Principles of Macroeconomics
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Course Introduction
Principles of Macroeconomics introduces students to the fundamental concepts and theories used to analyze the overall performance of economies. The course covers topics such as gross domestic product (GDP), inflation, unemployment, economic growth, fiscal and monetary policy, and international trade. Through real-world examples and quantitative analysis, students learn how economic indicators are measured and interpreted, the dynamics of business cycles, and the roles of government and central banks in managing the economy. The course aims to equip students with the analytical tools required to understand current economic issues and policy debates at the national and global levels.
Recommended Textbook
Macroeconomics 6th Canadian Edition by Andrew B. Abel
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Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) The critical assumptions behind the idea of Adam Smith's invisible hand are
A) wage-price flexibility and individuals pursuing their own self-interests.
B) balanced budget and balance trade.
C) zero unemployment and high economic growth.
D) high economic growth and low inflation.
Answer: A
Q2) Which of the following statements applies to the average labour productivity in Canada?
A) Average labour productivity has risen over time.
B) Average labour productivity growth has been strong during the World War II, 1950s and 1960s.
C) Average labour productivity growth has slowed down since 1970s, but increased in 1990s.
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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Q1) 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
Q2) Which of the following statements is true?
A) Total expenditures and total income are the same measures of economic activity.
B) The product , income , and expenditure approaches must generate the same answer to the measure of economic activity.
C) The fundamental identity of national income accounting states that the GDP measured by the expenditure, income, and product approaches must be identical.
D) All of the above.
Answer: D
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4
Chapter 3: Productivity, Output, and Employment
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Sample Questions
Q1) Suppose the country of Prescott has the production function Y = AK<sup>0.25</sup>N<sup>0.75</sup>. The following table shows Prescott's macroeconomic data for 2002 and 2003: \[\begin{array} { c c c c } \text { Year } & Y & K & N \\ \hline 2002 & 2000 & 1700 & 70 \\ 2003 & 2100 & 1785 & 75 \end{array}\] a. By how much did productivity grow between 2002 and 2003?
b. If productivity remains constant from 2003 to 2004 and the labour force increases from 75 to 80, how large will the capital stock need to be to produce output of 2200 in 2004?
Answer: a. Calculate a in each year as A = Y/K<sup>0.25</sup> N<sup>0.75</sup>. So A is 2000 / 1700<sup>0.25 </sup>70<sup>0.75 </sup>= 12.8704 in 2002 and 2100 / 1785<sup>0.25 </sup>75<sup>0.75 </sup>= 12.6769 in 2003. The growth rate of productivity is [(12.6769/12.8704) - 1] × 100% = -1.5%.
b. In 2004, A = 12.6769, N = 80, so K<sup>0.25 </sup>= Y / AN<sup>0.75 </sup>= 2200 / 12.6769 × 80<sup>0.75</sup> = 6.4877. Then K = (K<sup>0.25</sup>)4 = 1771.61. So we need a reduction of the capital stock.
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Chapter 4: Consumption, Saving, and Investment
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Q1) Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent decline in the real interest rate now has what effect on your desired capital stock?
A) raises it, because the future marginal productivity of capital is higher
B) lowers it, because the future marginal productivity of capital is lower
C) raises it, because the user cost of capital is now lower
D) lowers it, because the user cost of capital is now higher
Q2) 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.
Q3) The Canadian consumption function is given by C = 50 + 0.75 Y. This implies that
A) Canadians spend 75 percent of their income on average.
B) each Canadian spends 75 percent of her/his income.
C) Canadians on average spend 75 cents out of each additional dollar earned.
D) Canadian spend 50 dollars of their income on average.
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Page 6
Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) Sweetland economy's GDP is $2000 billion, desired consumption spending $1200 billion, desired investment spending $500 billion, and government purchases $400 billion. The Sweetland economy's absorption is
A) $2000 billion.
B) $1200 billion.
C) $2100 billion.
D) -$100 billion.
Q2) A small open economy has a current account balance of zero. A rise in its investment demand causes
A) a current account surplus.
B) a capital account deficit.
C) income to exceed absorption.
D) net borrowing from abroad.
