Macroeconomics, Canadian Edition (Hubbard et al.)
Chapter 4 GDP: Measuring Total Production and Income
4.1 Gross Domestic Product Measures Total Production
1) In the second quarter of 2011, the Canadian economy slowed down. This slowdown was
caused mostly by
A) a slowdown in exports to the U.S.
B) an economic expansion.
C) a reduction in advertising.
D) declining quality of service.
Answer: A
Diff: 2
Type: MC
Page Ref: 95
Topic: The Business Cycle
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: Chapter Opener: The Health of the Canadian Economy
2) In the second quarter of 2011, Canadian exporters experienced a slowdown in orders. The
Canadian economy was experiencing the effects of
A) deflation.
B) the underground economy.
C) the business cycle.
D) depreciation.
Answer: C
Diff: 2
Type: MC
Page Ref: 95
Topic: The Business Cycle
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: Chapter Opener: The Health of the Canadian Economy
3) During a business cycle expansion, total production ________ and total employment
________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 96
Topic: The Business Cycle
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
4-1
Copyright © 2015 Pearson Canada Inc.
4) Macroeconomics, as opposed to microeconomics, includes the study of what determines the
level of
A) employment in a specific industry.
B) employment in the economy.
C) output of a specific firm.
D) output of a specific industry.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 96
Topic: Macroeconomics vs. Microeconomics
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
5) Macroeconomics, as opposed to microeconomics, includes the study of what determines the
A) average price levels of goods and services in the economy.
B) price charged for laptop computers by Dell.
C) wages paid to employees by Dell.
D) quantity of Dell employees.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 96
Topic: Macroeconomics vs. Microeconomics
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
6) Macroeconomics seeks to understand
A) economic growth, business cycles, and inflation.
B) industry sales, marketing strategies and corporate growth.
C) product demand, product cost, and profit maximization.
D) public choices, private choices, and consumer maximization.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 96
Topic: Macroeconomics vs. Microeconomics
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
4-2
Copyright © 2015 Pearson Canada Inc.
7) Which of the following headlines would be more closely related to what macroeconomists
study than what microeconomists study?
A) Apple Prices Rise due to an Early Frost in Ontario
B) The Canadian Auto Workers Sign a Contract Raising Wages and Benefits 7% Over the Next
3 Years
C) Real GDP Grows by 2.3% in the Second Quarter
D) Airlines Raise Ticket Prices in Response to Rising Fuel Costs
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 96
Topic: Macroeconomics vs. Microeconomics
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
8) In calculating gross domestic product, Statistics Canada uses the sum of the market value of
final goods and services produced. This means that Statistics Canada
A) simply counts the total number of goods produced in the market place and then adds them up.
B) values goods at their market prices, multiplies them by the quantity produced, and then adds
them up.
C) simply counts the total number of goods and services produced in the marketplace and then
adds them up.
D) values goods and services at their market prices, multiplies them by the quantity produced,
and then adds them up.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 97
Topic: Measuring Total Production
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
9) Suppose, in 2015, you purchased a house built in 2003. Which of the following would be
included in the gross domestic product for 2015?
A) the value of the house in 2015
B) the value of the house in 2003
C) the value of the house in 2015 minus depreciation
D) the value of the services of the real estate agent
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 97
Topic: Measuring Total Production
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
4-3
Copyright © 2015 Pearson Canada Inc.
10) Gross domestic product is calculated by summing up
A) the total quantity of goods and services in the economy.
B) the total quantity of goods and services produced in the economy during a period of time.
C) the total market value of goods and services in the economy.
D) the total market value of final goods and services produced in the economy during a period of
time.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 97
Topic: Measuring Total Production
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
11) Which of the following goods is directly counted in GDP?
A) the lettuce that Subway purchases for its sandwiches
B) the bread that Subway purchases for its sandwiches
C) a 12-inch Subway sandwich purchased by a student
D) the plastic bags that Subway purchases to wrap its sandwiches
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 97
Topic: Final vs. Intermediate Goods
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
12) Which of the following transactions represents the purchase of a final good?
A) Tim Hortons purchases coffee beans.
B) WestJet buys a new European-made jetliner.
C) Blackberry buys computer processors from Intel.
D) Your father buys a new John Deere riding lawn mower.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 97
Topic: Final vs. Intermediate Goods
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
4-4
Copyright © 2015 Pearson Canada Inc.
13) Which of the following is not directly counted in GDP?
A) investment expenditures
B) government purchases
C) intermediate goods
D) consumer goods
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 97
Topic: Final vs. Intermediate Goods
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
14) Value added equals the market price of the firm's product minus
A) wages and salaries.
B) the price of intermediate goods.
C) the price of all factors of production.
D) depreciation on plant and equipment.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 103
Topic: Measuring GDP by the Value Added Method
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Analytic Skills
Special Feature: None
15) Which of the following would be directly counted in GDP in 2014?
A) kitchen cabinets purchased from Rona in 2014 to be installed in a house built in 1997
B) kitchen cabinets built in 1887, extracted from the 1887 home, and installed in a brand new
country-style home
C) kitchen cabinets built in 1887, extracted from the 1887 home, and installed in a farm house
built in 1950
D) none of the above
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 97
Topic: Measuring Total Production
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
4-5
Copyright © 2015 Pearson Canada Inc.
Table 4.1
Product
Sweatshirts
Dental examinations
Coffee drinks
Coffee beans
Quantity
50
40
1,000
2,000
Price
$35.00
75.00
4.00
0.50
16) Refer to Table 4.1. Suppose that a simple economy produces only four goods and services:
sweatshirts, dental examinations, coffee drinks, and coffee beans. Assume all of the coffee beans
are used in the production of the coffee drinks. Using the information in the above table, nominal
GDP for this simple economy equals
A) 3,090 units.
B) $7,250.
C) $8,750.
D) $9,750.
Answer: C
Diff: 2
Type: MC
Page Ref: 97-98
Topic: Measuring Total Production
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating GDP
Table 4.2
Product
Shoes
DVDs
Tomatoes
Ketchup
Quantity
40
100
2,000
300
Price
$60.00
18.00
1.00
4.00
17) Refer to Table 4.2. Suppose that a simple economy produces only four goods and services:
shoes, DVDs, tomatoes, and ketchup. Assume one half of the tomatoes are used in making the
ketchup and the other half of the tomatoes are purchased by households. Using the information in
the above table, nominal GDP for this simple economy equals
A) $7,400.
B) $6,400.
C) $5,800.
D) 2,440 units.
Answer: B
Diff: 2
Type: MC
Page Ref: 97-98
Topic: Measuring Total Production
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating GDP
4-6
Copyright © 2015 Pearson Canada Inc.
18) In the circular flow model, the value of total income for an economy ________ the value of
total production.
A) equals
B) is greater than
C) is less than
D) may be greater than or less than
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 98-99
Topic: The Circular Flow of Income
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
19) In the circular flow model, the value of total production for an economy ________ the value
of total expenditures on final goods and services.
A) equals
B) is greater than
C) is less than
D) may be greater than or less than
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 98-99
Topic: The Circular Flow of Income
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
20) The nominal GDP of Canada in 2012 was approximately $1.8 trillion. This means that
A) the value of output in 2012 was around $1.8 trillion.
B) total income in 2012 was around $1.8 trillion.
C) total spending in 2012 was around $1.8 trillion.
D) All of the above are true.
Answer: D
Diff: 2
Type: MC
Page Ref: 98-99
Topic: The Circular Flow of Income
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
4-7
Copyright © 2015 Pearson Canada Inc.
21) Which of the following is not an example of a transfer payment?
A) employment insurance payments
B) the government's contribution to a teacher's pension plan
C) social program payments to retirees
D) social program payments to disabled persons
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 100
Topic: Measuring Total Production
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
22) The purchase of a new automobile is included in
A) consumption expenditures on services.
B) consumption expenditures on nondurable goods.
C) consumption expenditures on durable goods.
D) investment expenditures.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 100
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
23) Which of the following is not a durable good?
A) furniture
B) automobile
C) clothing
D) refrigerator
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 100
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
4-8
Copyright © 2015 Pearson Canada Inc.
24) The factors of production include
A) wages.
B) capital.
C) investment.
D) transfers.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 99
Topic: The Circular Flow of Income
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
25) Investment, as defined by economists, would include the purchase of a
A) corporate bond.
B) government bond.
C) share of stock in SunCor.
D) computer by an accounting firm.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 100
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
26) An example of business fixed investment spending is
A) a purchase of a home by a household.
B) a purchase of a computer by an accounting firm.
C) a purchase of a bond by General Electric Corporation.
D) $200 million of unsold cars at a car dealership.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 100
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
4-9
Copyright © 2015 Pearson Canada Inc.
27) To calculate GDP by the expenditure method, one must add
A) wages, rents, interest, and profits.
B) consumption spending, investment spending, government spending and net exports.
C) consumption spending, investment spending, government spending and exports.
D) labour, natural resources, entrepreneurship, and capital.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 101
Topic: Measuring Total Production
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
28) Investment, as defined by economists, would not include which of the following? Ford
A) buys a new robotic machine (from a plant in Ontario) to assemble cars.
B) adds 1,000 new cars to inventories.
C) builds another assembly plant in Oakville, Ontario.
D) buys Canadian government bonds.
Answer: D
Diff: 1
Type: MC
Page Ref: 101
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: Don't Let This Happen to You: Remember What Economists Mean by
Investment
29) The purchase of a new house is included in
A) consumption expenditures.
B) investment expenditures.
C) government purchases.
D) net exports.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 100
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
4-10
Copyright © 2015 Pearson Canada Inc.
30) The purchase by a household in China of a CD produced in Canada is included in Canadian
A) consumption expenditures.
B) investment expenditures.
C) government purchases.
D) net exports.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 101
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
31) The purchase by a foreign government of an airplane produced in Canada is included in
Canadian
A) consumption expenditures.
B) investment expenditures.
C) government purchases.
D) net exports.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 101
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
32) In 2011, Kendall Ford, an automobile dealership, spent $20,000 on a new car lift for its
repair shop, $2,000 on a new copy machine for its sales division, and $600,000 on Ford Motor
company stock. Unsold cars and trucks were valued at $400,000 on January 1, 2011, and unsold
cars and trucks were valued at $900,000 on December 31, 2011. What is Kendall Ford's total
investment spending in 2011?
A) $22,000
B) $322,000
C) $522,000
D) $1,022,000
Answer: C
Diff: 3
Type: MC
Page Ref: 101
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Analytic Skills
Special Feature: Don't Let This Happen to You: Remember What Economists Mean by
Investment
4-11
Copyright © 2015 Pearson Canada Inc.
33) In 2012, which component of GDP had a negative value?
A) consumption
B) investment
C) government spending
D) net exports
Answer: D
Diff: 1
Type: MC
Page Ref: 101
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
34) What is the largest component of spending in Canada?
A) consumption spending
B) investment spending
C) government spending
D) net investment spending
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 100-101
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
35) In Canada, consumption as a percentage of GDP is
A) lower than most.
B) higher than most.
C) the highest.
D) the lowest.
Answer: A
Diff: 1
Type: MC
Page Ref: 100-101
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: Making the Connection: Do Canadians Spend Too Much?
4-12
Copyright © 2015 Pearson Canada Inc.
36) In 2012, Canadian household spending accounted for ________ of GDP.
A) 70 percent
B) 54 percent
C) 30 percent
D) 46 percent
Answer: B
Diff: 1
Type: MC
Page Ref: 100-101
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: Making the Connection: Do Canadians Spend Too Much?
37) Between April and June 2011, the Canadian economy shrank overall. This was caused by a
decrease in ________, despite an increase in ________.
A) consumption spending; exports
B) government spending; investment
C) consumption spending; investment
D) exports; investment
Answer: D
Diff: 2
Type: MC
Page Ref: 114-115
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: An Inside LOOK at Policy: A Slowdown in the Export of Goods and Services
is Shrinking the Canadian Economy
38) When consumers are less confident about their jobs or incomes, they are more likely to
A) reduce purchases of durable goods than nondurable goods.
B) reduce purchases of nondurable goods and increase purchases of durable goods.
C) increase investment spending and decrease consumption spending.
D) increase consumption spending and decrease investment spending.
Answer: A
Diff: 2
Type: MC
Page Ref: 114-115
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: An Inside LOOK at Policy: A Slowdown in the Export of Goods and Services
is Shrinking the Canadian Economy
4-13
Copyright © 2015 Pearson Canada Inc.
Table 4.3
Consumption expenditures
Investment expenditures
Government purchases
Exports
Imports
Wages
$800
200
300
100
200
800
39) Refer to Table 4.3. Consider the data above (in billions of dollars) for an economy: Gross
domestic product (in billions of dollars) for this economy equals
A) $2,200.
B) $1,600.
C) $1,400.
D) $1,200.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 100-101
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
Table 4.4
Consumption expenditures
Investment expenditures
Government purchases
Government transfer payments
Exports
Imports
$800
300
300
400
300
100
40) Refer to Table 4.4. Consider the data above (in billions of dollars) for an economy: Gross
domestic product (in billions of dollars) for this economy equals
A) $2,200.
B) $2,100.
C) $1,600.
D) $1,400.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 100-101
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Analytic Skills
Special Feature: None
4-14
Copyright © 2015 Pearson Canada Inc.
41) Which of the following is not true about the composition of Canadian GDP in 2012?
A) The majority of consumer spending is on durable goods.
B) Purchases made by government are larger than investment spending.
C) Imports are greater than exports.
D) Business fixed investment is the largest component of investment.
Answer: A
Diff: 2
Type: MC
Page Ref: 101
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
42) The sum of the value added of every firm involved in producing all final goods and services
________ gross domestic product.
A) equals
B) is greater than
C) is less than
D) is sometimes greater than and other times less than
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 103
Topic: Measuring GDP by the Value Added Method
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
Table 4.5
Stage of Production
Seller
1
Steel mill
2
Auto manufacturer
3
Auto dealer
Buyer
Auto manufacturer
Auto dealer
Consumer
Price
$10,000
18,000
25,000
Consider the table above showing three stages of production of an automobile.
43) Refer to Table 4.5. The value added by the automobile dealer equals
A) $7,000.
B) $15,000.
C) $18,000.
D) $25,000.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 103
Topic: Measuring GDP by the Value Added Method
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Analytic Skills
Special Feature: None
4-15
Copyright © 2015 Pearson Canada Inc.
44) Refer to Table 4.5. The value of each automobile in gross domestic product equals
A) $7,000.
B) $15,000.
C) $18,000.
D) $25,000.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 103
Topic: Measuring GDP by the Value Added Method
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Analytic Skills
Special Feature: None
Scenario 4.1
CANOES-R-US makes canoes. It buys the shell of the canoe from another firm for $300 and
uses its labour and intermediate goods to make the canoe. It sells the finished canoe to a retail
canoe store for $800. The retail canoe store then sells the canoe to a consumer for $1,200.
45) Refer to Scenario 4.1. The value added of CANOES-R-US for each canoe equals
A) $1,200.
B) $800.
C) $500.
D) $400.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 103
Topic: Measuring GDP by the Value Added Method
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Analytic Skills
Special Feature: None
46) Refer to Scenario 4.1. The value of each canoe in gross domestic product equals
A) $1,200.
B) $800.
C) $500.
D) $400.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 103
Topic: Measuring GDP by the Value Added Method
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Analytic Skills
Special Feature: None
4-16
Copyright © 2015 Pearson Canada Inc.
47) In the circular flow diagram, the value of all the income in the economy is greater than the
value of goods and services produced in the economy.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 98
Topic: The Circular Flow of Income
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Analytic Skills
Special Feature: None
48) Residential investment includes spending by firms on office buildings.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 100
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
49) High-income countries such as Canada spend a greater amount on services as compared to
goods.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 100
Topic: Components of GDP
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
50) Why do we not count the value of intermediate goods and services in gross domestic
product?
Answer: We would double count if we counted directly the value of intermediate goods and
services, because their value shows up in the value of the final goods and services in which they
are a part.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 100
Topic: Measuring Total Production
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
4-17
Copyright © 2015 Pearson Canada Inc.
51) People complain that inflation increases the cost of goods and services and therefore reduces
their purchasing power. If inflation and income grow at the same rate, is this complaint valid?
Explain carefully.
