Principles of Macroeconomics
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Course Introduction
Principles of Macroeconomics introduces students to the fundamental concepts and theories that explain the functioning of the overall economy. The course covers topics such as national income, gross domestic product (GDP), inflation, unemployment, fiscal and monetary policies, and international trade. Students will learn how economies grow and fluctuate, the factors influencing economic performance, and the roles that government and central banks play in promoting economic stability and development. Through real-world applications and data analysis, the course equips students with the tools to understand and evaluate current economic issues and policy debates.
Recommended Textbook
Macroeconomics 1st Canadian Edition by R. Glenn Hubbard
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Chapter 1: Introduction to Macroeconomics and the Great Recession
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Sample Questions
Q1) All of the following are part of an economic model,except A) data.
B) opinions.
C) assumptions.
D) hypotheses.
Answer: B
Q2) Long-run economic growth is the process by which productivity increases
A) the employment rate.
B) the average standard of living.
C) the size of the labour force.
D) federal tax revenues.
Answer: B
Q3) If you were building a macroeconomic model that explores the effect of the increase in interest rates on the inflation rate in Great Britain,interest rates would be an ________ variable and the inflation rate would be an ________ variable.
A) endogenous; endogenous
B) endogenous; exogenous
C) exogenous; exogenous
D) exogenous; endogenous
Answer: D
Page 3
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Chapter 2: Measuring the Macroeconomy
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Sample Questions
Q1) If the actual inflation rate is less than the expected inflation rate,the actual real interest rate will be ________ than the expected real interest rate.When this happens,________ will lose and ________ will gain.
A) less; borrowers; lenders
B) less; lenders; borrowers
C) greater; borrowers; lenders
D) greater; lenders; borrowers
Answer: C
Q2) Suppose the working-age population of a fictional economy falls into the following categories: 30 are retired; 45 are stay-at-home parents; 120 are employed full time; 40 are employed part time; 25 are unemployed but are actively looking for employment; 15 are unemployed and are not actively looking for employment.The official unemployment rate as calculated by Statistics Canada would be A) 9.62%.
B) 13.51%.
C) 14.55%.
D) 20.0%.
Answer: B
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Chapter 3: The Canadian Financial System
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Sample Questions
Q1) Some mutual funds in Canada are now investing in stocks of foreign firms.By expanding to global financial markets,these mutual funds will be able to diversify their stock portfolios,allowing savers more options to spread their money among many financial investments.This is an example of
A) risk sharing.
B) providing information.
C) investor securitization.
D) decreasing liquidity.
Answer: A
Q2) Suppose a Canada Savings Bond will mature in 4 years.If the bond pays a coupon of $200 per year and will make a final par value payment of $5000 at maturity,what is its price if the relevant market interest rate is 3%?
A) $5185.85
B) $5304.26
C) $5743.42
D) $6011.82
Answer: A
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Chapter 4: Money and Inflation
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Sample Questions
Q1) How is the quantity theory of money different from the quantity equation,and why must the quantity equation always be true?
Q2) Suppose you purchase a bottle of vitamin water with a price of $3.The price of $3 best reflects the function of money as a ________,and when you take $3 out of your wallet to purchase the bottle,money is functioning as a ________.
A) medium of exchange; standard of deferred payment
B) store of value; unit of account
C) unit of account; medium of exchange
D) medium of exchange; store of value
Q3) According to the quantity theory of money,the inflation rate equals
A) money supply minus real GDP.
B) the growth rate of the money supply minus the growth rate of real GDP.
C) real GDP minus the money supply.
D) the growth rate of real GDP minus the growth rate of the money supply.
Q4) Which of the following best represents the money supply?
A) Money supply = Monetary base
B) Money supply = Monetary base / Money multiplier
C) Money supply = Money multiplier ( Currency in circulation + Reserves)
D) Money supply = (Currency in circulation + Reserves) / Money multiplier
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Chapter 5: The Global Financial System and Exchange Rates
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Sample Questions
Q1) One advantage of a floating exchange rate system compared to a fixed or managed float exchange rate system is
A) it is easier for central banks to control inflation.
B) there is no need for government intervention.
C) it allows greater exchange rate stability.
D) it eliminates the possibility of depreciation during a recession.
Q2) An increase in capital outflows from Canada will
A) decrease the balance of the Canadian current account.
B) decrease the balance of the Canadian financial account.
C) increase the balance of the capital account of Canada.
D) decrease the balance of the capital account of Canada.
Q3) The higher the real interest rate,the ________ investment projects firms can profitably undertake,and the ________ the quantity of loanable funds they will demand.
