Principles of Macroeconomics
Pre-Test Questions
Course Introduction
Principles of Macroeconomics introduces students to the fundamental concepts and theories that underpin the study of the economy as a whole. Topics include national income determination, gross domestic product (GDP), unemployment, inflation, economic growth, and the roles of government policies in stabilizing the economy. The course provides an overview of how economic indicators are measured and analyzed, the functioning of markets at an aggregate level, and the impact of fiscal and monetary policies on economic performance. Emphasis is placed on real-world applications and the interconnectedness of global economies.
Recommended Textbook Principles of Macroeconomics 1st Edition by N. Gregory Mankiw
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Chapter 1: Ten Principles of Economics
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Sample Questions
Q1) Carol has spent $2000 purchasing and repairing an old car, which she expects to sell for $2400. She discovers that she needs an additional repair, which will cost $400. She can sell the car as it is now for $2000. What should she do?
A) She should sell the car now for $2000.
B) She should never sell something for less than it cost.
C) She should complete the repairs and sell the car.
D) It doesn't matter which action she takes; the outcome is the same either way.
Answer: D
Q2) Tim has spent $2500 purchasing and repairing a Hummer, which he expects to sell for $3500. He discovers that he needs an additional repair, which will cost $1100. He can sell the Hummer as it is now for $900. What should he do?
A) He should take the $900.
B) He should never sell something for less than it cost.
C) He should complete the repairs and sell the Hummer.
D) It doesn't matter which action he takes; the outcome is the same either way.
Answer: C
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Chapter 2: Thinking Like an Economist
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Sample Questions
Q1) When a production possibilities frontier is linear, what does it show?
A) a truer picture of real life than a bowed-out production possibilities frontier
B) that resources are perfectly adaptable from the production of one good to another
C) an example of increasing opportunity cost
D) an example of decreasing opportunity cost
Answer: B
Q2) Refer to Figure 2-6. What was the most likely cause of the movement from point C to point D?
A) unemployment
B) a decrease in society's preference for bananas
C) a decrease in society's preference for playing baseball
D) a shift to a longer working day
Answer: A
Q3) Refer to Figure 2-11. Points A, B, and D represent feasible or attainable outcomes for society.
A)True
B)False
Answer: True
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4
Chapter 3: Interdependence and the Gains From Trade
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Sample Questions
Q1) Refer to Figure 3-3. For Jerry, what is the opportunity cost of 1 kg of ice cream?
A) 1/3 kg of cones
B) 1 kg of cones
C) 3/2 kg of cones
D) 2 kg of cones
Answer: C
Q2) Refer to Figure 3-5. If Fred and Ginger devote half of their time (20 hours) to the production of each good, what would the total production be?
A) 7 ballet slippers and 8 tap shoes
B) 8 ballet slippers and 8 tap shoes
C) 9 ballet slippers and 6 tap shoes
D) 10 ballet slippers and 8 tap shoes
Answer: A
Q3) If it takes Canadian workers fewer hours to produce every good than it takes German workers, Canada cannot gain from trade with Germany.
A)True
B)False
Answer: False
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Chapter 4: The Market Forces of Supply and Demand
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Sample Questions
Q1) Market demand is given as QD = 140 - 5P. Market supply is given as QS = 2P. If price increases from $25 to $27, what is the price elasticity of demand?
A) 0.013
B) 0.13
C) 1.3
D) 13.0
Q2) Suppose you make jewellery. If the price of silver falls, what would we expect you to do?
A) be willing and able to produce less jewellery than before at each possible price
B) be willing and able to produce more jewellery than before at each possible price
C) face a greater demand for your jewellery
D) face a weaker demand for your jewellery
Q3) Which of the following will definitely cause equilibrium quantity to fall?
A) demand increases and supply decreases
B) demand and supply both decrease
C) demand decreases and supply increases
D) demand and supply both increase
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Chapter 5: Measuring a Nations Income
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Sample Questions
Q1) Why does expenditure equal income?
A) because firms are required by law to pay out all their revenue as income to someone
B) because ultimately firms are owned by households
C) because for every sale there is a buyer and a seller
D) because the demand and supply of goods and services must be equal
Q2) How is a country's wealth related to other measures of well-being such as life expectancy and literacy?
A) positively with both life expectancy and literacy
B) unrelated with life expectancy; positively with literacy
C) negatively with life expectancy; unrelated to literacy
D) negatively with both life expectancy and literacy
Q3) Which example would affect GDP, as measured by Statistics Canada?
A) A computer manufacturer sells computers to a bank.
B) Nick receives $45,000 from his company in compensation for losing his job.
C) You purchase the condo that you used to rent.
D) The local water company takes 20,000 litres of water from a nearby river.
Q4) Income exceeds production.
A)True
B)False
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Chapter 6: Measuring the Cost of Living
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Sample Questions
Q1) Consumers begin purchasing houses incorporating steel studs instead of wooden studs after the price of lumber increases. Which problem in the construction of the CPI does this situation best represent?