Answer: If inflation and income grow at the same rate, real income will be constant as inflation
increases both total expenditures and total income by the same amount. All of the money that a
business receives on the sale of its product must be paid out as income to the owners of the
factors of production. If the prices of final goods and services increase (inflation), then there is
more money for the businesses to pay out as income. Therefore, on average, the buying power of
income will remain constant. The complaint is not valid.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 98-101
Topic: Measuring Total Production
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Reflective Thinking
Special Feature: None
Table 4.6
Product
iPods
T-shirts
Bottled water
Oranges
Quantity
20
100
2,000
600
Price
$125.00
20.00
1.00
0.50
52) Refer to Table 4.6. Suppose that a simple economy produces only four goods and services:
iPods, t-shirts, bottled water, and oranges. Calculate nominal GDP for this simple economy.
Answer: Nominal GDP equals (20 × $125) + (100 × $20) + (2,000 × $1) + (600 × $0.50) =
$6,800.
Diff: 2
Type: ES
Page Ref: 98
Topic: Measuring Total Production
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating GDP
4-18
Copyright © 2015 Pearson Canada Inc.
Table 4.7
Product
Sweaters
CDs
Sugar
Soft drinks
Quantity
50
150
600
800
Price
$50.00
10.00
1.00
0.75
53) Refer to Table 4.7. Suppose that a simple economy produces only four goods and services:
sweaters, CDs, sugar, and soft drinks. Assume one half of the sugar is used in making the soft
drinks and the other half of the sugar is purchased by households. Calculate nominal GDP for
this simple economy.
Answer: Nominal GDP equals (50 × $50) + (150 × $10) + ((600 × .5) × $1)) + (800 × 0.75) =
$4,900.
Diff: 3
Type: ES
Page Ref: 98
Topic: Measuring Total Production
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating GDP
54) If the value added of a firm is positive, will the firm necessarily have positive profits?
Answer: No. Value added equals the price of the firm's product minus the cost of intermediate
goods. The intermediate goods are converted to the firm's profits by the application of such
resources as labour, capital, and entrepreneurship. Profit is the difference between the total sales
revenue and the opportunity cost of all the resources used to make the product.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 103
Topic: Measuring GDP by the Value Added Method
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Analytic Skills
Special Feature: None
55) How can a firm have a negative valued added, as supposedly some state-owned businesses
did in the former Soviet Union? What has to be true for value added to be negative?
Answer: A negative value added means that the cost of the intermediate goods exceeds the price
of the final product produced using the intermediate goods. For value added to be negative, a
firm would use its primary factors of production, such as labour and capital equipment, to
produce a product from the intermediate goods that is less valuable than the intermediate goods
themselves.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 103
Topic: Measuring GDP by the Value Added Method
Learning Outcome: 4.1 Explain how total production is measured
AACSB: Analytic Skills
Special Feature: None
4-19
Copyright © 2015 Pearson Canada Inc.
56) Gross domestic product in the economy is measured by the
A) total number of goods and services produced in the economy.
B) dollar value of all final goods and services produced in the economy.
C) total number of goods produced in the economy.
D) total number of services produced in the economy.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 96
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
57) One American study found that college students who graduate during a recession have to
search longer for a job and end up accepting jobs that, on average, pay ________ than jobs
accepted by students who graduate during expansions.
A) 50 percent less
B) 10 percent less
C) roughly the same
D) 7 percent more
Answer: B
Diff: 1
Type: MC
Page Ref: 95
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Ford Motor Company Feels the Effects of the Recession
58) In comparing China to the United Kingdom, China's relatively ________ growth rate in GDP
would make you more likely to take a job in China, and China's relatively ________ level of
GDP would make you less likely to take a job in China.
A) high; low
B) high; high
C) low; low
D) low; high
Answer: A
Diff: 1
Type: MC
Page Ref: 95
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: Economics in Your Life: What's the Best Country for You to Work In?
4-20
Copyright © 2015 Pearson Canada Inc.
59) A final good is one that
A) is used in the production of another good.
B) is a natural resource used to produce a good.
C) is purchased as an input in the production process.
D) is purchased by its final user.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 97
Topic: Final vs. Intermediate Goods
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
60) How are intermediate goods treated in the calculation of GDP?
A) Their value is not counted separately, but included as part of the value of the final good for
which they are an input.
B) Their value is counted separately, and their value is also included as part of the value of the
final good for which they are an input.
C) Their value is counted separately, but is not included as part of the value of the final good for
which they are an input.
D) They are included only if they are imported.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 97
Topic: Final vs. Intermediate Goods
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
61) An example of an intermediate good would be
A) the bread that goes into a sub sandwich that is sold by Mr. Sub.
B) the soda pop sold by Mr. Sub.
C) a sub sandwich sold by Mr. Sub.
D) the potato chips sold by Mr. Sub.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 97
Topic: Final vs. Intermediate Goods
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
4-21
Copyright © 2015 Pearson Canada Inc.
62) An example of an intermediate good would be
A) a new car.
B) a used car.
C) the rims on a new car.
D) new rims to replace old rims on a used car.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 97
Topic: Final vs. Intermediate Goods
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
63) An example of a final good would be
A) the sugar sold to Tim Hortons.
B) the whipped cream sold to Tim Hortons.
C) an extra-large double-double sold by Tim Hortons to a student.
D) the coffee beans sold to Tim Hortons.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 97
Topic: Final vs. Intermediate Goods
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
64) Which of the following are included in gross domestic product for an economy in a given
year?
A) the value of intermediate goods produced in that year
B) the value of used goods sold in that year
C) the value of final goods produced in that year
D) All of the above would be included in gross domestic product for an economy in a given year.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 96-97
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-22
Copyright © 2015 Pearson Canada Inc.
65) Rona sells new and used doors to contractors who build new homes. Rona also sells new and
used doors to homeowners. Which of the following would be counted in GDP?
A) the sale of a used door to a homeowner
B) the sale of a new door to homeowner
C) the sale of a used door to TapKon construction for installation into a new home
D) the sale of a new door to TapKon construction for installation into a new home
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 97
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
66) Which of the following transactions would be included in the official calculation of GDP?
A) A student buys a used textbook at the bookstore.
B) Magna sells $2 million worth of seats to General Motors.
C) You wash and wax your father's car as a favour to him.
D) You buy a new iPod.
E) You illegally download music off the Internet to put on your new iPhone.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 97
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
67) A car that is produced in 2016 is not sold until 2017. According to the definition of GDP, in
which year's GDP should it be counted?
A) 2016
B) 2017
C) Half of the sales price will count as part of 2016 GDP and half will count as part of 2017
GDP.
D) The production cost will count as part of 2016 GDP while the sales price will count as part of
2017 GDP.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 97
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-23
Copyright © 2015 Pearson Canada Inc.
68) A transfer payment is a payment by the government to an individual
A) for a service.
B) for an investment good.
C) for a consumption good.
D) for which the government does not receive a good or service in return.
E) for a debt owed.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 99
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
69) An example of a transfer payment is
A) a teacher's paycheque.
B) a paycheque for a member of the Royal Canadian Air Force.
C) an Old Age Security Payment.
D) a purchase of a new bridge to PEI.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 99
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
70) In the circular flow diagram, ________ supply the factors of production and ________ goods
and services.
A) households; sell
B) households; buy
C) firms; sell
D) firms; buy
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 99-100
Topic: The Circular Flow of Income
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
4-24
Copyright © 2015 Pearson Canada Inc.
71) ________ is/are the payment for the factor of production ________.
A) Wages; capital
B) Interest; labour
C) Profit; entrepreneurship
D) Rent; capital
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 98-100
Topic: The Circular Flow of Income
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
72) Investment spending includes spending on
A) stocks.
B) food.
C) changes in business inventories.
D) transfer payments.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 99-100
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
73) Which of the following are not considered part of government purchases?
A) Employment Insurance payments
B) teachers' salaries paid by a provincial government
C) a tank purchased by the federal government
D) a bridge purchased by the local government
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 99-100
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
4-25
Copyright © 2015 Pearson Canada Inc.
74) Consumption expenditures do not include household purchases of
A) dental care.
B) education.
C) new houses.
D) durable goods.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 100
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
75) Which of the following is considered a durable good?
A) dental care
B) clothing
C) food
D) a washing machine
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 100
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
76) Government spending ________ is included in gross domestic product.
A) at federal, provincial, and local levels of government
B) at the federal level of government only
C) at provincial and local levels of government only
D) on defense goods only
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 100-101
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-26
Copyright © 2015 Pearson Canada Inc.
77) Assuming that Canada is the domestic economy, ________ are goods and services produced
by ________ and purchased by ________.
A) exports; foreign countries; Canada
B) exports; Canada; Canada
C) imports; foreign countries; foreign countries
D) imports; foreign countries; Canada
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 101
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
78) The largest component of spending in GDP is
A) consumption spending.
B) investment spending.
C) government spending.
D) net export spending.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 101
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
79) In a small economy, gross investment in 2016 is $1,500, consumption spending is $6,000,
net investment is $200, government spending is $1,500, exports are $2,000 and imports are
$1,000. What is GDP for this economy in 2016?
A) $10,700
B) $10,300
C) $10,200
D) $10,000
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 101
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
4-27
Copyright © 2015 Pearson Canada Inc.
80) In a small economy, consumption spending in 2015 is $6,000, government spending is
$1,200, gross investment is $1,500, exports are $2,000, and imports are $1,000. What is gross
domestic product in 2015?
A) $9,700
B) $9,800
C) $10,800
D) $11,700
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 101
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
81) Consumption spending is $4.5 billion, gross private domestic investment is $3 billion, and
government expenditures are $2 billion. If GDP is $14 billion, which of the following could be
true regarding exports and imports in the economy?
A) Exports are $4.5 billion and imports are $2 billion.
B) Exports are $6 billion and imports are $8.5 billion.
C) Exports are $9 billion and imports are $6 billion.
D) Exports are $15 billion and imports are $10.5 billion.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 101
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
4-28
Copyright © 2015 Pearson Canada Inc.
Table 4.8
Product
Coke
iPhones
Backpacks
Hershey bars
Quantity
10,000
2,000
4,000
8,000
Price per
Unit
$2
150
25
1
82) Refer to Table 4.8. Consider the table of production and price statistics for a small economy
in 2015. If the economy only produces the four goods listed below, what is GDP for 2015?
A) $428,000
B) $267,000
C) $24,000
D) $1,424
Answer: A
Diff: 2
Type: MC
Page Ref: 97
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating GDP
83) Which of the following would increase gross private domestic investment in an economy?
A) an increase in the shares of Loblaw's stock households own
B) an increase in the number of workers Loblaw's hires
C) an increase in the level of Loblaw's inventory
D) an increase in the number of highway construction projects the government is funding
Answer: C
Diff: 2
Type: MC
Page Ref: 100
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: Don't Let This Happen to You: Remember What Economists Mean by
Investment
4-29
Copyright © 2015 Pearson Canada Inc.
84) Which of the following equations correctly measures GDP in an economy?
A) GDP = C + I + G + X
B) GDP = C + net I + G + NX
C) GDP = C + I + G + NX
D) GDP = C + G + I - taxes
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 101
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
85) Between 2014 and 2015, if an economy's exports rise by $8 billion and its imports fall by $8
billion, by how much will GDP change between the two years, all else equal?
A) Net exports will increase GDP by $8 billion.
B) The increase in exports is offset by the decrease in imports, so there is no change in net
exports and no effect on GDP.
C) Net exports will increase GDP by $16 billion.
D) Net exports will decrease GDP by $8 billion.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 100-101
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
4-30
Copyright © 2015 Pearson Canada Inc.
86) Which of the following would result in GDP for an economy equal to $10 trillion?
A) C = $6 trillion
I = $2 trillion
G = $1.5 trillion
NX = -$2 trillion
B) C = $7 trillion
I = $2 trillion
G = $4 trillion
NX = $3 trillion
C) C = $5 trillion
I = $5 trillion
G = $2 trillion
NX = -$2 trillion
D) C = $4 trillion
I = $3 trillion
G = $2 trillion
NX = -$1 trillion
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 101
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
87) Which component of consumption spending is the greatest in the Canadian economy?
A) services
B) durable goods
C) nondurable goods
D) new housing
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 101
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
4-31
Copyright © 2015 Pearson Canada Inc.
88) Total income in an economy is equal to
A) GDP minus net exports.
B) income minus taxes.
C) the sum of wages, interest, rent, and profit.
D) firm revenues.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 98
Topic: The Circular Flow of Income
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
89) To calculate GDP using the value-added method, one would add up
A) the market value of final goods and services produced during a particular period.
B) only the value added by the underground economy.
C) the value added by each firm involved in the production of final goods and services.
D) the market value of intermediate goods and services produced during a particular period.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 103
Topic: Measuring GDP by the Value Added Method
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
90) Which of the following would not be included in the expenditure category called investment
expenditures?
A) spending on new houses
B) a purchase of shares of preferred stock
C) a purchase of a copy machine by Purolator Courier's head office.
D) the cars held in inventory on a local Ford dealer's lot
Answer: B
Diff: 2
Type: MC
Page Ref: 100
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: Don't Let This Happen to You: Remember What Economists Mean by
Investment
4-32
Copyright © 2015 Pearson Canada Inc.
91) The circular flow diagram shows that
A) the value of total income is equal to the total value of expenditures on final goods and
services.
B) firms pay households wages, and households receive transfer payments from firms.
C) households spend all their income on goods and services.
D) GDP will be less than the total value of expenditures on final goods and services in the
economy.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 99
Topic: The Circular Flow of Income
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
92) Demographics and savings suggest that consumption's share of GDP is likely to ________ in
the future.
A) rise
B) remain highly stable
C) increase and then level off
D) drop
Answer: D
Diff: 1
Type: MC
Page Ref: 102
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
Special Feature: Making the Connection: Do Canadians Spend Too Much?
93) One reason why consumption accounts for more of GDP in the U.S. than it does in Canada is
A) Americans are more materialistic.
B) spending on health care is often counted as consumption in the U.S. and not in Canada.
C) Americans are less concerned about the future than Canadians.
D) there is less for consumers to buy in Canada.
Answer: B
Diff: 2
Type: MC
Page Ref: 102
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
Special Feature: Making the Connection: Do Canadians Spend Too Much?
4-33
Copyright © 2015 Pearson Canada Inc.
94) Export growth in Canada will help increase Canadian GDP because
A) an increase in exports will increase net exports, assuming no change in imports.
B) growth in exports indicates a decline in imports.
C) exports are added to imports when calculating GDP, causing GDP to increase.
D) exports are subtracted from imports when calculating GDP.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 100
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
95) Caroline is an artist. She purchases canvas, paints, brushes, and accessories for $75. She sells
one of her original paintings to an art gallery for $1,500, even though an art lover would pay
$4,500 for that painting. How much value does Caroline add?
A) $75
B) $1,425
C) $1,500
D) $4,425
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 103
Topic: Measuring GDP by the Value Added Method
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
96) Caroline is an artist. She purchases canvas, paints, brushes, and accessories for $75. She sells
one of her original paintings to an art gallery for $1,500. The gallery, in turn, sells the painting to
an art lover for $4,500. How much value does the gallery add?
A) $1,425
B) $1,500
C) $3,000
D) $4,500
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 103
Topic: Measuring GDP by the Value Added Method
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
4-34
Copyright © 2015 Pearson Canada Inc.
97) Emily is a writer. She buys pens and paper for $20 and writes a 500-page novel that she sells
to a publishing company for $500,000. If the publisher prints 1 million copies that sell for $25
each, what is the contribution to GDP of Emily's novel?
A) $25 million
B) $20 million
C) $500,000
D) $50,000
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 103
Topic: Measuring GDP by the Value Added Method
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
98) If Gladys sells her 1998 Jeep Cherokee for $3,500 in 2015, the sale of her car contributes
$3,500 to 2015 GDP.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 97
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
99) The circular flow of income shows that GDP can be measured as the sum of wages, interest,
rent, and profits received by households or total expenditures on goods and services by
households, firms, government, and the rest of the world.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 99
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-35
Copyright © 2015 Pearson Canada Inc.
100) Government spending on transfer payments is included in government purchases when
calculating GDP because it results in the production of new goods and services.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 99
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
Table 4.9
Product
Steel
iPods
Cars
Legal services
Quantity
1,000
5,000
500
100
Price per
Unit
$100
200
25,000
2,000
101) Refer to Table 4.9. Suppose that the above table represents the goods and services produced
in a very simple economy in 2015. Assume that steel is used as an input in the production of
autos. Using this information, calculate GDP for the year 2015.
Answer: First, we must decide which goods to include in the calculation of GDP. GDP is
defined as the money value of final goods and services produced. Since steel is included in the
production of autos, it is an intermediate good, not a final good. So, steel should be excluded
from the calculation. Final goods and services are goods and services consumed by the ultimate
user of the good or service. All the other goods and services in the table are considered final
goods.
