Principles of Macroeconomics
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Course Introduction
Principles of Macroeconomics introduces students to the foundational concepts that explain the functioning of an entire economy. The course covers key topics such as gross domestic product (GDP), inflation, unemployment, monetary and fiscal policy, economic growth, international trade, and the role of government. Through analysis of real-world events and application of economic models, students gain an understanding of how macroeconomic indicators are measured, how economies expand and contract, and how policy decisions impact both domestic and global markets. This course provides critical analytical tools for interpreting economic trends and making informed decisions in a constantly changing economic environment.
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) The actions that the Bank of Canada takes to manage the money supply and interest rates to pursue macroeconomic policy objectives refer to
A) fiscal policy.
B) monetary policy.
C) quantitative analysis.
D) Federal Reserve transparency.
Answer: B
Q2) If you were building a macroeconomic model that explores the effect of the aging population on the needed expenditure for social security and health care,the exogenous variable(s)would be the
A) aging population.
B) needed expenditure on social security.
C) needed expenditure on health care.
D) needed expenditure on both social security and health care.
Answer: A
Q3) What is the difference between an endogenous variable and an exogenous variable?
Answer: An endogenous variable is a variable explained by an economic model.An exogenous variable is a variable that is taken as given and is not explained by an economic model.
Page 3
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Chapter 2: Measuring the Macroeconomy
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Q1) Suppose you borrow $8000 for one year and at the end of the year you repay the $8000 plus $600 of interest.The expected inflation rate was 3.5% at the time you took out the loan,but the actual inflation rate turned out to be 2.5%.What was the expected real interest rate at the time of the loan? What was the actual real interest rate you paid? Who gained and who lost from the difference in the expected and actual inflation rates? Answer: If you paid $600 of interest on a loan of $8000,the nominal interest rate was 7.5%.If the expected inflation rate was 3.5%,the expected real interest rate was (7.5%3.5%)= 4%.If the actual inflation rate was 2.5%,the actual real interest rate was (7.5%2.5%)= 5%.You expected to pay a real interest rate of 4%,but actually paid a real interest rate of 5%,so you lost and the lender gained from the difference in the expected and actual inflation rates.
Q2) <b>Refer to Figure 2.4.</b>The GDP deflator for 2012 is A) 60.9. B) 94.3. C) 106.1.
D) 157.4.
Answer: C
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Chapter 3: The Canadian Financial System
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Sample Questions
Q1) Luke purchases a $50 000 face value one-year Treasury bill for $46 296.30,and the next day investors decide they will only buy one-year Treasury bills if they receive an interest rate of 4%.If Luke decides to sell his Treasury bill to another investor the day after he purchased it,he will
A) receive a capital gain of $1780.62.
B) receive a capital gain of $2000.00.
C) suffer a capital loss of $1923.08.
D) suffer a capital loss of $1851.85.
Answer: A
Q2) Suppose you made a 5% down payment on a house on January 1,2013,and on January 1,2014 you decided to sell the house.If the price of your house decreased by 10%,the return on your investment in the house would be
A) -5%.
B) -10%.
C) -50%.
D) -200%.
Answer: D
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Chapter 4: Money and Inflation
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Q1) Reserves are a bank ________ consisting of ________.
A) asset; vault cash plus bank deposits with the central bank
B) asset; chequing account deposits and savings account balances
C) liability; vault cash plus bank deposits with the Federal Reserve
D) liability; chequing account deposits and savings account balances
Q2) The purchase of government securities by the Bank of Canada will,in general,
A) not change the money supply.
B) not change the quantity of reserves held by banks.
C) decrease the quantity of reserves held by banks.
D) increase the quantity of reserves held by banks.
Q3) Which of the following determines the amount of money the banking system as a whole can create?
A) the quantity of bank reserves
B) the quantity of vault cash held by banks
C) currency held by the Bank of Canada
D) the total amount of assets held by the banking system
Q4) During the 1990s,Japan experienced periods of deflation and nominal interest rates that approached zero percent.Why would anyone lending money agree to a nominal interest rate of almost zero percent?
Q5) Explain why gold,despite its value,is difficult to use as a medium of exchange.
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Chapter 5: The Global Financial System and Exchange Rates
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Sample Questions
Q1) The part of the balance of payments that records (generally)minor transactions such as migrant's transfers,copyrights,and trademarks is the
A) capital account.
B) current account.
C) financial account.
D) statistical discrepancy account.
Q2) <b>Refer to Figure 5.4.</b>At an interest rate of 7%,
A) foreign borrowers have an incentive to offer lenders in Canada an interest rate greater than 7%.