A) substitution bias
B) introduction of new goods
C) unmeasured quality change
D) income bias
Q2) What does "substitution bias" in the consumer price index refer to?
A) replacing old goods with new goods in consumer purchases
B) replacing low-quality goods with high-quality goods in consumer purchases
C) replacing expensive goods with cheaper goods in consumer purchases
D) replacing old technology goods with new technology goods in consumer purchases
Q3) The price index in 2014 is 120, and in 2015 it is 127.2. What is the inflation rate?
A) 5 percent
B) 6 percent
C) 7.2 percent
D) 8.4 percent
Q4) Why does the GDP deflator give a different rate of inflation than the CPI does?
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Chapter 7: Production and Growth
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Sample Questions
Q1) Which statement best describes the relationship between the initial wealth and the growth rate of a country?
A) Countries with the highest growth rates over the past 100 years are the ones that had the highest level of real GDP 100 years ago.
B) Countries that were rich a century ago had little fluctuation around their average growth rates during the past 100 years.
C) Though the catch-up effect may suggest otherwise, the data show no strong relationship between initial conditions and growth rates.
D) Over the past century, the United States had the highest real GDP growth rate, and now it has the highest real GDP per person.
Q2) A country without a lot of domestic natural resources can have a high standard of living.
A)True
B)False
Q3) What is a production function. Write an equation for a typical production function, and explain what each of the terms represents.
Q4) How do inward-oriented policies affect a nation's growth
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Chapter 8: Saving, Investment, and the Financial System
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Sample Questions
Q1) Suppose a small closed economy has GDP of $5 billion, consumption of $3 billion, and government expenditures of $1 billion. Then domestic investment and national saving are both $1 billion.
A)True
B)False
Q2) Which of the following most likely determines the price of stocks traded on exchanges?
A) the Corporate Securities Commission
B) the supply and demand for goods and services
C) the supply and demand for the stock
D) the Toronto Stock Exchange
Q3) The country of Hykania does not trade with any other country. Its GDP is $20 billion. Its government purchases $3 billion worth of goods and services each year, collects $3 billion in taxes, and provides $1 billion in transfer payments to households. Private saving in Hyrkania is $4 billion. What is investment in Hyrkania?
A) $1 billion
B) $2 billion
C) $3 billion
D) $4 billion
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Chapter 9: Unemployment and Its Natural Rate
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Sample Questions
Q1) Suppose that consumers decide to buy more Blu-Ray players and fewer DVD players. As a result, Blu-Ray companies expand production while DVD companies lay off workers. What is this an example of?
A) structural unemployment created by efficiency wages
B) cyclical unemployment created by a recession
C) frictional unemployment created by a sectoral shift in demand
D) frictional unemployment created by a sectoral shift in supply
Q2) Cyclical unemployment and the natural rate of unemployment are sometimes hard to distinguish from each other, so economists are not very confident about estimates of the natural rate of unemployment. Still, since unemployment rates are consistently higher in Canada and most Western European countries than in the United States, it appears that the natural rate of unemployment is lower in the United States. What might explain this difference?
Q3) About half of all spells of unemployment end when the unemployed person leaves the labour force.
A)True
B)False
Q4) Most spells of unemployment are short, and most unemployment observed at any given time is long term. How can this be?
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Chapter 10: The Monetary System
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Sample Questions
Q1) In order for currency to be widely used as a medium of exchange, it is sufficient for the government to designate it as legal tender.
A)True
B)False
Q2) Which statement best describes the outcomes of open-market purchases conducted by the Bank of Canada?
A) Bank reserves increase, and the money supply increases.
B) Bank reserves increase, and the money supply decreases.
C) The Bank of Canada borrows from member banks, which increases the money supply.
D) The Bank of Canada lends money to member banks, which decreases the money supply.
Q3) Since 1994, what was phased out as a tool used by the Bank of Canada to control the money supply?
A) changing reserve requirements
B) changing the overnight rate
C) open-market operations
D) foreign exchange market operations
Q4) What is the difference between money and wealth?
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Chapter 11: Money Growth and Inflation
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Sample Questions
Q1) Greta puts money in a savings account at her bank, earning 3.5 percent. One year later, she takes her money out and notes that while her money was earning interest, prices rose 1.5 percent. How has the amount of goods Greta can buy changed one year later?
A) Greta can buy 3.5 percent more goods.
B) Greta can buy 3.5 percent less goods.
C) Greta can buy 2 percent more goods.
D) Greta can buy 2 percent less goods.
Q2) According to the classical dichotomy theory, when the money supply doubles, what also doubles?
A) the price level
B) the real interest rate
C) the inflation rate
D) the real income
Q3) According to the quantity theory of money, when the money supply doubles, which variable doubles?
A) the price level
B) the velocity of money
C) the real GDP
D) the real wage rate
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Chapter 12: Open-Economy Macroeconomics: Basic Concepts
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Sample Questions
Q1) A Canadian firm buys apples from New Zealand with Canadian currency. The New Zealand firm then uses this money to buy packaging equipment from a Canadian firm. How do these transactions affect net exports or net capital outflow?