Next, the money value of these final goods and services must be calculated. The money value
is found by multiplying the price of the good or service times the quantity produced of that good
or service. The total money value is found by summing up the individual money values. Thus,
GDP for 2015 = $200 × 5,000 + $ 25,000 × 500 + $2,000 × 100 =
$1,000,000 + $12,500,000 + 200,000 = $13,700,000.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 97-98
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
4-36
Copyright © 2015 Pearson Canada Inc.
102) Describe briefly how the final value of an iPhone must be equal to the sum of incomes
generated by the production of the iPhone.
Answer: Consider the value of an iPhone that costs $200. Part of the $200 goes to Apple in the
form of profit. Part of the $200 goes to the firms that sold Apple the parts that made up the
iPhone. Part of the $200 goes to the workers that built the iPhone. A portion of the $200 goes to
pay the sales clerk who sells the iPhone. Part of the $200 goes to the trucking company that
shipped the iPhone. In fact, all of the value of the $200 ends up as income for someone in the
economy. If we extend this idea to the entire economy and add up the value of all goods and
services, then the total will equal the total amount of income in the economy.
Diff: 3
Type: SA Page Ref: 99
Topic: The Circular Flow of Income
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating GDP
103) Why do we subtract import spending from total expenditures?
Answer: Import spending is defined as spending on goods and services that are produced in
foreign countries. When we total up consumption expenditures, investment spending, and
government spending, this total includes spending on goods and services, regardless of where
they are produced. That is, it includes some import spending. We must then subtract the value of
import spending from total expenditures because we would be including spending on goods and
services that were not the result of production of newly produced goods and services in Canada.
We want total expenditures to reflect expenditures on final goods and services produced in the
domestic economy.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 101
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-37
Copyright © 2015 Pearson Canada Inc.
104) Statistics Canada divides its statistics on GDP into four major categories. List the categories
of expenditures and define each one.
Answer: The largest category of expenditures is consumption expenditures. These are purchases
by households of final goods and services. They can be divided into purchases of services,
nondurable goods (goods that last less than 3 years) and durable goods (goods that last for longer
than 3 years). Consumption spending does not include purchases of housing. Spending by firms
on new factories, office buildings, machinery and inventories and spending by households on
new houses is the second category of spending called investment spending. Government
consumption and gross investment make up the third category of spending called government
purchases. Government purchases include purchases by provincial, federal, and local
governments. Finally, net export spending makes up the last category of expenditures. This is
exports minus imports. Imports are purchases of foreign goods and services by the domestic
economy, and exports are purchases of domestic goods and services by foreigners.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 100-101
Topic: Components of GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
105) Debbie makes porcelain plates in her home and sells them to the Opus gallery. She spent
$400 last month on supplies and made 50 plates. She sold the plates to the gallery at $25 per
plate. The gallery sells all the plates for $40 each. For all of the 50 plates, what is Debbie's total
value added? For all the 50 plates, what is the gallery's total value added?
Answer: To determine Debbie's value added, we must find the additional market value she gives
to the plates. For each plate, this is the difference between the price she charges the gallery and
the cost of her raw materials. Her cost per plate is $400/50 or $8. Her value added per plate is
$25 - $8 or $17. Her total value added for all 50 plates is $17 × 50 or $850. The gallery's value
added per plate is $40 - $25 = $15. The total value added by the gallery for all 50 plates is 50 ×
$15 = $750.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 103
Topic: Measuring GDP by the Value Added Method
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
4-38
Copyright © 2015 Pearson Canada Inc.
106) The table below describes the value added in the production of a gallon of gasoline by each
stage of production. (The values are hypothetical.)
Table 4.10
Stage of Production
Oil drilling
Refining
Shipping
Retail sales
Value of Sales
0.75
1.25
1.85
3.65
Value Added
a) What is the value added by each stage of production?
b) What is the total value added?
For simplicity, you can ignore the cost of the inputs for oil drilling.
Answer:
Stage of Production
Value of Sales
Value Added
Oil drilling
0.75
$0.75
Refining
1.25
0.50
Shipping
1.85
0.60
Retail sales
3.65
1.80
$3.65
a) The value added is the difference between the price the firm sells a good for and the price it
paid other firms for the intermediate good. The firm that does the oil drilling sells the gallon of
oil to the refinery for $0.75. Since we are assuming no other input costs for simplicity, the value
added by the drilling firm is $0.75. The refinery processes the oil and then sells it to the transport
company for $1.25. The refinery's value added is $0.50. The transport company sells the oil to
the retail company for $1.85. The transport company's value added is $1.85 - $1.25 = $0.60.
Finally, the retail gas station sells the gallon of gas for $3.65. The value added by the retail
station is $1.80.
b) The total value added is found by summing the value added by each firm involved the
production of the gallon of gas. The retail price is the same at this total of value added.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 103
Topic: Measuring GDP by the Value Added Method
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
4-39
Copyright © 2015 Pearson Canada Inc.
4.2 Does GDP Measure What We Want It to Measure?
1) The Philippines and Vietnam have roughly the same size population. Suppose the GDP of the
Philippines is $1 trillion and the GDP of Vietnam is $10 trillion. You should conclude
A) a typical person in Vietnam is 10 times as well off as the typical person in the Philippines.
B) a typical person in Vietnam is more than 10 times as well off as the typical person in the
Philippines.
C) a typical person in Vietnam is less than 10 times as well off as the typical person in the
Philippines.
D) it is not possible to make a good comparison of the economic well-being of a typical
individual in the 2 countries without additional information.
Answer: D
Diff: 2
Type: MC
Page Ref: 112
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: Economics in Your Life: What's the Best Country for You to Work In?
2) Gross domestic product understates the total production of final goods and services because of
the omission of
A) exports.
B) inflation.
C) intermediate goods.
D) household production.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 104
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
3) Gross domestic product understates the total production of final goods and services because of
the omission of
A) the underground economy.
B) intermediate goods.
C) inflation.
D) exports.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 104
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
4-40
Copyright © 2015 Pearson Canada Inc.
4) The size of the underground economy would tend to decrease if the government of a country
A) decreased government regulations on businesses.
B) made over-the-counter drugs illegal.
C) increased income tax rates.
D) increased business taxes.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 104
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
5) The size of the underground economy would tend to increase if the government of a country
A) decreased government regulations on businesses.
B) increased income tax rates.
C) legalized prostitution.
D) legalized marijuana.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 104
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
6) Suppose Bob works for Mary as a proofreader. Mary and Bob fall deeply in love, marry and
have eight children. Bob stops working for Mary in order to care for the children. What will be
the effect on GDP?
A) GDP will decrease.
B) GDP will increase.
C) GDP will not change.
D) GDP may increase or may decrease depending on inflation.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 104
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
4-41
Copyright © 2015 Pearson Canada Inc.
7) Which of the following statements about the underground economy is true?
A) The underground economy in developing countries amounts to less than 10% of measured
GDP.
B) Most transactions that occur in the underground economy are included in the calculation of
GDP.
C) Excluding underground economy production from measured GDP causes errors in GDP
growth estimates in the long run.
D) Income that is earned but not reported as income for tax purposes is included in the
calculation of GDP.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 104
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
8) The informal sector can be a significant drag on the economies of developing countries
because the firms in the informal sector
A) produce goods and services no one wants.
B) sell their goods and services to citizens in other countries.
C) do not pay taxes to the government.
D) employ illegal immigrants from other countries.
Answer: C
Diff: 1
Type: MC
Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
9) Recent estimates put the size of the underground economy in Canada at ________ of
measured GDP.
A) 1 percent
B) 2.2 percent
C) 10 percent
D) over 50 percent
Answer: B
Diff: 1
Type: MC
Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
4-42
Copyright © 2015 Pearson Canada Inc.
10) Legalizing all forms of illegal activities
A) reduces GDP and the size of the underground economy.
B) reduces GDP and increases the size of the underground economy.
C) increases GDP and reduces the size of the underground economy.
D) increases GDP and increases the size of the underground economy.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
11) Which of the following statements is true?
A) A decrease in the crime rate increases GDP as people will spend more on security.
B) Household production is counted in GDP as it amounts to real production.
C) GDP accounting rules do not adjust for production that pollutes the economy.
D) GDP growth distributes income equally to people in the economy.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
12) Which of the following is likely to increase measured GDP?
A) A greater number of women decide to stay at home and provide day care for their children
under age 5.
B) Marijuana becomes legal to grow and sell.
C) Tax rates increase and more people attempt to underreport their income for tax purposes.
D) More people decide to do their own lawn maintenance and give up using a professional
service.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
4-43
Copyright © 2015 Pearson Canada Inc.
13) The Canadian work week has declined from 60 hours in 1800s to 40 hours today. The impact
of the decline in working hours
A) increases Canadian GDP and increases the well-being of a typical working person in Canada.
B) increases Canadian GDP and decreases the well-being of a typical working person in Canada.
C) decreases Canadian GDP and increases the well-being of a typical working person in Canada.
D) decreases Canadian GDP and decreases the well-being of a typical working person in Canada.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 105
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
14) A sharp increase in the divorce rate increases the number of lawyers hired to determine
divorce settlements. This will
A) increase GDP and increase well-being in the economy.
B) increase GDP and decrease well-being in the economy.
C) decrease GDP and increase well-being in the economy.
D) decrease GDP and decrease well-being in the economy.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 105
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
15) Which of the following describes the relationship between the Better Life Index and GDP
per person?
A) As GDP per person increases the Better Life Index decreases.
B) As GDP per person increases the Better Life Index increases.
C) Increases in GDP per person appear to have no relationship with the Better Life Index.
D) There is a perfect linear relationship between GDP per person and the Better Life Index.
Answer: B
Diff: 2
Type: MC
Page Ref: 106
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: Making the Connection: GDP and Happiness
4-44
Copyright © 2015 Pearson Canada Inc.
16) GDP is
A) entirely unrelated to personal well-being.
B) imperfectly related to personal well-being.
C) the only method of measuring the success of a country.
D) entirely pointless.
Answer: B
Diff: 1
Type: MC
Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: Making the Connection: GDP and Happiness
17) Increases in real GDP would overstate the increase in the well-being of a country over time
if, over that time period, the
A) average hours worked per week increased.
B) amount of pollution decreased.
C) price level increased.
D) crime rate decreased.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 105
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
18) Increases in real GDP would understate the well-being of a country over time if, over that
time period, the
A) crime rate increased.
B) percentage of people addicted to illegal drugs increased.
C) amount of pollution decreased.
D) average hours worked per week decreased.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 105
Topic: Shortcomings in GDP as a Measure of Well-Being
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
4-45
Copyright © 2015 Pearson Canada Inc.
19) If GDP calculations included measurements of pollution and environmental damage, GDP
values would most likely be
A) greater than their values without these measurements.
B) less than their values without these measurements.
C) unchanged from their values without these measurements.
D) meaningless, since GDP values without these measurements would no longer be of value.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 105
Topic: Shortcomings in GDP as a Measure of Well-Being
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
20) Presently, GDP is ________ to compensate for the costs of environmental damage.
A) fully adjusted
B) partially adjusted
C) adjusted on a chain-weight basis
D) not adjusted
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 105
Topic: Shortcomings in GDP as a Measure of Well-Being
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
21) Developing countries with large informal sectors tend to have firms that invest less in capital
equipment.
Answer: TRUE
Diff: 2
Type: TF Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: Making the Connection: Why Do Many Developing Countries Have Such
Large Underground Economies?
22) If income is unequally distributed in an economy, increases in GDP may not raise well-being
in an economy.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Well-Being
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
4-46
Copyright © 2015 Pearson Canada Inc.
23) Real GDP per capita is calculated by dividing the value of real GDP for a country by the
country's adult population.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Well-Being
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
24) The underground economy—the informal sector—can be a significant drag on the economies
of developing countries. Why are firms in the informal sector often less efficient than firms in
the formal sector?
Answer: Entrepreneurs of the firms in the informal sector limit their investments in capital
equipment because they are afraid that the firms will someday be shut down. The workers in the
firms, consequently, have less capital equipment to work with.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 104
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: None
25) Even though it is generally true that the more goods and services people have, the better off
they are, GDP provides only a rough measure of well-being. Assuming language is not an issue,
what other factors besides GDP might you consider when deciding where to live and work?
Answer: Factors not included in GDP which you might consider include the value of leisure,
levels of pollution, crime levels, and other social problems. All of these factors are not included
in GDP measurements, yet may be very important in making a decision concerning your wellbeing.
Diff: 2
Type: ES
Page Ref: 104-106
Topic: Shortcomings in GDP as a Measure of Well-Being
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Reflective Thinking
Special Feature: Economics in Your Life: What's the Best Country for You to Work In?
4-47
Copyright © 2015 Pearson Canada Inc.
26) Over the last 50 years, has the ratio of household production to gross domestic product in
Canada increased or decreased? Consider the effect of the increased number of women working
outside the home, and the effect of advances in technology in household production such as
microwaves, coffee makers, power tools, etc.
Answer: "Household production" refers to goods and services people produce for themselves. It
is not clear whether the ratio of household production to gross domestic product has increased or
decreased. More women working outside the home has decreased the ratio of household
production to GDP, but the technological advances at home have allowed people to produce
more household production in less time.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 104
Topic: Shortcomings in GDP as a Measure of Total Production
Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being
AACSB: Analytic Skills
Special Feature: None
27) GDP is not a perfect measure of well-being because
A) the value of leisure is included in GDP.
B) GDP is not adjusted for pollution.
C) GDP is adjusted for changes in crime rates.
D) GDP is adjusted for increases in drug addiction.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 104
Topic: Shortcomings in GDP as a Measure of Well-Being
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
28) Which of the following accurately describes an effect of hurricane Juan on GDP?
A) GDP would decrease reflecting the costs of cleanup.
B) GDP would increase reflecting the costs of cleanup.
C) GDP would increase reflecting the decrease in production that occurred during the storm and
the productive capacity lost in the storm.
D) GDP would increase well-being.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Well-Being
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-48
Copyright © 2015 Pearson Canada Inc.
29) The underground economy can be described as
A) production of intermediate goods and services.
B) economic production that includes mining.
C) economic activity that is hidden from the government to avoid taxes or because the activity is
illegal.
D) production of infrastructure that spurs growth in the rest of the economy.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 104
Topic: Shortcomings in GDP as a Measure of Total Production
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
30) Which of the following is counted in GDP?
A) the value of goods and services produced in the underground economy
B) the cost of a speed boat purchased by drug smugglers
C) the value of do-it-yourself work
D) the value of leisure
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 104
Topic: Shortcomings in GDP as a Measure of Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
31) Marla is an architect who is designing a home for Chuck. Chuck is paying Marla $150 per
hour to design his new home. When Chuck and Marla get married, Marla continues to work on
designing the home, but she no longer charges Chuck for her work. As a result, GDP ________
because ________.
A) falls; Marla's work takes place in the underground economy once she's married
B) falls; Marla's work becomes less valuable once she's married
C) falls; Marla's architectural design services are no longer bought by Chuck once they're
married
D) rises; Marla becomes more productive once she's married
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-49
Copyright © 2015 Pearson Canada Inc.
32) "Household production" refers to
A) the manufacturing of durable household products.
B) the home building sector of the economy.
C) home-based craft businesses.
D) goods and services people produce for themselves.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 104
Topic: Shortcomings in GDP as a Measure of Total Production
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
33) The "underground economy" is also referred to as
A) the informal sector.
B) the formal sector.
C) the halfway economy.
D) the net domestic product economy.
Answer: A
Diff: 1
Type: MC
Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Well-Being
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: Making the Connection: GDP and Happiness
34) The OECD's Better Life Index
A) gives a very similar ranking of countries as GDP per capita.
B) shows that wealthy countries typically have a much lower quality of life than middle income
countries.
C) shows that there is no relationship between quality of life and GDP per capita.
D) can be expected to completely replace GDP as a measure used by economists in the next few
years.
Answer: A
Diff: 1
Type: MC
Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Well-Being
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: Making the Connection: GDP and Happiness
4-50
Copyright © 2015 Pearson Canada Inc.
35) Scott is a woodworker and charges $125 an hour for his time manufacturing custom-made
wood products. For his wife's birthday, he designs and creates an intricate birdseye maple
jewellery box that takes him 15 hours to complete. How is GDP affected by Scott's efforts?
A) GDP rises by $1,875.
B) GDP is not affected by Scott's production of the jewellery box.