Q3) The government of a small open economy announces a tax cut of $100 this year, combined with a tax increase of $110 next year, when the interest rate is 10%. What are the effects of this change on the world real interest rate, national saving, investment, and the current account balance in equilibrium when
a. Ricardian equivalence holds?
b. Ricardian equivalence does not hold?
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Chapter 6: Long-Run Economic Growth
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Q1) Suppose the current level of output is 5000, and the elasticity of output with respect to capital is 0.4. A 10% increase in capital would increase the current level of output to A) 5020.
B) 5050.
C) 5200.
D) 5500.
Q2) Why do some people think that the productivity slowdown since 1973 is just a return to normalcy after fast productivity growth during the previous 25 years?
A) Productivity growth of the previous 25 years was abnormally low.
B) The Great Depression and World War II had prevented technological opportunities from being exploited.
C) Canada is the only country to face the slowdown, due to poor regulatory decisions.
D) Canada has allowed countries like Japan to steal its technological breakthroughs.
Q3) 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?
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Chapter 7: The Asset Market, Money, and Prices
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Q1) Velocity of money is
A) the ratio of nominal money stock to nominal GDP.
B) the ratio of nominal GDP to nominal money stock.
C) the nominal money stock multiplied by the nominal GDP.
D) the ratio of nominal money stock to real GDP.
Q2) If real money demand increases 5%, and real money supply remain unchanged, by about how much does the price level change?
A) falls 5%
B) falls 50%
C) rises 50%
D) rises 5%
Q3) Suppose velocity is 3, real output is 6000, and the price level is 20. What is the level of real money demand in this economy?
A) 100
B) 2,000
C) 40,000
D) 120,000
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Chapter 8: Business Cycles
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Q1) When aggregate economic activity is declining, the economy is said to be in A) a contraction.
B) an expansion.
C) a trough.
D) a turning point.
Q2) The fact that business cycles are periodic but not recurrent means that A) business cycles occur at predictable intervals, but do not last a predetermined length of time.
B) the business cycle's standard contraction-trough-expansion-peak pattern has been observed to recur over and over again, but not at predictable intervals.
C) business cycles occur at predictable intervals, but do not all follow a standard contraction-trough-expansion-peak pattern.
D) business cycles last a predetermined length of time, but do not all follow a standard contraction-trough-expansion-peak pattern.
Q3) Describe briefly what are the major differences between the classical economists and the Keynesian economists with regard to causes of business cycles, long-run adjustments to shock, and the government policies in restoring the full employment.
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Chapter 9: The IS-LMAD-AS Model: A General Framework for
Macroeconomic Analysis
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Sample Questions
Q1) Suppose the Bank of Canada's short-run response to any change in the economy is to change the money supply to maintain the existing real interest rate. What would happen to money supply if there were a reduction in government purchases? Given the Bank of Canada's policy, what would happen in the very short run (before general equilibrium is restored) to output and the real interest rate? What must happen to the LM curve and the price level to restore general equilibrium?
Q2) Suppose the economy is initially in long-run equilibrium. For each of the shocks listed below, explain the long-run effects on output and the price level.
a. Labour supply decreases.
b. Productivity increases.
Q3) Which of the following will shift IS curve down and to the left?
A) an increase in expected future output
B) a decrease in expected future marginal product of capital
C) a fall in taxes
D) an increase in wealth
Q4) Describe the effects, in both the short run and the long run, of a decline in the money supply. Explain what happens to real output and the price level.
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Chapter 10: Exchange Rates, Business Cycles, and
Macroeconomic Policy in the Open Economy
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Q1) Which of the following statements best describes the movement of the Canadian dollar during the 1970s?
A) The dollar rose steadily.
B) The dollar was stable.
C) The dollar was stable until 1976 and fell thereafter.
D) The dollar fell until 1976 and rose thereafter.
Q2) There's been a real depreciation of the dollar over the past month. In the long run, you would expect the quantity of Canadian imports to ________ and the quantity of Canadian exports to ________.
A) fall; fall
B) rise; rise
C) fall; rise
D) rise; fall
Q3) Under a fixed exchange rate system, if the nominal interest parity condition holds,
A) the nominal interest rates in domestic and foreign economies must be the same.
B) the inflation rates in domestic and foreign economy must be the same.