A) They increase New Zealand net capital outflow and New Zealand net exports.
B) They increase New Zealand net exports but not New Zealand net capital outflow.
C) They increase New Zealand net capital outflow but not New Zealand net exports.
D) They increase neither New Zealand net exports nor New Zealand capital outflow.
Q2) If the exchange rate changes from 40 Thai baht per dollar to 25 Thai baht per dollar, what has happened to the dollar?
A) It has appreciated and so buys more Thai goods.
B) It has appreciated and so buys fewer Thai goods.
C) It has depreciated and so buys more Thai goods.
D) It has depreciated and so buys fewer Thai goods.
Q3) Why are net exports and net capital outflow always equal?
Q4) What does purchasing-power parity imply about the real exchange rate?
Q5) How do we find the real exchange rate from the nominal exchange rate?
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Chapter 13: A Macroeconomic Theory of the Small Open Economy
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Sample Questions
Q1) In the open-economy macroeconomic model, where does the demand for loanable funds come from?
A) domestic investment
B) net exports
C) net capital outflow
D) the sum of net capital outflow and domestic investment
Q2) Suppose that Canada imposes restrictions on the importation of steel into Canada. According to the open-economy macroeconomic model, what would be the most likely result?
A) This policy would lower the real exchange rate and increase net exports.
B) This policy would lower the real exchange rate and have no effect on net exports.
C) This policy would raise the real exchange rate and decrease net exports.
D) This policy would raise the real exchange rate and have no effect on net exports.
Q3) Suppose that Canadian investors decide that investment opportunities in African countries have improved. What happens to Canadian net capital outflow? What happens to the Canadian real interest rate?
Q4) Explain why saving need not equal domestic investment in an open economy.
Q5) Why do higher real interest rates lead to lower net capital outflow?
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Chapter 14: Aggregate Demand and Aggregate Supply
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Sample Questions
Q1) An increase in the money supply shifts the long-run aggregate-supply curve to the right.
A)True
B)False
Q2) According to misperceptions theory, if a firm thought that inflation was going to be 5 percent and actual inflation was 4 percent, how may the firm be affected?
A) It may believe that the relative price has increased, so it would increase production.
B) It may believe that the relative price has increased, so it would decrease production.
C) It may believe that the relative price has decreased, so it would increase production.
D) It may believe that the relative price has decreased, so it would decrease production.
Q3) Aggregate demand shifts to the left if the money supply decreases.
A)True
B)False
Q4) Discuss what economists believe is different about the long and short run.
Q5) Make a list of things that would shift the aggregate-demand curve to the right.
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Chapter 15: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Sample Questions
Q1) Both the multiplier and the investment accelerator tend to make the aggregate-demand curve shift farther than the increase in government expenditures.
A)True
B)False
Q2) According to most economists, what will a cut in tax rates do?
A) increase government tax revenue
B) decrease significantly the hours people work
C) have a smaller effect on the aggregate-supply curve than what supply-side economists believe
D) increase tax revenue by increasing worker effort
Q3) For the most part, fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.
A)True
B)False
Q4) Which of the following shifts aggregate demand right?
A) an increase in government expenditures or a decrease in the price level
B) a decrease in government expenditures or an increase in the price level
C) an increase in government expenditures, but not a change in the price level
D) a decrease in the price level, but not an increase in government expenditures
Page 17
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Chapter 16: The Short-Run Tradeoff Between Inflation and Unemployment
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Q1) In the Friedman-Phelps analysis, when inflation is less than expected, unemployment is greater than the natural rate.
A)True
B)False
Q2) If efficiency wages became more common, where would the long-run Phillips curve and the long-run aggregate-supply curve shift?
A) Both the long-run Phillips curve and the long-run aggregate-supply curve would shift right.
B) Both the long-run Phillips curve and the long-run aggregate-supply curve would shift left.
C) The long-run Phillips curve would shift right, and the long-run aggregate-supply curve would shift left.
D) The long-run Phillips curve would shift left, and the long-run aggregate-supply curve would shift right.
Q3) The vertical long-run Phillips curve is an exception to monetary neutrality implied by the classical dichotomy.
A)True
B)False
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Chapter 17: Five Debates Over Macroeconomic Policy
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Q1) Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises. If the economy starts from long-run equilibrium and aggregate demand shifts right, what must the central bank do, and what will happen to output?
A) The central bank must decrease the money supply, which will move output back toward its long-run level.
B) The central bank must decrease the money supply, which will move output farther from its long-run level.
C) The central bank must increase the money supply, which will move output back toward its long-run level.
D) The central bank must increase the money supply, which will move output farther from its long-run level.
Q2) What do opponents of using policy to stabilize the economy generally believe?
A) that neither fiscal nor monetary policy have much impact on aggregate demand
B) that attempts to stabilize the economy can increase the magnitude of economic fluctuations
C) that unemployment and inflation are not cause for much concern
D) that unemployment is a cause for concern, but inflation is not
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