C) GDP rises by $125.
D) GDP falls by $1,875.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 104
Topic: Shortcomings in GDP as a Measure of Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
36) The "underground economy" refers to
A) the buying and selling of goods that is concealed from the government.
B) the production of goods and services used by the government for covert spy operations.
C) the sector of the economy that earns profits that are higher than average.
D) the formal sector of the economy in developing countries.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Total Production
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
37) Which of the following transactions would take place in the "underground economy"?
A) Elizabeth tells her mother she's going to work but she really goes to see a movie.
B) Paul buys 30 litres of gasoline for $1.29 a gallon, not realizing that a fraction of that price
goes to the government as tax revenue.
C) John makes chain-link belts and necklaces and sells them at a local flea market for cash to
avoid paying taxes.
D) Matt bought an iPad for $499 but decided to sell it on eBay instead of keeping it.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Total Production
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
4-51
Copyright © 2015 Pearson Canada Inc.
38) If a country passes a labour law limiting the number of hours of work per week, GDP would
________ and leisure would ________.
A) decrease; increase
B) increase; increase
C) decrease; decrease
D) increase; decrease
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 105
Topic: Shortcomings in GDP as a Measure of Well-Being
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
39) If China decides to enact laws to clean up the environment, what would be the effect on its
GDP?
A) GDP would increase, reflecting the fact that the environment would be cleaner.
B) GDP would decrease if the pollution controls reduce productivity by more than the cost of the
controls.
C) GDP would increase as the citizens of China become happier as the environment is cleaned
up.
D) GDP would increase since the environmental costs of pollution were not included in the
calculation of GDP.
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 105
Topic: Shortcomings in GDP as a Measure of Well-Being
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-52
Copyright © 2015 Pearson Canada Inc.
40) Because workers in Canada work fewer hours per week, on average, than they did over 100
years ago,
A) workers in Canada are worse off than they were over 100 years ago.
B) workers in Canada earn less income than they did over 100 years ago.
C) GDP is lower than it would be if Canadian workers worked the same hours that they did over
100 years ago.
D) GDP is higher than it would be if Canadian workers worked the same hours that they did over
100 years ago.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 105
Topic: Shortcomings in GDP as a Measure of Well-Being
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
41) Which of the following is a true statement about the impact of World War II on the Canadian
economy?
A) Canadian GDP decreased dramatically from 1939 to 1945.
B) The wartime years were a period of prosperity for Canadian consumers.
C) Less than 10% of the labour force was in the military or producing war goods.
D) Increased production of tanks, ships, planes, and munitions accounted for most of the increase
in GDP.
Answer: D
Diff: 2
Type: MC
Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
Special Feature: Making the Connection: Did World War II Bring Prosperity?
42) GDP is not a complete measure of well-being.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Well-Being
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-53
Copyright © 2015 Pearson Canada Inc.
43) The size of the underground economy as a percent of GDP is larger in Canada as compared
to poorer countries such as Zimbabwe.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 104
Topic: Shortcomings in GDP as a Measure of Total Production
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
44) Based on the increase in GDP that comes with a war effort, we can conclude that wars make
consumers better off.
Answer: FALSE
Diff: 1
Type: TF Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Well-Being
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
45) If an increase in crime causes households to spend money on police and security systems,
GDP will rise.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 105
Topic: Shortcomings in GDP as a Measure of Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-54
Copyright © 2015 Pearson Canada Inc.
46) Give two reasons why GDP does not reflect total production in an economy.
Answer: The measure of GDP leaves out production in two cases. First, it does not count
household production as part of production. A person engages in household production if he or
she produces for himself or herself. Do-it-yourself work is household production. Homemaking
and child care done by a parent for their own children is household production. This is clearly
productive work, but is excluded from the calculation of GDP. Second, GDP does not include the
production of the underground economy. This includes illegal activity, work that is unreported to
avoid taxes, and work that is unreported to avoid regulation. Again, these are productive
activities, yet are not included in GDP.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
47) What is the underground economy and how could it hurt an economy? How does it hurt
developing economies?
Answer: The underground economy is that part of the economy involved in buying and selling
goods and services that are concealed from government to avoid taxes or regulations or because
the goods and services are illegal. This sector of the economy can serve as a drag on the
economy. Firms that participate in the underground economy face the possibility of the
government finding out about their operations and shutting them down because they are acting
illegally. They tend to be smaller and invest less in capital. Since workers in this sector have less
capital to work with, they are less productive and produce fewer goods and services. Firms also
incur costs to avoid discovery by the government, such as paying bribes and hiring lookouts.
These are resources that could be used in other productive activities. Because of these reasons,
this sector of the economy is not as productive as it might be if it were legal. Fewer goods and
services are produced. This is not an insignificant problem, as the underground sector can be
large in developing countries as high tax rates drive many firms to the underground sector to
avoid taxes.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 104-105
Topic: Shortcomings in GDP as a Measure of Total Production
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
4-55
Copyright © 2015 Pearson Canada Inc.
48) China's current rate of GDP growth is quite rapid. Its current growth rate is probably three
times that of Canada. However, pollution levels are much higher in China. Would you consider
China to be better off than Canada given this information? Why or why not?
Answer: China is not better off because of higher rates of growth of GDP. GDP is not a perfect
measure of well-being. GDP is not adjusted for pollution or other negative effects of production.
Certainly the rapid growth of GDP raises the standard of living for many people in China.
However, this comes at the cost of dirty air and water. According to the World Health
Organization, seven of the ten most polluted cities in the world are in China. This pollution can
result in negative health effects. Improved living standards positively affect well-being, but
increased pollution has a negative effect on well-being. In addition, GDP per capita may be a
better measure of standard of living rather than growth in GDP.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 105
Topic: Shortcomings in GDP as a Measure of Well-Being
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4.3 Real GDP versus Nominal GDP
1) Nominal GDP is GDP in a given year
A) adjusted for inflation.
B) adjusted for anticipated inflation.
C) valued in the prices of that year.
D) valued in the prices of the base year.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 107
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
2) Real GDP is GDP in a given year
A) adjusted only for anticipated inflation.
B) adjusted only for unanticipated inflation.
C) valued in the prices of that year.
D) valued in the prices of the base year.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 107
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
4-56
Copyright © 2015 Pearson Canada Inc.
Table 4.11
Year
2007
2014
Guns
Produced
80
90
Price of Guns
$5
6
Butter
Produced
40
60
Price of
Butter
$4
10
Consider the above data for Tyrovia, a country that produces only two products: guns and butter.
3) Refer to Table 4.11. Real GDP for Tyrovia for 2014 using 2007 as the base year equals
A) $1,140.
B) $880.
C) $690.
D) $560.
Answer: C
Diff: 2
Type: MC
Page Ref: 108
Topic: Calculating Real GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real GDP
4) Refer to Table 4.11. Nominal GDP for Tyrovia in 2014 equals
A) $1,140.
B) $880.
C) $690.
D) $560.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 108
Topic: Measuring Total Production
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Analytic Skills
Special Feature: None
4-57
Copyright © 2015 Pearson Canada Inc.
Table 4.12
Year
2008
2009
2010
2011
Nominal GDP
$7,400
7,813
8,301
8,760
Real GDP
$7,537
7,813
8,165
8,516
5) Refer to Table 4.12. Consider the data shown above on nominal GDP and real GDP (values
are in billions of dollars). The base year used in calculating real GDP is
A) 2008.
B) 2009.
C) 2010.
D) 2011.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 107
Topic: Calculating Real GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
Table 4.13
Year
2009
2011
Oranges
Produced
1,800
2,000
Price of
Oranges
$0.90
1.00
Shirts
Produced
110
110
Price of
Shirts
$30.00
35.00
Consider the data shown above for Vicuna, a country that produces only two products: oranges
and shirts.
6) Refer to Table 4.13. Real GDP for Vicuna for 2009 using 2011 as the base year equals
A) $4,620.
B) $5,100.
C) $5,650.
D) $5,850.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 107
Topic: Calculating Real GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Analytic Skills
Special Feature: None
4-58
Copyright © 2015 Pearson Canada Inc.
7) Refer to Table 4.13. Nominal GDP for Vicuna for 2009 equals
A) $4,920.
B) $5,100.
C) $5,300.
D) $5,850.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 107
Topic: Measuring Total Production
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Analytic Skills
Special Feature: None
8) If the quantity of goods and services produced in the economy decreases,
A) it may be possible for real GDP to increase.
B) real GDP would certainly increase.
C) it may be possible for nominal GDP to increase.
D) nominal GDP would certainly increase.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 108
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
9) Suppose that nominal GDP in 2011 was less than real GDP in 2011. Given this information,
we know for certain that
A) the price level in 2011 was greater than the price level in the base year.
B) the price level in 2011 was less than the price level in the base year.
C) real GDP in 2011 was less than real GDP in the base year.
D) real GDP in 2011 was greater than real GDP in the base year.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
4-59
Copyright © 2015 Pearson Canada Inc.
10) Which of the following could cause nominal GDP to decrease, but real GDP to increase?
A) The price level rises, and the quantity of final goods and services produced rises.
B) The price level falls, and the quantity of final goods and services produced rises.
C) The price level rises, and the quantity of final goods and services produced falls.
D) The price level falls, and the quantity of final goods and services produced falls.
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Analytic Skills
Special Feature: None
11) Which of the following could cause nominal GDP to increase, but real GDP to decrease?
A) The price level rises, and the quantity of final goods and services produced rises.
B) The price level rises, and the quantity of final goods and services produced falls.
C) The price level falls, and the quantity of final goods and services produced rises.
D) The price level falls, and the quantity of final goods and services produced falls.
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Analytic Skills
Special Feature: None
12) If real GDP in 2014 (using 2007 prices) is lower than nominal GDP of 2013, then
A) prices in 2014 are lower than prices in 2013.
B) nominal GDP in 2014 equals nominal GDP in 2013.
C) prices in 2014 are higher than prices in 2013.
D) real GDP in 2014 is larger than real GDP in 2013.
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
4-60
Copyright © 2015 Pearson Canada Inc.
13) To examine how the total production of an economy has changed over time, it would be
better to examine
A) real GDP.
B) nominal GDP.
C) GDP at current prices.
D) the GDP deflator.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
14) If prices in the economy rise, then
A) the purchasing power of a dollar rises.
B) the purchasing power of a dollar stays constant.
C) the purchasing power of a dollar declines.
D) the purchasing power of a dollar cannot be determined.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
15) Real GDP will increase
A) only if the price level rises.
B) only if the price level falls.
C) only if the quantity of final goods and services produced rises.
D) if either the price level rises or the quantity of final goods and services produced rises.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
4-61
Copyright © 2015 Pearson Canada Inc.
16) If nominal GDP is $5 trillion and real GDP is $4 trillion, the GDP deflator is
A) 12.5.
B) 80.
C) 125.
D) 800.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 109-110
Topic: The GDP Deflator
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Analytic Skills
Special Feature: None
17) The GDP deflator is the
A) difference between real GDP and nominal GDP multiplied by 100.
B) difference between nominal GDP and real GDP multiplied by 100.
C) ratio of real GDP to nominal GDP multiplied by 100.
D) ratio of nominal GDP to real GDP multiplied by 100.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 109
Topic: The GDP Deflator
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
18) Nominal GDP will increase
A) only if the price level rises.
B) only if the price level falls.
C) only if the quantity of final goods and services produced rises.
D) if either the price level or the quantity of goods and services produced rises.
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
4-62
Copyright © 2015 Pearson Canada Inc.
19) The GDP deflator is a measure of the
A) total production of the economy adjusted for inflation.
B) total production of the economy unadjusted for inflation.
C) average level of prices of final goods and services in the economy.
D) average level of prices of intermediate goods and services in the economy.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 109-110
Topic: The GDP Deflator
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
20) If nominal GDP exceeds real GDP for a specific year, then the GDP deflator must be
A) equal to 100.
B) greater than 100.
C) less than 100.
D) less than 0.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 108-109
Topic: The GDP Deflator
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
21) The GDP deflator in year 2 is 105, using year 1 as the base year. This means that, on
average, the cost of goods and services is
A) 5% higher in year 2 than in year 1.
B) 105% higher in year 2 than in year 1.
C) 5% higher in year 1 than in year 2.
D) 105% higher in year 1 than in year 2.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 109-110
Topic: The GDP Deflator
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Analytic Skills
Special Feature: None
4-63
Copyright © 2015 Pearson Canada Inc.
22) If the GDP deflator is less than 100, then for that year nominal GDP ________ real GDP.
A) equals
B) is greater than
C) is less than
D) may be greater than or less than
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 109-110
Topic: The GDP Deflator
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
Table 4.14
Year
2011
2012
Nominal GDP
1 762
1 818
Real GDP
1 628
1 658
23) Refer to Table 4.14. Consider the data shown above on nominal GDP and real GDP (values
are in billions of dollars). The GDP deflator for 2011 equals
A) 92.2.
B) 102.6.
C) 108.5.
D) 109.1.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 109-110
Topic: The GDP Deflator
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Analytic Skills
Special Feature: None
4-64
Copyright © 2015 Pearson Canada Inc.
Table 4.15
Year
2009
2010
2011
Nominal GDP
$13,399
14,078
14,441
Real GDP
$12,976
13,254
13,312
24) Refer to Table 4.15. Consider the data shown above on nominal GDP and real GDP (values
are in billions of dollars). The GDP deflator for 2010 equals
A) 94.1.
B) 105.1.
C) 106.2.
D) 108.5.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 109-110
Topic: The GDP Deflator
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Analytic Skills
Special Feature: None
25) If prices rise on average in the Canadian economy, the purchasing power of a dollar declines.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
26) Using "chain-weighted" prices to calculate real GDP remedies the distortions caused by
changes in relative prices over time.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
27) If the GDP deflator is equal to 100, then for that year nominal GDP is equal to real GDP.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 109-110
Topic: The GDP Deflator
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
4-65
Copyright © 2015 Pearson Canada Inc.
28) In the term "real GDP," what does "GDP" stand for and what does it measure? What does
"real" indicate?
Answer: GDP stands for gross domestic product and measures the value of the total production
of final goods and services. "Real" indicates that the goods and services produced are valued
using the prices of the base year, not the current year, and therefore are adjusted for inflation.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
29) Is nominal GDP measured in terms of quantity or in terms of dollars? If dollars, the value of
the dollar from what period? Is real GDP measured in terms of quantity or in terms of dollars? If
dollars, the value of the dollar from what period?
Answer: Both nominal GDP and real GDP are measured in terms of dollars. Nominal GDP is
measured using the value of the dollar for that specific year, and real GDP is measured using the
value of the dollar for the base year.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
30) Japan experienced periods of deflation—a declining price level—during the 1990s. During a
deflationary period, which would be higher: nominal GDP or real GDP? Why? Assume that the
base year of choice is prior to the deflationary period.
Answer: Real GDP would be higher, as long as the base year was before the period of deflation.
Nominal GDP would be measured using the lower prices that resulted from the deflation. Real
GDP would use the higher prices before the deflation, assuming the base year was before the
deflation.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
4-66
Copyright © 2015 Pearson Canada Inc.
31) Since real GDP is adjusted for inflation and nominal GDP is not, nominal GDP must always
be higher than real GDP. Do you agree or disagree? Why?
Answer: Disagree. It depends on whether the year being examined is before or after the base
year. If after the base year, then nominal GDP will always exceed real GDP if inflation has
occurred. If before the base year, then nominal GDP will always be less than real GDP if
inflation has occurred. If the year being examined is before the base year and inflation has
occurred, then the base year prices will exceed the prices of that year.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Analytic Skills
Special Feature: None
Table 4.16
Product
Hats
French fries
Digital cameras
2009
Quantity
200
2,000
40
Price
$20
1
200
2011
Quantity
250
2,300
50
Price
$21
2
140
32) Refer to Table 4.16. Consider the data shown above for a simple economy. Calculate
nominal GDP and real GDP for 2011, using 2009 as the base year. Show your work.
Answer:
Nominal GDP for 2011 equals (250 × $21) + (2,300 × $2) + (50 × $140) = $16,850.
Real GDP for 2011 equals (250 × $20) + (2,300 × $1) + (50 × $200) = $17,300.
Diff: 3
Type: ES
Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real GDP
4-67
Copyright © 2015 Pearson Canada Inc.
