Principles of Macroeconomics Solved
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Introduction
Principles of Macroeconomics introduces students to the fundamental concepts and theories that explain the functioning of entire economies. The course covers topics such as national income, economic growth, inflation, unemployment, monetary and fiscal policy, and international trade. Through the study of aggregate demand and supply, students gain a framework for analyzing economic fluctuations and the policy tools available to promote stability and growth. Emphasis is placed on real-world application of macroeconomic principles to current events and macroeconomic policy debates.
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Principles of Macroeconomics 6th Canadian Edition by N. Gregory Mankiw
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Chapter 1: Ten Principles of Economics
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Sample Questions
Q1) If France is better than Belarus at producing wine,but Belarus is better than France at producing crystal,what should happen?
A)Belarus should sell crystal to France, and should buy French wine.
B)Belarus should impose a tariff on French wine in order to protect jobs in the Belarusian crystal industry.
C)Belarus should subsidize its wine industry so that it can compete with French wine.
D)Belarus should put a quota on the amount of French wine imported.
Answer: A
Q2) What is one advantage that market economies have over central planning?
A)Market economies provide an equal distribution of goods and services to consumers.
B)Market economies establish government economic control.
C)Market economies solve the problem of scarcity.
D)Market economies are more efficient.
Answer: D
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3
Chapter 2: Thinking Like an Economist
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Q1) Refer to Figure 2-1.Which arrow shows the flow of goods and services?
A)arrow A
B)arrow B
C)arrow C
D)arrow D
Answer: B
Q2) What are economists who try to improve the world considered?
A)mathematicians
B)policy advisors
C)scientists
D)politicians
Answer: B
Q3) What is the single most important purpose of your textbook?
A)to teach you about the effects of the government's economic policies
B)to teach you the language of economics
C)to teach you the economist's way of thinking
D)to teach you how to make money
Answer: C
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Chapter 3: Interdependence and the Gains from Trade
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Sample Questions
Q1) Refer to Table 3-5.Which country has an absolute or comparative advantage in each product?
A)Japan has a comparative advantage in airplanes, and Canada has an absolute advantage in cars.
B)Japan has a comparative advantage in cars, and Canada has an absolute advantage in airplanes.
C)Japan has a comparative advantage in cars, and Canada has an absolute advantage in neither good.
D)Japan has a comparative advantage in airplanes, and Canada has an absolute advantage in both goods.
Answer: A
Q2) 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
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Chapter 4: The Market Forces of Supply and Demand (PART
1)
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Q1) If a seller in a competitive market chooses to charge more than the market price,what would happen?
A)Buyers would tend to buy more from this seller.
B)The owners of the raw materials used in production would raise the prices for the raw materials.
C)Other sellers would also raise their prices.
D)Buyers will tend to make purchases from other sellers.
Q2) What is a market?
A)a group of demanders and suppliers of a particular good or service
B)a group of people with common desires
C)a place where only sellers meet
D)a place where only buyers come together
Q3) If the number of buyers in the market decreases,what will happen?
A)Demand in the market will increase.
B)Demand in the market will decrease.
C)Supply in the market will increase.
D)Supply in the market will decrease.
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Chapter 4: The Market Forces of Supply and Demand (PART
2)
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Q1) What is the relationship between price and quantity supplied?
A)negative, or inverse
B)positive, or direct
C)nonexistent
D)the same as the relationship between price and quantity demanded
Q2) A dress manufacturer is expecting higher prices for dresses in the near future.What would we expect?
A)the dress manufacturer to supply more dresses now
B)the dress manufacturer to supply fewer dresses now
C)the demand for this manufacturer's dresses to fall
D)no change in the dress manufacturer's current supply
Q3) Surpluses drive price up while shortages drive price down.
A)True
B)False
Q4) The law of supply states that,other things equal,when the price of a good rises,the quantity supplied of the good falls.
A)True
B)False
Page 7
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Chapter 5: Measuring a Nation's Income
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Sample Questions
Q1) If nominal GDP is $1 trillion and real GDP is $0.8 trillion,what is the GDP deflator?
A)0.8
B)1.25
C)80
D)125
Q2) Which of the following examples will increase Canadian net exports?
A)A Canadian resident buys a skateboard manufactured in Canada by a German firm.
B)A U.S. resident buys a Blackberry manufactured in Canada.
C)A Canadian resident buys a souvenir in Paris.
D)A Canadian resident buys Microsoft shares.
Q3) Which of the following represents a transfer payment?
A)You transfer $1000 from your bank account to a mutual fund.
B)The bank transfers $10 quarterly interest to your savings account.
C)The government sends your grandfather his pension cheque.
D)Your employer automatically transfers $100 each month from your wages to a nontaxable medical spending account.
Q4) Income exceeds production.