C) the real exchange rates in domestic and foreign economies must be the same.
D) the net exports in domestic and foreign economies must be the same.
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Chapter 11: Classical Business Cycle Analysis:
Market-Clearing Macroeconomics
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Q1) The Central Bank had announced that it would allow M2 to grow by 8% this year, and M2 did grow by 8% this year. You would not expect
A) money to be neutral in the short run.
B) money to be neutral in the long run.
C) output to remain unchanged.
D) a movement along the short-run aggregate supply curve.
Q2) An increase in government purchases in the classical model would A) shift the production function.
B) shift the marginal product of labour curve.
C) shift the labour demand curve.
D) shift the labour supply curve.
Q3) When, because of hiring and firing costs, firms retain workers in a recession that they would otherwise lay off, there is said to be A) labour hoarding.
B) a decline in capacity utilization.
C) voluntary unemployment.
D) involuntary unemployment.
Q4) Why do many economists believe that money affects output? What is the empirical evidence in support of that belief?
Page 13
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Chapter 12: Keynesian Business Cycle Analysis:
Non-Market-Clearing Macroeconomics
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Q1) According to Keynesian theory, SRAS curve is positively sloped, because
A) employers and employees fail to predict prices correctly.
B) employers and employees have misperception about the change in relative price level.
C) labour contracts are signed for a period in which labour market conditions are not known.
D) wages are flexible, but prices are not.
Q2) The Keynesian theory is consistent with the business cycle fact that inflation is A) procyclical and leading.
B) procyclical and lagging.
C) countercyclical and leading.
D) countercyclical and lagging.
Q3) If the menu cost theory is true, then firms that change prices less frequently than other firms are likely to be in
A) more competitive industries.
B) service, rather than manufacturing, industries.
C) growing, rather than declining, industries.
D) less competitive industries.
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Chapter 13: Unemployment and Inflation
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Q1) The reduction of the inflation rate is called
A) deflation.
B) disinflation.
C) unflation.
D) reflation.
Q2) If you were prime minister, what would you do to reduce the natural rate of unemployment? Propose at least three different methods.
Q3) According to the expectations-augmented Phillips curve,
A) If inflation rate is zero, unemployment rate will be zero.
B) If unanticipated inflation rate is zero, unemployment rate will be zero.
C) If unanticipated inflation rate is zero, cyclical unemployment rate will be zero
D) If unanticipated inflation rate is zero, cyclical unemployment rate will be negative.
Q4) Keynesians prefer a disinflation policy of
A) cold turkey.
B) stabilization.
C) gradualism.
D) aggregate demand management.
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Chapter 14: Monetary Policy and the Bank of Canada
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Q1) Which of the following variables is likely to serve as an intermediate target for monetary policy?
A) money supply
B) inflation rate
C) open-market operations
D) unemployment rate
Q2) Fractional reserve banking is the system that
A) allows banks not to insure their deposits.
B) allows banks not to join the Canadian Payments Association.
C) limits banks' activities from crossing provincial lines.
D) allows banks to keep smaller reserves than their deposits.
Q3) Suppose there was a banking crisis. The money supply would shrink by the greatest amount if the public ________ their currency-deposit ratio and the banks ________ their reserve-deposit ratio.
A) decreased; decreased
B) decreased; increased
C) increased; decreased
D) increased; increased
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Chapter 15: Government Spending and Its Financing
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Q1) Since the 1950s, transfer payments' share of GDP has
A) steadily increased.
B) steadily decreased.
C) remained fairly steady.
D) increased during Liberal governments and decreased during Conservative governments.
Q2) Suppose that all workers place a value on their leisure of 75 goods per day. The production function relating output per day Y to the number of people working per day N is Y = 500N - 0.4N<sup>2</sup>, and the marginal product of labour is MPN = 500 - 0.8 N.
A 25% tax is levied on wages.
a. How much is output per day?
b. In terms of lost output, what is the cost of the distortion introduced by this tax?
Q3) A decrease in taxes on the current generation would have no effect on consumption or national saving if
A) individuals face borrowing constraints.
B) individuals increase their consumption by less than the tax cut.
C) consumers bequeath all of the tax cut to the next generation.
D) consumers are not forward looking concerning their future tax burden.
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