Table 4.17
Product
MP3s
Tacos
Coats
2005
Quantity
40
2,000
300
Price
$250.00
2.00
50.00
2010
Quantity
45
2,200
310
Price
$200.00
2.25
52.00
2011
Quantity
50
2,300
350
Price
$150.00
2.40
55.00
33) Refer to Table 4.17. Consider the data above for a simple economy: Using 2005 as the base
year, calculate nominal GDP, real GDP, and the GDP deflator for 2011. Show your work.
Answer:
Nominal GDP for 2011 equals (50 × $150) + (2,300 × $2.40) + (350 × $55) = $32,270.
Real GDP for 2011 equals (50 × $250) + (2,300 × $2.00) + (350 × $50) = $34,600.
The GDP deflator equals
× 100 = 93.3
Diff: 3
Type: ES
Page Ref: 108
Topic: Real GDP vs. Nominal GDP
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real GDP
34) If the GDP deflator is less than 100, which will be higher: nominal GDP or real GDP? Why?
Answer: Real GDP will be higher. The GDP deflator is the ratio of nominal GDP to real GDP,
so if the value is less than 100, nominal GDP must be smaller than real GDP.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 109-110
Topic: The GDP Deflator
Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP
AACSB: Reflective Thinking
Special Feature: None
35) The measure of production that values production using current prices is called
A) value-added GDP.
B) nominal GDP.
C) real GDP.
D) underground GDP.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 107
Topic: Real GDP vs. Nominal GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-68
Copyright © 2015 Pearson Canada Inc.
36) The ________ is a measure of the price level and is calculated by dividing ________ by
________ and multiplying by 100.
A) CPI; real GDP; nominal GDP
B) GDP deflator; real GDP; nominal GDP
C) GDP deflator; nominal GDP; real GDP
D) PPI; nominal GDP; real GDP
E) PPI; real GDP; nominal GDP
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 109
Topic: The GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
37) The measure of production that values output using base-year prices is called
A) real GDP.
B) nominal GDP.
C) value-added GDP.
D) underground GDP.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 107
Topic: Real GDP vs. Nominal GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
38) The drawback to calculating real GDP using base-year prices is that
A) real GDP in one year is not comparable to real GDP in another year.
B) relative prices change over time, which is not reflected in base-year prices, and this distorts
GDP.
C) relative prices change over time and these changes are reflected in base-year prices.
D) quality changes are reflected in base-year prices.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 107
Topic: Calculating Real GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-69
Copyright © 2015 Pearson Canada Inc.
39) Nominal GDP is another term for
A) inflation-adjusted GDP.
B) real GDP.
C) constant-dollar GDP.
D) current-dollar GDP.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 107
Topic: Real GDP vs. Nominal GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
Table 4.18
Nominal GDP
Real GDP
2014
$10,000
9,500
2015
$12,000
10,500
40) Refer to Table 4.18. Given the information above, what can we say has happened in the
economy from 2014 to 2015?
A) The price level has fallen.
B) The price level has risen.
C) The price level has remained constant.
D) Not enough information is available to determine what has happened to prices.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 109-110
Topic: The GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
41) In periods when prices are falling, on average,
A) real GDP will grow slower than nominal GDP.
B) real GDP will grow faster than nominal GDP.
C) real GDP will grow as fast as nominal GDP.
D) one cannot calculate real GDP.
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 109
Topic: Real GDP vs. Nominal GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
4-70
Copyright © 2015 Pearson Canada Inc.
42) If prices are rising on average, then
A) real GDP will always be equal to nominal GDP.
B) real GDP will be greater than nominal GDP in the years after the base year.
C) real GDP will be less than nominal GDP in the years before the base year.
D) real GDP will be greater than nominal GDP in the years before the base year.
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 109
Topic: Real GDP vs. Nominal GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
43) If real GDP increases, we know for sure that
A) output has risen.
B) prices have risen.
C) prices have risen but output has remained constant.
D) prices have remained constant.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-71
Copyright © 2015 Pearson Canada Inc.
Table 4.19
Product
Movie
Burgers
Bikes
2002
Quantity
20
100
3
Price
$6.00
2.00
1,000.00
2016
Quantity
30
90
6
Price
$7.00
2.50
1,100.00
A very simple economy produces three goods: movies, burgers, and bikes. The quantities
produced and their corresponding prices for 2002 and 2016 are shown in the table above.
44) Refer to Table 4.19. What is nominal GDP in 2016?
A) $3,320
B) $3,690
C) $6,360
D) $7,035
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 109-110
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
45) Refer to Table 4.19. What is nominal GDP in 2002?
A) $3,320
B) $3,690
C) $6,360
D) $7,035
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 109-110
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
46) Refer to Table 4.19. What is real GDP in 2016, using 2002 as the base year?
A) $3,320
B) $3,690
C) $6,360
D) $7,035
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 109-110
Topic: Calculating Real GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
Table 4.20
Product
Cameras
Legal services
Books
2002
Quantity
100
50
200
Price
$10
15
40
2015
Quantity
120
45
210
Price
$12
20
45
A very simple economy produces three goods: cameras, legal services, and books. The quantities
produced and their corresponding prices for 2002 and 2015 are shown in the table above.
47) Refer to Table 4.20. What is real GDP in 2015, using 2002 as the base year?
A) $28,885
B) $11,790
C) $11,200
D) $10,275
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 108
Topic: Calculating Real GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: Solved Problem: Calculating Real GDP
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Copyright © 2015 Pearson Canada Inc.
48) Refer to Table 4.20. What is real GDP in 2015, using 2015 as the base year?
A) $28,885
B) $11,790
C) $11,200
D) $10,275
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 108
Topic: Calculating Real GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real GDP
49) Refer to Table 4.20. What is nominal GDP in 2015 when 2002 is the base year?
A) $28,885
B) $11,790
C) $11,200
D) $10,275
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 108
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
50) Refer to Table 4.20. What is the GDP deflator in 2015 if 2015 is the base year?
A) 120
B) 118
C) 100
D) 87
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 109
Topic: GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
4-74
Copyright © 2015 Pearson Canada Inc.
51) Refer to Table 4.20. What is the GDP deflator in 2002 if 2015 is the base year?
A) 187
B) 87
C) 8.7
D) 0.87
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 109
Topic: GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
52) If the GDP deflator rises from 185 to 190, what is the rate of inflation between the two
years?
A) 270%
B) 50%
C) 5%
D) 2.7%
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 109-110
Topic: GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
53) If the GDP deflator is 142, by how much have prices changed since the base year?
A) Prices have increased by 42%.
B) Prices have increased by 142%.
C) Prices have decreased by 4.2%.
D) Prices have increased by 58%.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 109-110
Topic: GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
4-75
Copyright © 2015 Pearson Canada Inc.
54) An inflation rate of 5% between 2015 and 2016 would be implied by a change in the GDP
deflator from ________ in 2015 to ________ in 2016.
A) 105; 115
B) 200; 205
C) 400; 420
D) 375; 390
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 109-110
Topic: GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
55) To make the calculation of real GDP more accurate, Statistics Canada began publishing real
GDP data in
A) base-year prices.
B) current prices.
C) chain-weighted prices.
D) market prices.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 107
Topic: Calculating Real GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
Special Feature: None
56) When Statistics Canada calculates real GDP using the average of prices in the current year
and the year preceding it, and this average changes from year to year, this is called calculating
GDP using
A) chain-weighted prices.
B) fixed-weight prices.
C) current-year prices.
D) fixed base-year prices.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 107
Topic: Calculating Real GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
57) Which of the following is a true statement about real and nominal GDP?
A) If nominal GDP increases from one year to the next, we know that production of goods and
services has risen.
B) Nominal GDP is a better measure than real GDP in comparing changes in the production of
goods and services year after year.
C) Increases in average prices do not affect the calculation of nominal GDP.
D) If real GDP increases from one year to the next, we know that production of goods and
services has risen.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
58) If nominal GDP rises, we can say that
A) production has risen and prices remain constant.
B) prices have risen and production remains constant.
C) production has risen, or prices have risen, or both have risen.
D) production has fallen and prices have risen.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 108-109
Topic: Real GDP vs. Nominal GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
59) The GDP deflator is equal to
A) real GDP divided by nominal GDP.
B) nominal GDP divided by real GDP, multiplied by 100.
C) nominal GDP divided by real GDP.
D) real GDP divided by nominal GDP, multiplied by 100.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 109-110
Topic: The GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-77
Copyright © 2015 Pearson Canada Inc.
60) Under what circumstances would the GDP deflator be less than 100 after the base year?
A) The GDP deflator will be less than 100 if there has been inflation relative to the base year.
B) The GDP deflator will be less than 100 if there has been inflation of less than 2% per year
relative to the base year.
C) The GDP deflator will be less than 100 if there has been deflation relative to the base year.
D) There are no circumstances under which the GDP deflator could be less than 100.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 109
Topic: The GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
Table 4.21
Nominal GDP
Real GDP
2014
$10,000
9,500
2015
$12,000
10,500
61) Refer to Table 4.21. Given the information above, calculate the GDP deflator in 2015.
A) 114
B) 105
C) 95
D) 87
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 109-110
Topic: The GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
62) Refer to Table 4.21. Given the information above, calculate the GDP deflator in 2014.
A) 87
B) 95
C) 105
D) 114
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 109-110
Topic: The GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
Table 4.22
Nominal GDP
Real GDP
2015
$10,000
9,500
2016
$12,000
10,500
63) Refer to Table 4.22. Given the information above, calculate the rate of increase in the price
level from 2015 to 2016.
A) 8.6%
B) 7.9%
C) -7.9%
D) -8.6%
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 109-110
Topic: The GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
64) Nominal GDP measures the value of all final goods and services at base-year prices.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 107
Topic: Real GDP vs. Nominal GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
65) The GDP deflator is a measure of the price level, which is calculated as nominal GDP
divided by real GDP and multiplied by 100.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 109
Topic: GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
66) If nominal GDP is less than real GDP, then the GDP deflator will be greater than 100.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 109
Topic: GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
67) Why does inflation make nominal GDP a poor measure of the increase in total production
from one year to the next?
Answer: Nominal GDP can change because of either quantity changes or price changes. When
there is inflation, nominal GDP overstates the increase in total production.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 107-109
Topic: Real GDP vs. Nominal GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
Table 4.23
Product
Pizza
Haircuts
Backpacks
2013
Quantity
100
50
200
Price
$10
15
40
2015
Quantity
120
45
210
Price
$12
20
45
68) Refer to Table 4.23. Suppose that a very simple economy produces three goods: pizzas,
haircuts, and backpacks. Suppose the quantities produced and their corresponding prices for
2013 and 2015 are shown in the table above. Use the information to compute real GDP in the
year 2013 and 2015. Assume that 2013 is the base year. Is output higher in 2015 or 2013? Why?
Answer: Recall that real GDP is found by valuing GDP in a particular year using base year
prices. Since 2013 is the base year, real GDP for 2013 is found by multiplying 2007 prices by
2007 quantities and then adding the values up. The individual values for 2013 are calculated in
the following table:
Product
Pizzas
Haircuts
Backpacks
Quantity
100
50
200
Price
$10
15
40
Value
$1,000
750
8,000
Therefore, Real GDP for 2013 =
Quantity of pizza in 2013 × price of pizza in 2013 = $1,000
Quantity of haircuts in 2013 × price of haircuts in 2013 = $750
Quantity of backpacks in 2013 × price of backpacks in 2013 = $8,000
Total $9,750.
The individual values for 2015 output and prices in 2013 are calculated in the following table:
Product
Pizzas
Haircuts
Backpacks
Quantity
120
45
210
Price
$10
15
40
Value
$1,200
675
8,400
Therefore, Real GDP for 2015 =
Quantity of pizza in 2015 × price of pizza in 2013 = $1,200
Quantity of haircuts in 2015 × price of haircuts in 2013 = $675
Quantity of backpacks in 2015 × price of backpacks in 2013 = $8,400
Total $10,275.
Since real GDP is a measure of output, and real GDP is higher in 2015 as compared to 2013,
output has increased.
Comment: Recurring
Diff: 3
Type: SA Page Ref: 108
Topic: Calculating Real GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real GDP
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Copyright © 2015 Pearson Canada Inc.
Table 4.24
Product
Pizzas
Haircuts
Backpacks
2007
Quantity
100
50
200
Price
$10
15
40
2015
Quantity
120
45
210
Price
$12
20
45
69) Refer to Table 4.24. Suppose that a very simple economy produces three goods: pizzas,
haircuts, and backpacks. Suppose the quantities produced and their corresponding prices for
2007 and 2015 are shown in the table above. Use the information to compute real GDP in the
year 2007 and 2011. Calculate real GDP in 2015 assuming the base year is 2007. Do the same
calculation assuming the base year is 2015. Are the calculations different? Why?
Answer: Recall that real GDP is found by valuing GDP in a particular year using base year
prices. When 2007 is the base year, real GDP for 2011 is found by multiplying 2007 prices by
2015 quantities and then adding the values up. The individual values for 2015 (2007 is the base
year) are calculated in the following table:
Product
Pizzas
Haircuts
Backpacks
Quantity
120
45
210
Price
$10
15
40
Value
$1,200
675
8,400
Therefore, Real GDP for 2015(2007 base year) =
Quantity of pizza in 2015 × price of pizza in 2007 = $1,200
Quantity of haircuts in 2015 × price of haircuts in 2007 = $675
Quantity of backpacks in 2015 × price of backpacks in 2007 = $8,400
Total $10,275.
The individual values for 2015 (2015 base year) are calculated in the following table:
Product
Pizzas
Haircuts
Backpacks
Quantity
120
45
210
Price
$12
20
45
Value
$1,440
900
9,450
Therefore, Real GDP for 2015 (2015 base year) =
Quantity of pizza in 2015 × price of pizza in 2015 = $1,440
Quantity of haircuts in 2015 × price of haircuts in 2015 = $900
Quantity of backpacks in 2015 × price of backpacks in 2015 = $9,450
Total $11,790.
When 2011 is used as the base year, the calculation of real GDP is larger as compared to the
calculation of real GDP for 2011 assuming 2007 is the base year. The values differ because the
prices are different in 2007 and 2011, so the value of real GDP does depend on the chosen base
year. However, since we use the same base year prices for every year when we calculate a GDP
series, we can still compare real GDP across the different years.
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Copyright © 2015 Pearson Canada Inc.
Diff: 3
Type: SA Page Ref: 108
Topic: Calculating Real GDP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real GDP
Table 4.25
Nominal GDP
Real GDP
2014
10,000
9,500
2015
$15,000
10,500
70) Refer to Table 4.25. Given the information above, calculate the rate of increase in the price
level from 2014 to 2015. Use the percent change in the GDP deflator.
Answer: To calculate the rate of change of prices, the GDP deflator for 2010 and 2011 must be
determined.
The GDP deflator for 2014 =
× 100 = 105.3
The GDP deflator for 2015 =
× 100 = 142.9
= 35.7%
Comment: Recurring
Diff: 3
Type: SA Page Ref: 108-110
Topic: The GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
4-83
Copyright © 2015 Pearson Canada Inc.
Table 4.26
Nominal GDP
Real GDP
2010
$10,000
10,000
2011
$15,000
14,000
71) Refer to Table 4.26. Given the information above, calculate the GDP deflator for both 2010
and 2011. What does the value of the deflator in the year 2010 tell you about that year with
respect to the base year? What happened to prices in 2011 as compared to 2010?
Answer: To calculate the GDP deflator for 2008 and 2009 we use the following formula given
in the text:
The GDP deflator =
× 100
The GDP deflator for 2010 =
× 100 = 100
The GDP deflator for 2011 =
× 100 = 107.1
Since the value of the deflator is 100 in 2010, 2010 must be the base year. Since the value of the
deflator in 2011 is greater than the value of the deflator in 2010, prices must have risen.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 109-110
Topic: The GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
4-84
Copyright © 2015 Pearson Canada Inc.
72) Use the formula for the GDP deflator to explain how it is affected by an increase in prices in
the economy. If the value of the deflator equals 100, what does that tell you about that year with
respect to the base year?
Answer: The formula for the GDP deflator is given by:
The GDP deflator =
× 100
From this formula we can see that if prices are rising in the economy but production remains
constant, nominal GDP will go up but real GDP will remain the same, so the deflator should rise.
If prices rise more rapidly than production in the economy, then nominal GDP will rise relative
to real GDP and the value of the GDP deflator will rise. It is in this way the deflator can help
economists track changes in prices in the economy over time.
If the value of the deflator is 100 in a particular year, that year must be the base year or
nominal GDP and real GDP are exactly the same.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 109-110
Topic: The GDP Deflator
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
4.4 Other Measures of Total Production and Total Income
1) Gross national product, GNP, of Canada is the market value of all final goods and services
A) produced within Canada.