A)True
B)False
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Chapter 6: Measuring the Cost of Living
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Q1) Five years ago,when you took up your current job,your wage was $20 an hour.Now it is $22.Suppose you do not know the CPIs,but only the inflation rates for the past 5 years: 2.5,1.9,2.2,2.7,and 3.1 percent.
a)In real terms,do you now earn more or less than 5 years ago?
b)How much was the inflation rate over the 5-year period?
c)If the CPI was 112.5 in the first year,how much is it today?
Q2) If the nominal interest rate is 10 percent and the rate of inflation is 3 percent,what is the real interest rate?
A)-7 percent
B)-5 percent
C)5 percent
D)7 percent
Q3) Canadians spend about 28 percent of their total expenditures on housing.If the price of housing increases by 10 percent,by how much does the CPI increase?
A)280 percent
B)28 percent
C)2.8 percent
D)0.28 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 of the following terms refers to the relationship between the quantity of output created and the quantity of inputs needed to create it?
A)the capital accumulation function
B)technological knowledge
C)the production function
D)human capital
Q2) Productivity can be found as number of hours worked divided by output.
A)True
B)False
Q3) What might the African governments do to foster higher economic growth?
Q4) Which of the following would be considered physical capital?
A)the pizza oven at the Liquidity Preferences Tavern
B)soy beans used to make soy milk
C)the skills and knowledge of a barber
D)the number of hours people spend in the gym
Q5) What does diminishing returns to capital imply?
A)Capital produces fewer goods as it ages.
B)New ideas are not as useful as old ideas.
C)Increases in the capital stock eventually decrease output.
D)Increases in the capital stock increase output by ever smaller amounts.
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Chapter 8: Saving,Investment,and the Financial System
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Sample Questions
Q1) Which of the following would most likely happen in the market for loanable funds if the government were to decrease the tax on interest income?
A)Both investment and savings would rise.
B)Investment would rise, and savings would fall.
C)Both investment and savings would fall.
D)Investment would fall, and savings would rise.
Q2) Which of the following best describes the evolution of Canadian national debt between 1996 and 2009?
A)It fell by 10 percent of GDP.
B)It fell, and then it rose.
C)It fell by $60 billion.
D)It fell to 33 percent of GDP.
Q3) PacknCamp Corporation has a price of $50,has issued 2 million shares,has increased its cumulated retained earnings by $2 million,and has a dividend yield of 2 percent.What is the price/earnings ratio of PacknCamp?
A)50, which is high compared to historical standards of the market
B)50, which is low compared to historical standards of the market
C)25, which is low compared to historical standards of the market
D)25, which is high compared to historical standards of the market
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Page 11
Chapter 9: Unemployment and Its Natural Rate
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Q1) How is the unemployment rate computed?
A)by counting the number of unemployment insurance claims filed
B)by dividing the number of unemployed by the number of persons in the labour force
C)by determining the number of unemployed in the population aged 18 and older
D)by counting the number of working-age persons who don't have a job
Q2) How are discouraged workers counted in unemployment statistics?
A)They are not counted either as part of the adult population or as part of the labour force.
B)They are counted as part of the adult population, but not as part of the labour force.
C)They are counted as part of the adult population and as unemployed.
D)They are counted as unemployed, but not part of labour force.
Q3) Most spells of unemployment are short,and most unemployment observed at any given time is long term.How can this be?
Q4) Over half of the unemployed are recent entrants into the labour force.
A)True
B)False
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Chapter 10: The Monetary System
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Sample Questions
Q1) Which of the following best describes bank runs today?
A)Bank runs are uncommon because of the high required reserve ratio.
B)Bank runs are uncommon because of CDIC deposit insurance.
C)Bank runs are common because of the low required reserve ratio.
D)Bank runs are common because the CDIC is inefficient.
Q2) How does currency contribute to the money supply?
A)Currency held by the public and by banks is part of the money supply.
B)Currency held by the public is part of the money supply, but currency held by banks is not.
C)Currency held by the public is not part of the money supply, but currency held by banks is.
D)Currency held by the public or banks is not part of the money supply since it is not included in M1.
Q3) In an economy that relies on barter,trade requires a double coincidence of wants.
A)True
B)False
Q4) M1+ includes savings deposits.
A)True
B)False
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Chapter 11: Money Growth and Inflation
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Q1) What terms refers to the cost of changing price tags and price listings?
A)inflation-induced tax distortions
B)relative-price variability costs
C)shoeleather costs
D)menu costs
Q2) Identify each of the following as nominal or real variables.
a.the physical output of goods and services
b.the overall price level
c.the dollar price of apples
d.the price of apples relative to the price of oranges
e.the unemployment rate
f. the amount that shows up on your paycheque after taxes
g. the amount of goods you can purchase with the wage you get each hour
h. the taxes that you pay the government
Q3) According to the quantity equation,if Y doubles,V is constant,and M doubles,what factor does the price level multiply by?
A)1/4
B)1/2
C)1
D)2
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Chapter 12: Open-Economy Macroeconomics: Basic Concepts
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Sample Questions
Q1) When a company from Germany builds an automobile factory in Canada,the German firm has engaged in foreign direct investment.