A) more; smaller
B) more; greater
C) fewer; greater
D) fewer; smaller
Q4) What determines the supply of loanable funds and the demand for loanable funds?
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Q5) What is the difference between nominal exchange rates and real exchange rates?
Chapter 6: The Labour Market
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Sample Questions
Q1) Daniel was just laid off from his teaching job at the local high school due to budget cuts resulting from the reduction in tax revenue during the recent economic downturn.Daniel would best be categorized as
A) frictionally unemployed.
B) structurally unemployed.
C) cyclically unemployed.
D) seasonally unemployed.
Q2) Holding other factors constant,decreasing the amount and duration of unemployment benefits would likely
A) decrease cyclical unemployment and the natural rate of unemployment.
B) increase structural unemployment and the natural rate of unemployment.
C) increase frictional unemployment and the natural rate of unemployment.
D) decrease the natural rate of unemployment.
Q3) Unemployment due to factors such as weather or fluctuations in demand for certain goods and services during different times of the year is called ________ unemployment.
A) frictional
B) structural
C) cyclical
D) seasonal
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Chapter 7: The Standard of Living Over Time and Across Countries
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Sample Questions
Q1) Suppose that the production function for an economy is Y = AK¹/³ ²/³.On one graph,show the production function undergoing two equal increases in workers,holding capital and total factor productivity constant,and on a second graph show the production function undergoing two equal increases in total factor productivity,holding capital and labour constant.Explain what happens to real GDP in each situation.
Q2) Suppose that the production function for the economy is: Y = AK¹/ ³/ .Assume that A = 1000,the capital stock is $32 000 billion,and the labour force is 120 million (or 0.120 billion)workers.The value of the marginal product of capital is A) $0.0147.
B) $0.0213.
C) $0.0597.
D) $0.25.
Q3) All else equal,as the capital stock increases,the marginal product of capital will A) increase at an increasing rate.
B) increase at a decreasing rate. C) decrease at an increasing rate. D) decrease at a decreasing rate.
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Chapter 8: Long-Run Economic Growth
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Q1) If the actual capital-labour ratio is below the steady-state capital-labour ratio,growth from convergence will be ________,and the economy will grow ________ than it will along a balanced growth path.
A) negative; slower
B) negative; faster
C) positive; slower
D) positive; faster
Q2) By comparing ________ and ________,we will be able to determine what happens with capital stock over time.
A) investment; spending
B) consumption; spending
C) investment; depreciation
D) consumption; depreciation
Q3) In the Solow growth model,the steady state occurs when A) investment = depreciation.
B) depreciation = 0.
C) the capital-labour ratio = 1.
D) saving = investment.
Q4) What is the difference between real GDP per worker and real GDP per effective worker?
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Chapter 9: Business Cycles
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Sample Questions
Q1) If households save $0.40 of each additional dollar of increased income and spend the rest,the expenditure multiplier will be
A) 1.67.
B) 2.5.
C) 4.
D) 6.
Q2) Assume that for the third quarter of 2012,actual real GDP was $176.1 billion and potential real GDP was $163.9 billion.According to Okun's law,the cyclical unemployment rate during the third quarter of 2012 was
A) -6.1%.
B) -3.7%.
C) 3.5%.
D) 6.1%.
Q3) At full-employment GDP,
A) the long-run aggregate demand curve is horizontal.
B) the long-run aggregate demand curve is vertical.
C) the long-run aggregate supply curve is horizontal.
D) the long-run aggregate supply curve is vertical.
Q4) Explain the relationship between business cycles in different countries.
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Chapter 10: Explaining Aggregate Demand: the Is-Mp Model
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Sample Questions
Q1) The Bank of Canada has control over the long-term real interest rate provided that three variables remain unchanged.These three variables include all of the following,except
A) the expected rate of inflation.
B) the default premium.
C) term structure effects.
D) the short-term real interest rate.
Q2) The IS curve shows the combinations of ________ and ________ where the goods market is in equilibrium.
A) aggregate expenditure; real GDP
B) the real interest rate; real GDP
C) potential GDP; aggregate expenditure
D) the nominal interest rate; the quantity of money
Q3) The IS-MP model assumes the Bank of Canada targets ________,and the IS-LM model assumes the Bank of Canada targets ________.
A) the expected inflation rate; the unemployment rate
B) the short-term nominal interest rates; the money supply
C) the output gap; the long-term real interest rate
D) short-term real interest rates; the expected inflation rate
Q4) Explain how the AD curve can be derived from the IS-MP model.