B) consumed within Canada.
C) produced by citizens of Canada anywhere in the world.
D) consumed by citizens of Canada anywhere in the world.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 110
Topic: GDP vs. GNP
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Reflective Thinking
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
2) The output of Mexican citizens who work in Ontario would be included in the
A) gross domestic product of Mexico.
B) gross national product of Mexico.
C) gross national product of Canada.
D) net national product of Canada.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110
Topic: GDP vs. GNP
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Reflective Thinking
Special Feature: None
3) The output of Canadian citizens who work in the United States would be included in the
A) gross domestic product of the United States.
B) gross national product of the United States.
C) gross domestic product of Canada.
D) gross national product of the United States and the gross national product of Canada.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110
Topic: GDP vs. GNP
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Reflective Thinking
Special Feature: None
4) If a Canadian firm opens a production facility in India, the total value of the production will
be included in the
A) gross domestic product of Canada.
B) national income of Canada.
C) gross domestic product of India.
D) national income of India.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110
Topic: GDP vs. GNP
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Reflective Thinking
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
5) Which of the following is included in both Canadian GDP and Canadian GNP?
A) the value of all cars produced by General Motors in Canada
B) the value of all cars produced by Ford in Mexico
C) the value of all cars produced by Toyota in Canada
D) the value of all cars produced by Nissan in Japan and Canada
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110
Topic: GDP vs. GNP
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Reflective Thinking
Special Feature: None
6) A country in which a significant fraction of domestic production takes place in foreign-owned
factories and facilities is most likely a country where
A) GNP is much larger than GDP.
B) GDP is much larger than GNP.
C) GDP is equal to GNP.
D) GDP is not comparable to GDP.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110
Topic: GDP vs. GNP
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Reflective Thinking
Special Feature: None
7) The value of what a Canadian-owned Tim Hortons produces in South Korea is included in the
Canadian ________ and the South Korean ________.
A) GDP; GDP
B) GNP; GDP
C) GDP; GNP
D) GNP; GNP
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110
Topic: GDP vs. GNP
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Reflective Thinking
Special Feature: None
4-87
Copyright © 2015 Pearson Canada Inc.
8) National income equals gross national product minus
A) imports.
B) depreciation.
C) inventories.
D) changes in inventories.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 110-111
Topic: National Income
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Reflective Thinking
Special Feature: None
9) National income equals gross domestic product
A) plus sales taxes.
B) plus government transfer payments.
C) minus the consumption of fixed capital.
D) minus government transfer payments.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 110-111
Topic: National Income
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Reflective Thinking
Special Feature: None
10) Depreciation is
A) the value of worn-out equipment, machinery, and buildings.
B) the value of the decrease in business inventory stocks.
C) the value of the addition to the capital stock.
D) the decline in the value of the stock market, net of dividends.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 110-111
Topic: Depreciation
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Reflective Thinking
Special Feature: None
4-88
Copyright © 2015 Pearson Canada Inc.
11) Suppose that in 2014, the national income in Madeupistan was $2 billion, depreciation was
$1.5 billion, personal taxes were $2 billion, and transfer payments were $1 billion. Gross
domestic product in 2014 is
A) $18.5 billion.
B) $21.5 billion.
C) $22 billion.
D) $24.5 billion.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110
Topic: Measuring Total Production
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Analytic Skills
Special Feature: None
12) The best measure of the income households actually have available to spend is
A) household income.
B) disposable household income.
C) national income.
D) net national income.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 111
Topic: Disposable Household Income
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Reflective Thinking
Special Feature: None
13) Disposable household income equals household income
A) minus personal tax payments.
B) plus government transfer payments.
C) minus personal tax payments plus government transfer payments.
D) minus government transfer payments plus personal tax payments.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 111
Topic: Disposable Household Income
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Reflective Thinking
Special Feature: None
4-89
Copyright © 2015 Pearson Canada Inc.
Table 4.27
National income
Retained earnings not paid as dividends
Transfer payments
Interest on government bonds
Personal taxes
$1,000
50
40
20
30
The components of national income for an economy are represented in Table 4.27 above. All
values are in billions of dollars.
14) Refer to Table 4.27. What is the level of household income for this economy?
A) $1,140 billion
B) $1,010 billion
C) $990 billion
D) $860 billion
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 111
Topic: Household Income
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Analytic Skills
Special Feature: None
15) Refer to Table 4.27. What is the level of disposable household income for this economy?
A) $1,080 billion
B) $1,010 billion
C) $980 billion
D) $860 billion
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 111
Topic: Disposable Household Income
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Analytic Skills
Special Feature: None
4-90
Copyright © 2015 Pearson Canada Inc.
16) The total value of production from Ford's manufacturing plant in Cologne, Germany would
be included in Germany's gross national product.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 110
Topic: GDP vs. GNP
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Reflective Thinking
Special Feature: None
17) Transfer payments are subtracted from national income to get to Household income.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 111
Topic: Household Income
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Reflective Thinking
Special Feature: None
18) For developed countries like Canada, GDP will always exceed GNP.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 110
Topic: GDP vs. GNP
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Reflective Thinking
Special Feature: None
19) What are the differences between national income, household income, and disposable
household income?
Answer: National income is the total income received by a country's residents. Personal income,
which is income actually received by households, is national income minus corporations'
retained earnings, plus government transfer payments and the interest on government bonds paid
to households. Disposable personal income, which represents the income available for
households to spend, is personal income less personal tax payments, such as the federal personal
income tax.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 110-111
Topic: Other Measures of Total Production and Total Income
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Reflective Thinking
Special Feature: None
4-91
Copyright © 2015 Pearson Canada Inc.
Table 4.28
National income
Retained earnings
Depreciation
Interest on government bonds
Transfer payments
Personal taxes
Billions of Dollars
$11,200
560
700
300
2,200
1,400
20) Refer to Table 4.28. The table above represents hypothetical data from the National Income
Accounts for 2014. Use the data to calculate personal income and disposable income.
Answer: Personal income = National income - Retained earnings + Transfer payments + Interest
on government bonds.
Substituting the table values:
Household income = $11,200 - 560 + 2,200 + 300
= $13,140 billion.
Disposable household income = Personal household - Personal taxes
= $13,140 - 1,400 = $11,740 billion.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 110-111
Topic: Other Measures of Total Production and Total Income
Learning Outcome: 4.4 Become familiar with other measures of total production and total
income
AACSB: Analytic Skills
Special Feature: None
21) National income is equal to
A) personal income minus personal taxes.
B) GDP minus depreciation.
C) disposable personal income, plus depreciation, plus personal taxes.
D) GNP plus depreciation.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 110
Topic: National Income
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-92
Copyright © 2015 Pearson Canada Inc.
22) Gross national product is defined as
A) the value of final goods and services produced within Canada.
B) the value of final goods and services produced outside of Canada.
C) the value of final goods and services produced by residents of Canada even if the production
takes place outside of Canada.
D) the value of final goods and services produced within Canada, by Canadian residents.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 110
Topic: Gross National Product
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
23) If a Canadian firm produces car parts in Mexico, that production should count towards
A) Canadian GNP.
B) Mexico's GNP.
C) Canadian GDP.
D) It will not affect either Canadian GNP or Canadian GDP.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110
Topic: GDP vs. GNP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
24) If a Japanese firm produces cars in Canada, that production should count towards
A) Canadian GNP.
B) Japanese GDP.
C) Canadian GDP.
D) both Canadian GNP and Japanese GDP.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110
Topic: GDP vs. GNP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-93
Copyright © 2015 Pearson Canada Inc.
25) Which of the following would increase GNP in Canada?
A) an increase in the production of oil by Canadian-owned Talisman Energy from wells in
Mexico
B) an increase in the production of Japanese-owned Toyota cars in Mexico
C) an increase in the production of Japanese-owned Toyota cars in Canada
D) an increase in the production of Mexican-owned Grupo Minsa corn in Canada
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110
Topic: GDP vs. GNP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
26) When lumber from Brazilian forests is used by a U.S.-owned company to produce furniture
in Canada, the value of the furniture produced will be counted as a final good in
A) U.S. GDP.
B) Canada's GDP.
C) Brazil's GDP.
D) Brazil's GNP.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110
Topic: GDP vs. GNP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
27) When Ford (an American company) increases the production of cars in Australia, which of
the following occurs?
A) GDP in the United States rises.
B) GNP in the United States rises.
C) GNP in Australia rises.
D) Both A and C occur.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110
Topic: GDP vs. GNP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-94
Copyright © 2015 Pearson Canada Inc.
28) National income is defined as
A) gross national product plus transfer payments.
B) gross national product, less retained earnings, plus transfer payments.
C) gross domestic product, less retained earnings, plus transfer payments.
D) gross domestic product less the consumption of fixed capital.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 110-111
Topic: National Income
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
29) Household income is defined as
A) national income, less retained earnings, plus transfer payments, plus interest on government
bonds.
B) national income, plus retained earnings, less transfer payments, less interest on government
bonds.
C) national income less depreciation.
D) national income less personal taxes.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 111
Topic: Personal Income
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
30) Disposable household income is defined as
A) personal income, less personal taxes, plus indirect sales taxes.
B) personal income, less transfer payments, plus personal taxes.
C) personal income less personal taxes.
D) personal income less depreciation.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 111
Topic: Disposable Personal Income
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-95
Copyright © 2015 Pearson Canada Inc.
31) National income is derived from gross domestic product by
A) subtracting retained earnings from gross domestic product.
B) adding personal taxes and depreciation to gross domestic product.
C) subtracting depreciation from gross domestic product.
D) adding personal income and transfer payments to gross domestic product.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110
Topic: National Income
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
32) An increase in national income could be caused by which of the following?
A) an increase in depreciation
B) an increase in personal taxes
C) a decrease in personal income
D) an increase in gross domestic product
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110-111
Topic: National Income
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
33) Which of the following would increase disposable personal income?
A) a decrease in transfer payments received
B) a decrease in taxes paid
C) a decrease in personal income
D) All of the above would increase disposable income.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110-111
Topic: Disposable Personal Income
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-96
Copyright © 2015 Pearson Canada Inc.
34) Gross domestic product is generally ________ national income.
A) greater than
B) less than
C) equal to
D) unrelated to
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110-111
Topic: National Income
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
Table 4.29
GDP
Depreciation
Retained earnings
Personal income tax
Transfer payments
Billions of
Dollars
$1,800
300
400
100
100
35) Refer to Table 4.29. Based on the table above, what is the national income for this economy?
A) $800 billion
B) $1,100 billion
C) $1,500 billion
D) $1,700 billion
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110-111
Topic: National Income
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
4-97
Copyright © 2015 Pearson Canada Inc.
Table 4.30
GDP
Transfer Payments
Retained earnings
Depreciation
Billions of
Dollars
$5,250
50
700
1,250
36) Refer to Table 4.30. Based on the table above, what is the national income for this economy?
A) $4,700 billion
B) $4,000 billion
C) $3,150 billion
D) $2,450 billion
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 110-111
Topic: National Income
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
Table 4.31
GDP
Depreciation
Retained earnings
Personal tax payments
Transfer payments
Billions of
Dollars
$3,250
300
1,000
500
80
37) Refer to Table 4.31. Based on the table above, what is household income for this economy?
A) $1,950 billion
B) $2,250 billion
C) $2,450 billion
D) $5,130 billion
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 632/258
Topic: Personal Income
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
4-98
Copyright © 2015 Pearson Canada Inc.
38) When American GDP grows more quickly,
A) Canadian firms will export more, leading to faster Canadian GDP growth.
B) Canadians will import some of the newly made American goods, causing Canadian GDP to
shrink.
C) government spending in Canada will likely increase.
D) Canadian firms will invest less, causing domestic investment to fall and Canadian GDP to
rise.
Answer: A
Diff: 2
Type: MC
Page Ref: 114-115
Topic: Measuring Total Production
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: An Inside LOOK at Policy: A Slowdown in the Export of Goods and Services
Shrinks the Canadian Economy in 2011.
39) The values of real GDP and real GNP are almost the same for Canada.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 111
Topic: GDP vs. GNP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
40) The values of real GDP and real GNP are almost the same in countries where a significant
fraction of domestic production takes place in foreign-owned firms.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 110-111
Topic: GDP vs. GNP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
41) Disposable household income is equal to household income minus personal tax payments.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 111
Topic: Disposable Personal Income
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
4-99
Copyright © 2015 Pearson Canada Inc.
42) Explain the difference between gross domestic product and gross national product. Give an
example of each.
Answer: Gross domestic product is the value of final goods and services produced within
Canada. In contrast, gross national product is the value of final goods and services produced by
residents of Canada, regardless if the production takes place in Canada. GNP would include the
production from a Canadian-run gold mine located in Africa. GDP would include production
from a Japanese-owned Toyota plant located in Ontario.
Comment: Recurring
Diff: 1
Type: SA Page Ref: 110
Topic: GDP vs. GNP
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
Table 4.32
National income
Retained earnings
Depreciation
Interest on government bonds
Transfer payments
Personal taxes
Billions of
Dollars
$1,489
400
300
20
100
150
43) Refer to Table 4.32. The table above represents hypothetical data from the National Income
Accounts for 2013. Use the data to calculate household income and household disposable
income.
Answer: Household Income = National income - Retained earnings + Transfer payments +
Interest on government bonds.
Substituting the table values:
Household Income = $1489 - 400 + 100 + 20
= $1,209 billion.
Household Disposable income = Household Income - Personal Taxes
= $1,209 - 150 = $1,059 billion.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 110-111
Topic: Other Measures of Total Production and Total Income
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Analytic Skills
Special Feature: None
4-100
Copyright © 2015 Pearson Canada Inc.
Macroeconomics, Canadian Edition (Hubbard et al.)
Chapter 5 Unemployment and Inflation
5.1 Measuring the Unemployment Rate, the Labour Force Participation Rate, and the
Employment-Population Ratio
1) Unlike Canada's manufacturing sector, which remained cautiously static with a PMI of 50.1 in
2013, the eurozone had a PMI of 46.9, which predicts it will ________ the number of persons it
employed which will ________ the total number of persons unemployed in the economy.
A) decrease; increase
B) decrease; decrease
C) increase; decrease
D) increase; increase
Answer: A
Diff: 1
Type: MC
Page Ref: 121
Topic: The Unemployment Rate
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Canadian Manufacturers Grow While Others Shrink
2) The economy has gone into a recession. You have majored in computer science and, because
of the recession, have difficulty in finding a job. Should you go back to school and get a second
major?
A) Yes, the recession will ensure that I will never find a job as a programmer.
B) Yes, the recession will lower income in my field permanently.
C) No, the recession will most likely be short-lived and I can get a job after it is over.
D) No, the recession will have no impact on my ability to get a job or my future income.
Answer: C
Diff: 2
Type: MC
Page Ref: 121
Topic: How Long Are People Typically Unemployed?
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: Economics in Your Life: Should You Change Your Career Plans If You
Graduate During a Recession?
5-1
Copyright © 2015 Pearson Canada Inc.
3) The unemployment rate is an important economic statistic that can tell us about the health of
the economy. If the unemployment rate turns out to be high or higher than anticipated, we would
expect
A) it is more likely that an incumbent Prime Minister will be re-elected.
B) that stock prices are more likely to fall.
C) that jobs are less difficult to find.
D) that investors will be more optimistic about the economy.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 122
Topic: The Unemployment Rate
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
4) Statistics Canada would categorize a person as ________ if they were temporarily away from
their job because they were ill.
A) employed
B) unemployed
C) a discouraged worker
D) out of the labour force
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 122
Topic: The Labour Force Survey
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
5) Statistics Canada would categorize a retiree who is not working as
A) employed.
B) unemployed.
C) a discouraged worker.
D) out of the labour force.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 122
Topic: The Labour Force Survey
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
5-2
Copyright © 2015 Pearson Canada Inc.
6) The labour force equals the number of people
A) employed.
B) unemployed.
C) employed plus unemployed.
D) in the working-age population.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 122
Topic: The Labour Force Survey
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
7) Suppose that homemakers are included as employed in the labour force statistics, rather than
being counted as out of the labour force. This would
A) increase the measured unemployment rate.
B) increase the measured labour force participation rate.
C) decrease the number of persons in the labour force.
D) decrease the number of persons in the working-age population.
Answer: B
Diff: 3
Type: MC
Page Ref: 123
Topic: Labour Force Participation
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
5-3
Copyright © 2015 Pearson Canada Inc.