A)True
B)False
Q2) Which of the following would be Canadian foreign direct investment?
A)Your Canadian-based mutual fund buys shares of stock in Eastern European companies.
B)A Canadian citizen opens a guitar store in Hong Kong.
C)A Swiss bank buys a Canadian government bond.
D)A German tractor factory opens a plant in Victoria, British Colimbia.
Q3) What happened after the introduction of the euro as the common currency of many European countries?
A)It led to less international trade.
B)It reduced the costs of trading within Europe.
C)It led to greater differences in monetary policy amongst participating countries.
D)It reduced trade of some European countries with Canada.
Q4) How can one derive the identity that saving equals the sum of domestic investment and net capital outflow from the national income accounting identity?
Page 15
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Chapter 13: A Macroeconomic Theory of the Small Open Economy
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Q1) Using the macroeconomic model studied,analyze the impact of the following events on the Canadian economy:
a. a voluntary export restraint (VER) by Japanese car producers
b. an export subsidy by Canadian government for Canadian lumber producers
c. an increase in U.S. GDP
Q2) In an open economy,what does the market for loanable funds equate national saving with?
A)domestic investment
B)net capital outflow
C)the sum of national consumption and government spending
D)the sum of domestic investment and net capital outflow
Q3) What does a higher real interest rate lower the quantity of?
A)national saving
B)net capital outflow
C)loanable funds demanded
D)loanable funds supplied
Q4) 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?
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) What changes are likely to happen in an economy when production costs rise?
A)Output and prices rise.
B)Output rises and prices fall.
C)Output falls and prices rise.
D)Output and prices fall.
Q2) According to the classical view in economics,which of the following variables or policies can influence economic growth in the long run?
A)an increase in capital stock
B)an increase in money supply
C)an increase in unemployment benefits
D)an increase in nominal interest rates
Q3) What is classical dichotomy?
A)It is the separation of variables that move with the business cycle and variables that do not.
B)It is the separation of changes in money and changes in government expenditures.
C)It is the separation of endogenous and exogenous variables.
D)It is the separation of real and nominal variables.
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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Q1) When the interest rate increases,how do the opportunity cost of holding money and the quantity of money demanded change?
A)The opportunity cost of holding money increases, so the quantity of money demanded increases.
B)The opportunity cost of holding money increases, so the quantity of money demanded decreases.
C)The opportunity cost of holding money decreases, so the quantity of money demanded increases.
D)The opportunity cost of holding money decreases, so the quantity of money demanded decreases.
Q2) When a central bank sets a target for the interest rate,it commits itself to which of the following?
A)revealing its target to the public
B)adjusting the demand for money in order to make the equilibrium in the money market hit that target
C)adjusting the money supply in order to meet the interest-rate target
D)having to make open-market sales
Q3) What is the difference between monetary policy and fiscal policy?
Q4) Use the money market to explain why the aggregate demand curve slopes downward.
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Chapter 16: The Short-Run Tradeoff between Inflation and Unemployment
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Q1) A decrease in the growth rate of the money supply eventually causes the short-run Phillips curve to shift right.
A)True
B)False
Q2) Refer to the Figure 16-3.Starting from c and 3,where does a decrease in aggregate demand move the economy to,in the short run and the long run?
A)a and 1 in the short run, b and 2 in the long run
B)b and 2 in the short run, a and 1 in the long run
C)d and 4 in the short run, e and 5 in the long run
D)b and 4 in the short run, e and 1 in the long run
Q3) According to Friedman and Phelps,when is the unemployment rate below the natural rate?
A)when actual inflation is greater than expected inflation
B)when actual inflation is less than expected inflation
C)when actual inflation equals expected inflation
D)when actual inflation is low
Q4) Suppose that the Bank of Canada unexpectedly decreases the money supply.What will happen to unemployment in the short run? What will happen to unemployment in the long run?
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Chapter 17: Five Debates over Macroeconomic Policy
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Sample Questions
Q1) Deficits do not necessarily burden future generations.Discuss and provide some examples.
Q2) Suppose the economy goes into recession.Which of the following is a list of things policymakers could do to try to end the recession?
A)increase the money supply, increase taxes, and increase government spending
B)increase the money supply, increase taxes, and decrease government spending
C)increase the money supply, decrease taxes, and increase government spending
D)decrease the money supply, increase taxes, and decrease government spending
Q3) Explain why policy lags could make stabilization policies counterproductive.
Q4) Which of the following is a part of the argument against deficits?
A)They increase interest rates and investment.
B)They increase interest rates and decrease investment.
C)They decrease interest rates and investment.
D)They decrease interest rates and increase investment.
Q5) Identify three government policies that discourage saving.
Q6) The laws governing the activity of the Bank of Canada give some specific recommendations about what goals it should pursue,so it has little discretion in making policy.
A)True
B)False
Page 20
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