank reserves are equal to
A) $2 million.
B) $3 million.
C) $5 million.
D) $10 million.
Q3) Monetarists suggest doing which of the following?
A) maintain a steady growth rate of the money supply
B) use fiscal policy to combat unemployment in the short run
C) use monetary policy to combat unemployment in the long run
D) use fiscal policy to combat inflation in the long run
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Page 16
Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) Which of the following would be most likely to increase consumption in the economy?
A) a lump-sum tax cut
B) a tax break for saving account
C) a cut in sales taxes
D) a cut in the corporate tax rate
Q2) Real money demand in the economy is given by L = 0.3Y - 600i, where Y is real income and i is the nominal interest rate. In equilibrium, real money demand L equals real money supply M/P. Suppose that Y equals 2000 and the real interest rate is 5%.
a. At what rate of inflation is seignorage maximized?
b. What is the maximum amount of seignorage revenue?
Q3) Assume the marginal tax rate for income above $25000 has risen to 30 percent. If the tax rate for the income less than $25000 is 10 percent, what is the average tax rate for a person with an income of $40,000?
A) 15%
B) 16%
C) 17.5%
D) 18%
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