Table 5.1
Total population
Working-age population
Employment
Unemployment
20,000
15,000
1,000
100
Consider the data above for a simple economy.
8) Refer to Table 5.1. The unemployment rate for this simple economy equals
A) (100/1,000) × 100 percent.
B) (100/1,100) × 100 percent.
C) (100/15,000) × 100 percent.
D) (100/20,000) × 100 percent.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 123
Topic: The Unemployment Rate
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Analytic Skills
Special Feature: None
9) Refer to Table 5.1. The labour force participation rate for this simple economy equals
A) (1,000/1,100) × 100 percent.
B) (1,000/15,000) × 100 percent.
C) (1,100/15,000) × 100 percent.
D) (1,100/20,000) × 100 percent.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 123
Topic: Labour Force Participation
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Analytic Skills
Special Feature: None
5-4
Copyright © 2015 Pearson Canada Inc.
10) Suppose the working-age population of a fictional economy falls into the following
categories: 90 are retired or homemakers; 60 have full-time employment; 20 have part-time
employment; 20 do not have employment, but are actively looking for employment; and 10
would like employment but do not have employment and are not actively looking for
employment. The official unemployment rate as calculated by Statistics Canada would equal
A) (20/60) × 100.
B) (20/80) × 100.
C) (30/80) × 100.
D) (20/100) × 100.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 123
Topic: The Unemployment Rate
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Analytic Skills
Special Feature: None
11) Suppose the labour force stays constant, and the working-age population stays constant, but a
greater number of persons who were unemployed become employed. The labour force
participation rate will
A) increase.
B) decrease.
C) remain constant.
D) not change in a way that can be predicted.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 123
Topic: Labour Force Participation
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
5-5
Copyright © 2015 Pearson Canada Inc.
12) The unemployment rate equals the number of unemployed divided by the ________, all
times 100.
A) number of employed
B) labour force
C) working-age population
D) total population
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 123
Topic: The Unemployment Rate
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
13) Suppose the government launches a successful advertising campaign that convinces workers
with high school degrees to quit their jobs and become full time students. This would cause
A) the unemployment rate to decrease.
B) the labour force participation rate to decrease.
C) the number of discouraged workers to increase.
D) no change in the unemployment rate.
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 123
Topic: Labour Force Participation
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Analytic Skills
Special Feature: None
14) Someone who is available for work but has not actively looked for work in the previous four
weeks would be classified as
A) employed.
B) unemployed.
C) not in the labour force.
D) not in the working-age population.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 122
Topic: The Labour Force Survey
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
5-6
Copyright © 2015 Pearson Canada Inc.
15) The labour force participation rate equals the
A) (number of employed divided by the labour force) × 100.
B) (labour force divided by the number of people not in the labour force) × 100.
C) (labour force divided by working-age population) × 100.
D) (labour force divided by the total population) × 100.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 123
Topic: Labour Force Participation
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
16) Which of the following labour market statistics best indicates the amount of labour that is
available to the economy from a given working-age population?
A) unemployment rate
B) discouraged-worker ratio
C) labour force participation rate
D) the ratio of minimum wage to inflation
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 123
Topic: Labour Force Participation
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
17) Which of the following cause the unemployment rate as measured by Statistics Canada to
understate the true extent of joblessness?
A) inflation
B) discouraged workers
C) people employed in the underground economy
D) unemployed persons falsely report themselves to be actively looking for a job
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 124
Topic: Problems with Measuring the Unemployment Rate
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
5-7
Copyright © 2015 Pearson Canada Inc.
18) Which of the following cause the unemployment rate as measured by Statistics Canada to
overstate the true extent of joblessness?
A) inflation
B) discouraged workers
C) counting people as employed who are working part time, although they would prefer to be
working full time
D) unemployed persons falsely report themselves to be actively looking for a job
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 124
Topic: Problems with Measuring the Unemployment Rate
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
19) Which of the following explains the changes in the Canadian adult male labour force
participation rate since 1976?
A) More men are joining the military as compared to the past.
B) More men are retiring later in life as compared to the past.
C) Fewer men consider themselves discouraged workers as compared to the past.
D) Younger men are remaining in school longer as compared to the past.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 125
Topic: Labour Force Participation
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
20) In April 2013, Canada saw an increase of ________ jobs.
A) 183,000
B) 162,500
C) 21,500
D) 3.1 percent.
Answer: B
Diff: 1
Type: MC
Page Ref: 125
Topic: Labour Force Participation
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
5-8
Copyright © 2015 Pearson Canada Inc.
21) In 2007 the average period of unemployment was ________ than in 2009.
A) higher in all categories
B) approximately the same
C) lower in all categories
D) lower in most categories
Answer: C
Diff: 1
Type: MC
Page Ref: 125
Topic: Labour Force Participation
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: Making the Connection: How Unusual Was the Unemployment Situation
Following the 2007-2009 Recession?
22) Since 1981, the labour force participation rate for adult men has ________ and for adult
women has ________.
A) increased; increased
B) increased; decreased
C) decreased; increased
D) decreased; decreased
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 125
Topic: Labour Force Participation
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
23) Using a broader measure of the unemployment rate where discouraged workers and part-time
workers who wished to work full time were counted as unemployed, you would expect this
unemployment rate to ________ compared to the Statistics Canada measured unemployment
rate.
A) increase
B) more than double
C) decrease
D) barely change
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 124
Topic: Labour Force Participation
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
5-9
Copyright © 2015 Pearson Canada Inc.
24) In the modern Canadian economy, the typical unemployed person stays unemployed for
A) a relatively long time, over a year.
B) a relatively short time, less than 13 weeks.
C) a long time during expansions and short time during recessions.
D) an amount of time that is hard to quantify.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 125
Topic: How Long Are People Typically Unemployed?
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
25) An issue with the Labour Force Survey (LFS) which overstates the extent of joblessness is
A) individuals who are working but concealing it for legal reasons are counted as unemployed.
B) they verify claims that people have actively looked for work.
C) they tend to count unemployed people more often because they are not working.
D) there is no distinction between employees who work part-time but would like to have a fulltime job and those who are content with their full- or part-time job.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 124
Topic: Labour Force Survey
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
26) The most important group not identified by the unemployment rate is
A) seniors.
B) discouraged workers.
C) part-time workers seeking full-time work.
D) those under the minimum working age.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 124
Topic: Labour Force Survey
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
5-10
Copyright © 2015 Pearson Canada Inc.
27) Which of the following statements is true about the Canadian economy?
A) Each year, many new jobs are created, but few existing jobs are destroyed, and the
unemployed find jobs quickly.
B) Each year, few new jobs are created, but few existing jobs are destroyed, keeping
unemployment low.
C) Each year, many new jobs are created and many existing jobs are destroyed.
D) Each year few jobs are created, and therefore it takes the unemployed a long time to find a
new job.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 125
Topic: Job Creation and Job Destruction
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
28) Counting part-time workers who are looking for full-time work as employed overstates the
degree of joblessness in the economy.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 124
Topic: The Labour Force Survey
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
29) In Canada, the typical person who has lost his or her job finds another one in a few months
except during severe recessions.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 125
Topic: How Long Are People Typically Unemployed?
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
5-11
Copyright © 2015 Pearson Canada Inc.
30) The labour force participation rates of women have rapidly increased since 1976.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 124
Topic: Labour Force Participation
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Reflective Thinking
Special Feature: None
5-12
Copyright © 2015 Pearson Canada Inc.
31) Fill in the missing values in the table of data collected in the fictitious Labour Force Survey
below. Show your work.
Working-age
population
Employment
Unemployment
Unemployment rate
Labour force
Labour force
participation rate
Answer:
Working-age
population
Employment
Unemployment
Unemployment rate
Labour force
Labour force
participation rate
Unemployment rate =
5.4%
135,113
67.0%
201,661
127,817
7,296
5.4%
135,113
67.0%
× 100.
Unemployed = (Labour force × Unemployment rate)/100
(135,113 × 5.4)/100 = 7,296
Labour force = Employed + Unemployed
Employed = Labour Force - Unemployed
Employed = 135,113 - 7,296 = 127,817
Labour force participation rate =
× 100.
Labour force = (Working-age population × Labour force participation rate) × 100
Working-age population = (Labour force/Labour force participation rate) × 100
Working-age population = (135,113/67) × 100 = 201,661
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 123
Topic: The Labour Force Survey
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Analytic Skills
Special Feature: None
5-13
Copyright © 2015 Pearson Canada Inc.
32) Fill in the missing values in the table of data collected in the fictitious Labour Force Survey
below. Show your work.
Working-age
population
Employment
Unemployment
Unemployment rate
Labour force
Labour force
participation rate
Answer:
Working-age
population
Employment
Unemployment
Unemployment rate
Labour force
Labour force
participation rate
235,900
9.4%
65.5%
235,900
139,991
14,524
9.4%
154,515
65.5%
Labour force participation rate =
× 100.
Labour force = (Working-age population × Labour force participation rate)/100
Labour force = (227,204 × 66.1)/100 = 150,182
× 100.
Unemployment rate =
Unemployed = (Labour force × Unemployment rate)/100
(150,182 × 5)/100 = 7,509
Labour force = Employed + Unemployed
Employed = Labour force - Unemployed
Employed = 150,182 - 7,509 = 142,673
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 123
Topic: The Labour Force Survey
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Analytic Skills
Special Feature: None
5-14
Copyright © 2015 Pearson Canada Inc.
33) Statistics Canada counts as employed people who work part-time, but would prefer to work
full-time. Suppose the people who had part-time jobs, but wanted full-time jobs, were counted as
unemployed. Explain how the unemployment rate and the labour force participation rate would
change.
Answer: The unemployment rate would increase and the labour force participation rate would
stay the same. The number of unemployed would rise, but the labour force would stay the same.
The part-time workers who wanted to be full-time workers would simply go from being
employed to unemployed. With no change in the labour force, the labour force participation rate
would not change.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 124
Topic: The Unemployment Rate
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Analytic Skills
Special Feature: None
34) Statistics Canada does not count discouraged workers as unemployed. Suppose discouraged
workers were counted as unemployed. Explain how the unemployment rate and the labour force
participation rate would change.
Answer: Both the unemployment rate and the labour force participation rate would increase. The
number of unemployed would rise, as would the labour force. The unemployment rate would rise
because adding the same number to the numerator and the denominator of a fraction that is less
than one increases the value of the fraction. The labour force participation rate would rise
because the labour force increases with no change in the working-age population.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 123-124
Topic: Labour Force Participation
Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate
and understand how they are computed
AACSB: Analytic Skills
Special Feature: None
5-15
Copyright © 2015 Pearson Canada Inc.
35) The labour force is the sum of
A) employed workers and discouraged workers.
B) employed workers and unemployed workers.
C) employed workers and individuals not looking for work.
D) employed workers and the working age population.
E) unemployed workers and the working age population.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 122
Topic: The Labour Force Survey
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
36) In April 2013, the Purchasing Managers' Index (PMI) for Canada 's manufacturing sector
was 50.1 while the PMI for the eurozone was 46.9. Based solely on this data, we would expect
A) employment to rise in both regions.
B) employment to fall in both regions.
C) employment to remain stable in Canada and fall in the eurozone.
D) employment to fall in Canada and remain stable in the eurozone.
Answer: C
Diff: 1
Type: MC
Page Ref: 121
Topic: The Unemployment Rate
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Canadian Manufacturers Grow While Others Shrink
37) Upon your graduation from university, you find that the economy is in recession and the
unemployment rate is relatively high. Nonetheless, you continue along your career path looking
for a new job because
A) the cost of additional education is always higher during recession.
B) high unemployment rates do not usually last for very long.
C) looking for work is your only option.
D) the wages of university graduates do not fall during recession.
Answer: B
Diff: 1
Type: MC
Page Ref: 121
Topic: Government Policies
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: Economics in Your Life: Should You Change Your Career Plans If You
Graduate During a Recession?
5-16
Copyright © 2015 Pearson Canada Inc.
38) The unemployment rate is
A) the percentage of the labour force that is employed.
B) the percentage of the working-age population that is unemployed.
C) the percentage of the labour force that is unemployed.
D) the percentage of the working-age population that is employed.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 122
Topic: The Unemployment Rate
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
39) A full-time student who is not working is categorized as
A) unemployed.
B) employed.
C) not in the labour force.
D) a discouraged worker.
E) frictionally unemployed.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 122-123
Topic: The Labour Force Survey
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
40) Discouraged workers are classified by Statistics Canada as
A) part of the labour force.
B) out of the labour force.
C) unemployed.
D) employed.
E) part-time employees.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 124
Topic: The Labour Force Survey
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-17
Copyright © 2015 Pearson Canada Inc.
41) Discouraged workers are
A) workers who have a part time job but want a full time job.
B) workers who find their current jobs unfulfilling and are considering a job change.
C) workers who have consistently been looking for work for more than 4 weeks.
D) workers who have stopped looking for work because they believe there are no jobs for them.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 124
Topic: The Labour Force Survey
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
42) The labour force participation rate is defined as
A) the percentage of the working-age population that is employed.
B) the percentage of the working-age population that is unemployed.
C) the percentage of the labour force that is employed.
D) the percentage of the labour force that is unemployed.
E) the percentage of the working-age population in the labour force.
Answer: E
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 123
Topic: Labour Force Participation
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
43) Mike has been unemployed for over a year. He hasn't looked for a job in the last three
months, but he's just started looking for work again. Because Mike started looking for a new job,
A) the unemployment rate increased.
B) the labour force participation rate decreased.
C) the unemployment rate decreased.
D) the working-age population increased.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 123-124
Topic: The Unemployment Rate
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-18
Copyright © 2015 Pearson Canada Inc.
44) During the month of May, 300,000 workers moved from being classified as "unemployed" to
being classified as "employed." As a result,
A) the unemployment rate rose.
B) the labour force participation rate fell.
C) the unemployment rate fell.
D) the labour force participation rate rose.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 123
Topic: The Unemployment Rate
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
45) Which of the following would reduce the labour force participation rate, all else equal?
A) an increase in the number of people in the labour force
B) an increase in the unemployment rate
C) a decrease in the unemployment rate
D) an increase in the working-age population
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 123
Topic: Labour Force Participation
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
46) Jack lost his job six months ago and he's been actively looking for a new job ever since.
Statistics Canada would classify Jack as
A) unemployed.
B) out of the labour force.
C) a discouraged worker.
D) all of the above
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 122-124
Topic: The Labour Force Survey
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-19
Copyright © 2015 Pearson Canada Inc.
47) Which of the following causes the unemployment rate to understate the true extent of
joblessness?
A) Many full-time workers really want to be part-time workers.
B) Persons who collect unemployment benefits report themselves to be searching for a job.
C) Discouraged workers are not counted as unemployed.
D) A drug dealer reports herself as unemployed.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 124
Topic: Problems with Measuring the Unemployment Rate
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
48) An increase in the size of the underground economy would
A) have no effect on the official unemployment rate.
B) cause the official unemployment rate to fall as more people find jobs outside the formal
economy.
C) cause the labour force participation rate to rise.
D) cause the labour force participation rate to fall.
Answer: D
Diff: 1
Type: MC
Page Ref: 123-124
Topic: The Unemployment Rate
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
Special Feature: None
49) If the number employed is 17.5 million, the working-age population is 28.5 million, and the
number unemployed is 1.4 million, then the unemployment rate is
A) 7.4%.
B) 8%.
C) 5%.
D) 4.7%.
E) 61%.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 123
Topic: The Unemployment Rate
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Analytic Skills
Special Feature: None
5-20
Copyright © 2015 Pearson Canada Inc.
50) If the number employed is 190 million, the number unemployed is 10 million, and the
working-age population is 250 million, then the labour force participation rate is
A) 4%.
B) 5.2%.
C) 60%.
D) 76%.
E) 80%.
Answer: E
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 123-124
Topic: Labour Force Participation
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Analytic Skills
Special Feature: None
51) Except for recessions, the duration of unemployment for the typical person lasts
A) less than 4 weeks.
B) less than 13 weeks.
C) 14 to 25 weeks.
D) more than 25 weeks.
E) over five years.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 125
Topic: How Long Are People Typically Unemployed?
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-21
Copyright © 2015 Pearson Canada Inc.
52) If the number of unemployed workers is 2 million and the number in the labour force is 28
million, what is the unemployment rate?
A) 0.7%
B) 4%
C) 7%
D) 40%
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 123
Topic: The Unemployment Rate
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Analytic Skills
Special Feature: None
53) If the number of unemployed workers is 20 million, the number of employed workers is 30
million, and the working-age population is 80 million, what is the labour force participation rate?