B) foreign lenders have an incentive to offer borrowers in Canada an interest rate less than 7%.
C) Canadian lenders have an incentive to offer borrowers in the rest of the world an interest rate of 7%.
D) Canadian borrowers have an incentive to offer Canadian lenders an interest rate greater than 7%.
Q3) What are the three major types of foreign-exchange systems,and how do they operate?
Q4) What is the difference between nominal exchange rates and real exchange rates?
Q5) Why is the balance of payments always zero?
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Chapter 6: The Labour Market
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Q1) The marginal product of labour is
A) the extra revenue a firm receives from adding one more unit of labour, holding everything else constant.
B) the extra output a firm receives from adding one more unit of labour, holding everything else constant.
C) the extra income a firm receives from adding one more unit of labour, holding everything else constant.
D) the supply of labour for a firm.
Q2) Which of the following is not one of the primary reasons structural and frictional unemployment vary?
A) demographics
B) technological change
C) employee preferences
D) sectoral shifts
Q3) Luke was earning $60 per hour and working 40 hours per week.Luke's wage rose to $70 per hour,and as a result,he now works 50 hours per week.What can you conclude from this information about the substitution and income effects of a wage increase for Luke?
Q4) How does a real wage above the equilibrium wage cause unemployment?
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Chapter 7: The Standard of Living Over Time and Across Countries
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Q1) In the aggregate production function,the symbol "A " represents an index of how efficiently the economy transforms capital and labour into real GDP."A" measures the influence
A) of any factor that determines real GDP.
B) of the quantities of capital and labour that determine real GDP.
C) of any factor that determines real GDP other than the quantities of capital and labour. D) of the quantities of capital and labour that determine real GDP, holding other factors constant.
Q2) Suppose that the production function for the economy is Y = AK .² . .If the capital stock = 40 000,the quantity of labour = 10 000,and the efficiency index = 1,real GDP is
A) $13 195.08.
B) $16 000.00.
C) $16 946.34.
D) $28 000.00.
Q3) Countries with a low standard of living have low levels of total factor productivity.List five reasons that account for the low levels of total factor productivity.
Q4) What is human capital? How do workers acquire human capital?
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Chapter 8: Long-Run Economic Growth
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Q1) What is the difference between real GDP per worker and real GDP per effective worker?
Q2) The level of investment necessary to keep the capital-labour ratio constant is called A) capital investment.
B) break-even investment.
C) depreciated investment.
D) diluted investment.
Q3) In the Solow growth model,a change in the capital-labour ratio is equal to A) (saving - investment).
B) saving + depreciation).
C) (investment - depreciation).
D) (capital stock - labour force).
Q4) According to the AK growth model,budget surpluses ________ the national saving rate and ________ the steady-state growth rate.
A) increase; increase
B) reduce; reduce
C) increase; do not change
D) reduce; do not change
Q5) Describe the steady state in the Solow growth model.
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Chapter 9: Business Cycles
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Sample Questions
Q1) If potential GDP for the third quarter of 2012 = $20.4 billion,and the deviation from potential GDP for the third quarter of 2012 = -$1.6 billion,then the output gap was
A) -7.8%.
B) -12.8%.
C) -18.8%.
D) -32.6%.
Q2) All of the following are typically considered procyclical variables except A) the inflation rate.
B) investment expenditures.
C) the unemployment rate.
D) expenditures on durable goods.
Q3) Explain why price and wage stickiness in the short run are reasons that macroeconomic shocks can result in fluctuations in total employment and total production.
Q4) Explain whether sales of durable goods is a procyclical or countercyclical variable: If spending on durable goods is increasing,is the economy likely in a recession,heading for a recession,in an expansion,or heading for an expansion?
Q5) What is the business cycle and why does it occur?
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Chapter 10: Explaining Aggregate Demand: the Is-Mp Model
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Q1) If the MPC = 0.75,a decrease in personal taxes from $100 billion to $80 billion will increase real GDP by
A) $20 billion.
B) $40 billion.
C) $60 billion.
D) $80 billion.
Q2) <b>Refer to Figure 10.4.</b>..Suppose the economy's equilibrium starts out with an output gap of \(\hat{Y}\) ,and real GDP increases so the output gap increases to \(\hat{Y}\) .If the Bank of Canada acts to keep the short-term nominal interest rate at the target and the term structure effect,the default-risk premium,and the expected inflation rate remain constant,then the long-term nominal interest rate will A) increase.
B) decrease.
C) remain constant.