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Chapter 11: The Is-Mp Model: Adding Inflation and the Open Economy
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Q1) <b>Refer to Figure 11.2.</b>.Assume the economy is in equilibrium at ,where real GDP equals potential GDP,and then the economy experiences a positive demand shock.Other things equal,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.
Q2) A Phillips curve shows the short-run relationship between
A) potential GDP and real GDP.
B) the nominal interest rate and the real interest rate.
C) tax rates and tax revenues.
D) the unemployment rate and the inflation rate.
Q3) Assume the expected inflation for this year was 2%,but the actual inflation turned to be 6%.What are the implications of this unanticipated inflation on:
a) your salary?
b) your student loan?
Q4) 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.
Page 13
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Chapter 12: Monetary Policy in the Short Run
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Q1) The goal of the Bank of Canada is
A) a high foreign-exchange value of the dollar.
B) a high reserve ratio.
C) no inflation.
D) price stability.
Q2) The most important policy tool used by the Bank of Canada is
A) the target inflation rate.
B) the discount rate.
C) the required reserve rate.
D) the target for the overnight rate.
Q3) If the Bank of Canada attempts to increase real GDP and employment by ________ its target for overnight rate,it is conducting ________ monetary policy.
A) raising; expansionary
B) raising; contractionary
C) lowering; expansionary
D) lowering; contractionary
Q4) What is a liquidity crisis?
Q5) Why does the Bank of Canada attempt to achieve a low,stable rate of inflation rather than an inflation rate of 0%?
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Chapter 13: Fiscal Policy in the Short Run
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Sample Questions
Q1) C = $40 million + 0.6(1 - 0.2)Y
I = $35 million
G = $31 million
NX = -$6 million
Based on the above data,the value of the expenditure multiplier is
A) 1.14.
B) 1.92.
C) 2.08.
D) 8.33.
Q2) <b>Refer to Figure 13.2.</b>Assume the economy is initially in equilibrium with real GDP equal to potential GDP.Other things equal,if the economy enters a recession and the government underestimates the severity of the recession when implementing fiscal policy,the output gap will ________ and the rate of inflation will ________ than if the government had correctly estimated the recession's severity.
A) decrease less; decrease less
B) decrease more; decrease more
C) decrease more; decrease less
D) not change; not change
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Chapter 14: Aggregate Demand, aggregate Supply, and Monetary Policy
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Q1) Suppose the economy is initially in equilibrium where real GDP equals potential GDP and the inflation rate is at the target rate.Other things equal,a housing boom will cause aggregate expenditures to increase,which will result in a new,short-run equilibrium.To return GDP to its potential level,the inflation rate will adjust.With adaptive expectations,this moves the economy to another new short-run equilibrium point.Since the housing boom is temporary,the end of the housing boom will move the economy to yet another new equilibrium point.From this point,since expectations are adaptive,the economy will experience ________ as it moves back to long-run equilibrium.
A) a decrease in aggregate demand and an increase in the inflation rate
B) an increase in aggregate supply and an increase in the inflation rate
C) a decrease in aggregate demand and a decrease in the inflation rate
D) an increase in aggregate supply and a decrease in the inflation rate
Q2) When the economy responds to a supply shock,there is ________ in the short run and ________ in the long run between inflation and unemployment
A) an inverse relationship; no trade-off
B) no trade-off; an inverse relationship
C) an inverse relationship; an inverse relationship
D) no trade-off; no trade-off
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Chapter 15: Fiscal Policy and the Government Budget in the
Long Run
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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) Holding everything else constant,if total factor productivity ________ or if the labour force growth rate ________ the debt-to-GDP ratio will increase.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Q3) Explain why many economists are skeptical about whether Ricardian equivalence describes the behaviour of households in the economy.
Q4) Explain why debt is usually measured using the debt-to-GDP ratio rather than the absolute amount of debt.
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Chapter 16: Consumption and Investment
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Q1) If a person completely smooths consumption over his lifetime,then consumption is best represented by which of the following?
A) wealth / the number of years the person expects to live
B) lifetime income / the number of years the person expects to work
C) (wealth + lifetime income) / the number of years the person expects to live
D) (wealth + lifetime income) / the number of years the person expects to work
Q2) According to the life-cycle hypothesis,
A) consumption during retirement decreases at a greater rate than disposable income. B) consumption during working years increases at a greater rate than disposable income.
C) saving during retirement decreases at a greater rate than disposable income.
D) consumption and saving are smoothed out over a lifetime so they both change at the same rate as disposable income.
Q3) Explain why asymmetric information can cause the real interest rate to increase,and why increases in the real interest rate can actually make lending more risky for financial institutions.
Q4) Explain how changes in corporate taxes affect the investment decisions of firms.
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