D) be indeterminate, since the Bank of Canada has no control over long-term rates.
Q3) 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) Under a fixed exchange rate system,if the government decides to devalue its currency,net exports will ________ and the IS curve will shift to the ________.
A) increase; left
B) increase; right
C) decrease; left
D) decrease; right
Q2) Economists initially viewed the Phillips curve as a structural relationship,meaning that the relationship between the two measured variables
A) can change only slightly over time.
B) can change greatly over time.
C) will not change over time.
D) will change in the short run but not in the long run.
Q3) 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.
Q4) How does the open-economy IS-MP model incorporate net exports with a fixed exchange rate system?
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Chapter 12: Monetary Policy in the Short Run
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Q1) The Bank of Canada conducts open market operations with the primary goal of
A) affecting the overnight rate.
B) affecting the discount rate.
C) stabilizing the foreign-exchange market.
D) adjusting reserve requirements.
Q2) What is a liquidity crisis?
Q3) ________ institutions are banks and other financial institutions whose failure would lead to large disruptions in the economy.
A) Systematically important
B) Commercial
C) Corporate
D) Federal
Q4) To decrease bank reserves,the Bank of Canada can
A) engage in an open market sale.
B) reduce reserve requirements.
C) lower the discount rate.
D) set a lower interest rate for term deposits.
Q5) What are the effects of an expansionary monetary policy on interest rates and output in an open economy with floating exchange rates?
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Chapter 13: Fiscal Policy in the Short Run
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Q1) <b>Refer to Figure 13.3.</b>If exchange rates are floating,an expansionary fiscal policy and the typical central bank response to the change in inflation caused by the fiscal policy would best be represented by a movement from ________ in panel (a)and a corresponding movement from ________ in panel (b).
A) point A to point D; point X to point Y
B) point C to point B; point X to point Y
C) point D to point A; point Y to point X
D) point B to point C; point Y to point X
Q2) What are the effects of an expansionary fiscal policy on interest rates and output in an open economy with floating exchange rates?
Q3) Suppose you are paid a wage of $50 per hour.If your marginal income tax rate is 20%,then for every additional hour you work,your after-tax wage is
A) $10.
B) $20.
C) $25.
D) $40.
Q4) What is the goal of fiscal policy,and what tools have policymakers traditionally used to conduct fiscal policy?
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Chapter
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Q1) If the economy experiences an unanticipated demand shock and households and firms have rational expectations,there is
A) no trade-off between unemployment and inflation in either the short run or the long run.
B) a trade-off between unemployment and inflation in the long run, but not in the short run.
C) a trade-off between unemployment and inflation in the short run, but not in the long run.
D) a trade-off between unemployment and inflation in both the short run and the long run.
Q2) <b>Refer to Figure 14.3.</b>Suppose the economy is initially at long-run equilibrium and the Bank of Canada increases the target inflation rate,and to hit this rate,it must reduce the real interest rate.The economy then reaches a new,short-run equilibrium point.Assuming expectations are adaptive,the next movement will result in the economy reaching a new,long-run equilibrium at
A) point A.
B) point B.
C) point C.
D) point D.
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Chapter 15: Fiscal Policy and the Government Budget in the
Long Run
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Q1) Since 1992,Canadian federal expenditures have ________ as a percentage of GDP. A) remained fairly stable B) increased dramatically C) slowly declined D) been extremely volatile
Q2) What are the differences between the federal debt,the budget deficit,and the primary budget deficit?
Q3) <b>Refer to Table 15.1.</b>The primary budget deficit for Arugula in 2012 is
A) $135 million.
B) $195 million.
C) $380 million.
D) $600 million.
Q4) When the nominal interest rate is not constant,an increase in the growth rate of the money supply ________ the inflation rate,and ________ the debt-to-GDP ratio. A) increases; increases B) increases; decreases C) increases; has an ambiguous effect on D) decreases; increases
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Chapter 16: Consumption and Investment
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Q1) Assume that a temporary tax break has been put in place that allows for an increase in allowable depreciation.If and when the government changes the depreciation allowance back to its original amount,the desired capital stock will ________ and investment spending will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Q2) Given a decrease in the real interest rate,the income effect will be ________ for lenders and ________ for borrowers.
A) negative; negative
B) ambiguous; positive
C) positive; ambiguous
D) positive; negative
Q3) What is meant by the statement that investment projects are irreversible? How does the idea that investment projects are irreversible affect the volatility of investment in capital goods?
Q4) What is precautionary saving? What might cause precautionary saving to increase or decrease if households have a desired level of wealth?
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