A) 12.5%
B) 37.5%
C) 40%
D) 62.5%
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 123
Topic: Labour Force Participation
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Analytic Skills
Special Feature: None
5-22
Copyright © 2015 Pearson Canada Inc.
54) If the number of unemployed workers is 1.9 million, the number in the working-age
population is 50 million, and the unemployment rate is 4%, what is the labour force participation
rate?
A) 4.75%
B) 7.8%
C) 95%
D) 96.2%
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 123
Topic: Labour Force Participation
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Analytic Skills
Special Feature: None
55) If the number of unemployed workers is 1.9 million, the number in the working-age
population is 50 million, and the unemployment rate is 4%, how many workers are in the labour
force?
A) 1 million
B) 20 million
C) 475 million
D) 481 million
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 123
Topic: Labour Force Participation
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Analytic Skills
Special Feature: None
5-23
Copyright © 2015 Pearson Canada Inc.
56) Which of the following describes actual trends in the Canadian labour force participation
rate?
A) The labour force participation rate of adult men has risen since 1975.
B) The labour force participation rate of adult women has fallen since 1975.
C) The labour force participation rate of adult men not in school, but too young to retire has risen
since 1975.
D) The labour force participation rate of adult women has risen since 1975.
E) The labour force participation rate of all adults has fallen since 1975.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 124-125
Topic: Labour Force Participation
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
Special Feature: None
57) How would including members of the military in employment, labour force, and workingage population statistics affect the unemployment rate and the labour force participation rate?
A) Including members of the military would increase the unemployment rate and reduce the
labour force participation rate.
B) Including members of the military would reduce the unemployment rate and increase the
labour force participation rate.
C) Including the military would increase both the unemployment rate and the labour force
participation rate.
D) Including the military would reduce both the unemployment rate and the labour force
participation rate.
Answer: B
Diff: 2
Type: MC
Page Ref: 124
Topic: Labour Force Participation
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: Solved Problem: What Happens if You Include the Military?
5-24
Copyright © 2015 Pearson Canada Inc.
58) In 2009, at the end of the 2008-2009 recession, the common length of time for a person to be
unemployed was
A) less than 4 weeks.
B) 5 to 13 weeks.
C) 14 to 25 weeks.
D) 26 weeks or more.
Answer: A
Diff: 1
Type: MC
Page Ref: 125
Topic: The Unemployment Rate
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
Special Feature: None
59) Jack was unemployed two weeks ago but just started a new job. As a result of this increase in
the number of employed workers, which of the following occurred?
A) The labour force participation rate increased.
B) The unemployment rate increased.
C) The labour force participation rate decreased.
D) The unemployment rate decreased.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 123
Topic: The Unemployment Rate
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
60) Jack just received a promotion at work and now works 50 hours per week instead of 35. As a
result,
A) the unemployment rate increased.
B) the unemployment rate decreased.
C) the labour force participation rate increased.
D) neither the unemployment rate nor the labour force participation rate changed.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 122-123
Topic: The Unemployment Rate
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-25
Copyright © 2015 Pearson Canada Inc.
61) For the last few decades, the labour force participation rates of men have ________, and the
labour force participation rates of women have ________.
A) risen; risen
B) fallen; fallen
C) risen; fallen
D) fallen; risen
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 124
Topic: Labour Force Participation
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
62) The labour force survey asks adults about their employment status and is used to compile the
monthly unemployment rate.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 122
Topic: The Labour Force Survey
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
63) The labour force survey is compiled from firms who answer questions about the number of
persons who are employed and on the company payroll.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 122
Topic: Establishment Survey
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-26
Copyright © 2015 Pearson Canada Inc.
64) In the labour force survey, all people are categorized as either employed or unemployed.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 122
Topic: Establishment Survey
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
65) The labour force participation rates of men have gradually increased since 1975.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 124
Topic: Labour Force Participation
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
66) How could a growing labour force lead to an increase in the unemployment rate?
Answer: The labour force is calculated as the sum of employed workers and unemployed
workers in the economy. If the labour force is growing and, simultaneously, the unemployment
rate is increasing, the number of people in the labour force classified as unemployed workers
must be increasing.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 124
Topic: Labour Force Participation
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Analytic Skills
Special Feature: None
5-27
Copyright © 2015 Pearson Canada Inc.
67) How would the unemployment rate and the labour force participation rate change if
discouraged workers were counted as unemployed rather than as out of the labour force?
Illustrate this using the formulae for both measurements.
Answer: The unemployment rate is calculated as:
× 100
Including discouraged workers would increase the number of people counted as being in the
labour force and would increase the number of people counted as unemployed. In terms of our
calculation, the numerator would rise, and the denominator would rise. However, the numerator
would rise by a greater percentage than the denominator, as the denominator is the sum of
employment plus unemployment. If the top number rises more quickly than the bottom number,
then the whole number rises. This would increase the unemployment rate.
The labour force participation rate is calculated as:
× 100
Including discouraged workers would increase the number of people in the labour force, but not
change the number of people in the working-age population. This would increase the labour
force participation rate because the numerator increases. Increasing the numerator of a fraction
increases the fraction.
Comment: Recurring
Diff: 3
Type: SA Page Ref: 123-124
Topic: The Unemployment Rate
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-28
Copyright © 2015 Pearson Canada Inc.
68) Suppose 180,000 people are employed, 20,000 people are unemployed, the working-age
population is 250,000, and 50,000 people are out of the labour force. Calculate the
unemployment rate.
Answer: The unemployment rate is calculated as:
× 100
The labour force is the sum of those employed plus the unemployed. This is 180,000 plus
20,000, which equals 200,000 people. Substituting this information into our equation, we get:
× 100
which equals 10%.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 123
Topic: The Unemployment Rate
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Analytic Skills
Special Feature: None
69) Suppose 180,000 people are employed, 20,000 people are unemployed, and 50,000 people
are out of the labour force. Calculate the labour force participation rate.
Answer: The labour force participation rate is calculated as:
× 100
The labour force is the sum of those employed plus the unemployed. This is 180,000 plus
20,000, which equals 200,000 people. The working-age population is the sum of those in the
labour force and those out of the labour force. This is 200,000 plus 50,000, which equals
250,000. Substituting this information into our equation, we get:
× 100
which equals 80%.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 122-123
Topic: Labour Force Participation
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Analytic Skills
Special Feature: None
5-29
Copyright © 2015 Pearson Canada Inc.
5.2 Types of Unemployment
1) Frictional unemployment is the result of
A) a persistent mismatch between the skills and characteristics of workers and the requirements
of the jobs.
B) the search process of matching workers with jobs.
C) the ups and downs in inflation.
D) a slowdown in the economy.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 126-127
Topic: Types of Unemployment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
2) The advice to "keep searching, there are plenty of jobs around here for which you are
qualified," would be most appropriate for which of the following types of unemployment?
A) frictional unemployment
B) structural unemployment
C) cyclical unemployment
D) seasonal unemployment
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 126-127
Topic: Types of Unemployment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
3) A student who just graduated from college but has not found a job would most likely be
A) frictionally unemployed.
B) structurally unemployed.
C) cyclically unemployed.
D) seasonally unemployed.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 126-127
Topic: Types of Unemployment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
5-30
Copyright © 2015 Pearson Canada Inc.
4) Cyclical unemployment is the result of
A) a persistent mismatch between the skills and characteristics of workers and the requirements
of the jobs.
B) the search process of matching workers with jobs.
C) the ups and downs in inflation.
D) a slowdown in the economy.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 127
Topic: Types of Unemployment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
5) Structural unemployment is the result of
A) a persistent mismatch between the skills and characteristics of workers and the requirements
of the jobs.
B) the search process of matching workers with jobs.
C) the ups and downs in inflation.
D) a slowdown in the economy.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 127
Topic: Types of Unemployment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
6) In July 2011, Canada Post cut 200 call-centre positions. The laid-off employees who were not
able to find jobs at another call-centre due to a permanent decline in in-house call-centre services
would be considered
A) structurally unemployed.
B) frictionally unemployed.
C) seasonally unemployed.
D) cyclically unemployed.
Answer: A
Diff: 2
Type: MC
Page Ref: 128-129
Topic: Types of Unemployment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: Making the Connection: How Should We Categorize the Unemployment of
Laid-off Canada Post Employees?
5-31
Copyright © 2015 Pearson Canada Inc.
7) According to the text, economists consider full employment to occur when
A) everyone who wants a job has a job.
B) frictional unemployment equals zero.
C) the sum of frictional unemployment and structural unemployment equals zero.
D) the unemployment rate consists of only frictional and structural unemployment.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 128
Topic: Full Employment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
8) If cyclical unemployment is eliminated in the economy, then
A) the economy is considered to be at full employment.
B) the unemployment rate is below the natural rate of unemployment.
C) the unemployment rate is above the natural rate of unemployment.
D) the economy is at less than full employment.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 128
Topic: Full Employment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
9) Full employment is not considered to be zero unemployment, because
A) some cyclical unemployment always exists.
B) some people do not want a job.
C) there are not enough jobs for everyone who wants one.
D) people do not find jobs instantaneously.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 128
Topic: Full Employment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
5-32
Copyright © 2015 Pearson Canada Inc.
10) The natural rate of unemployment is the amount of unemployment
A) associated with the business cycle.
B) equal to frictional plus structural unemployment.
C) that exists when the economy goes into recession.
D) that exists when the economy is in an expansion.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 128
Topic: Full Employment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
11) During the recession of 2008-2009, cyclical unemployment increased as the recession
continued. This increase in cyclical unemployment
A) increased the natural rate of unemployment.
B) decreased the natural rate of unemployment.
C) had no effect on the natural rate of unemployment.
D) could have increased or decreased the natural rate of unemployment.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 127-128
Topic: Full Employment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
12) A lumberjack loses his job because timber cutting restrictions were imposed by the
Environment Canada to protect the spotted owl habitat. This lumberjack would be
A) frictionally unemployed.
B) cyclically unemployed.
C) structurally unemployed.
D) seasonally unemployed.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 127
Topic: Types of Unemployment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
5-33
Copyright © 2015 Pearson Canada Inc.
13) If you have trouble finding a job because of a slowdown in the overall economy, we would
say that you are
A) frictionally unemployed.
B) structurally unemployed.
C) cyclically unemployed.
D) seasonally unemployed.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 127
Topic: Types of Unemployment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
14) The advice to "retrain" would be most appropriate for which of the following types of
unemployment?
A) frictional unemployment
B) structural unemployment
C) cyclical unemployment
D) core unemployment
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 127
Topic: Types of Unemployment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
15) If the federal government implements programs so that the unemployed are more quickly
matched with jobs, then
A) the natural rate of unemployment will increase.
B) the natural rate of unemployment will decrease.
C) the natural rate of unemployment will not change.
D) the natural rate of unemployment could either increase or decrease.
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 128
Topic: Full Employment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
5-34
Copyright © 2015 Pearson Canada Inc.
16) Eliminating frictional unemployment would be good for the economy.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 126
Topic: Types of Unemployment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
17) Unemployment caused by a business cycle recession is called cyclical unemployment.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 127
Topic: Types of Unemployment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
18) The natural rate of unemployment consists of frictional unemployment plus structural
unemployment.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 128
Topic: Types of Unemployment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Reflective Thinking
Special Feature: None
5-35
Copyright © 2015 Pearson Canada Inc.
19) To understand why someone cannot get a job, it helps to know the four types of
unemployment. List the four types of unemployment and explain what causes each type. What
advice for finding a job would be appropriate for someone in each type of unemployment?
Answer: Frictional unemployment is the unemployment that arises from the process of matching
workers with jobs. These workers are qualified; they just need to search for a job. The advice for
finding a job would be to keep searching, because there are jobs available for which they are
qualified.
Structural unemployment is unemployment arising from a persistent mismatch between the
skills and characteristics of workers and the requirements of the jobs. The advice for finding a
job would be to retrain so that they can match up with the requirements of current jobs.
Cyclical unemployment is unemployment caused by a business cycle recession. The advice
for finding a job would be to hang in there and continue searching, but realize that there are less
jobs available than the number of applicants. The cyclically unemployed person could perhaps
get a temporary job until the economy picks up, or perhaps consider continuing his or her
education while the business cycle slowdown lasts.
Seasonal unemployment is unemployment due to time or season of the year. The seasonally
unemployed person could consider searching of employment in an industry with a different
season, or perhaps retraining for jobs that do not depend so much on seasonal factors.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 126-127
Topic: Types of Unemployment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Analytic Skills
Special Feature: None
20) Many of the reasons why someone cannot get a job are similar to the reasons why someone
cannot get a date. Using the ideas of frictionally unemployed, structurally unemployed, and
cyclically unemployed, describe and explain how a student at your university might be
frictionally "undated," structurally "undated," and cyclically "undated."
Answer: The frictionally "undated" student does not have a date because of the search process of
matching up people. It is an information search problem. There are lots of other students who
would go out with the student, but it takes time to find them.
The structurally "undated" student does not match up with the characteristics of the other
students looking for dates. Perhaps the structurally "undated" student is considerably older, from
another region or country, or just has different preferences.
The cyclically "undated" student does not have a date because there are not many dates to be
had—there is a recession in dates. This could be during final exams when most students do not
date.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 126-127
Topic: Types of Unemployment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Analytic Skills
Special Feature: None
5-36
Copyright © 2015 Pearson Canada Inc.
21) A central concept in macroeconomics is the idea of the natural rate of unemployment. Why
does it make sense to define full employment to occur when the unemployment rate equals the
natural rate of unemployment, instead of when the unemployment rate equals zero? Elaborate
and explain carefully.
Answer: With a growing, dynamic economy where businesses expand and contract,
technological change regularly occurs, and people enter and leave the labour market on a
continual basis, zero percent unemployment is not possible nor desirable. Frictional
unemployment and structural unemployment are normal parts of a healthy, growing economy.
With frictional unemployment, people and firms have to search for one another and that takes
time. With structural unemployment, technology changes and international competition cause
people to have to retrain to match up with the evolving job requirements. Economists,
consequently, consider full employment to occur when the only unemployment is frictional
unemployment and structural unemployment.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 126-127
Topic: Types of Unemployment
Learning Outcome: 5.2 Identify the four types of unemployment
AACSB: Analytic Skills
Special Feature: None
22) The short-term unemployment arising from the process of matching workers with jobs is
called
A) frictional unemployment.
B) structural unemployment.
C) cyclical unemployment.
D) seasonal unemployment.
E) unnatural unemployment.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 126
Topic: Types of Unemployment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-37
Copyright © 2015 Pearson Canada Inc.
23) Unemployment arising from a persistent mismatch between the skills and characteristics of
workers and the requirements of jobs is called
A) frictional unemployment.
B) structural unemployment.
C) cyclical unemployment.
D) seasonal unemployment.
E) unnatural unemployment.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 127
Topic: Types of Unemployment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
24) Workers laid off as a result of a recession suffer
A) frictional unemployment.
B) structural unemployment.
C) cyclical unemployment.
D) seasonal unemployment.
E) natural unemployment.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 127
Topic: Types of Unemployment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-38
Copyright © 2015 Pearson Canada Inc.
25) People who lost their jobs as hand-drawn animators because of the popularity of computergenerated 3D animation are examples of persons who are suffering
A) frictional unemployment.
B) structural unemployment.
C) cyclical unemployment.
D) seasonal unemployment.
E) unnatural unemployment.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 127
Topic: Types of Unemployment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
26) Which of the following is an example of a worker experiencing cyclical unemployment?
A) a worker who changes jobs to move closer her family
B) an assembly-line worker who loses his job because of automation
C) a Canadian Pacific Railway employee who got laid off because of the recession of 2008-2009
D) a lifeguard who was hired during the summer season is laid off after summer is over
E) a worker who quits his job because he does not get along with his boss
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 127
Topic: Types of Unemployment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-39
Copyright © 2015 Pearson Canada Inc.
27) Jack just told his boss that he thinks his boss is an idiot. It is likely that Jack will be
experiencing ________ unemployment in the near future.
A) permanent
B) cyclical
C) frictional
D) structural
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 126
Topic: Types of Unemployment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
28) Sarah is a full-time student who is not looking for work. What kind of unemployment is
Sarah experiencing?
A) cyclical
B) structural
C) frictional
D) Sarah is not experiencing unemployment of any kind because she is not currently part of the
labour force.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 126-127
Topic: Types of Unemployment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-40
Copyright © 2015 Pearson Canada Inc.
29) Emma is a road construction worker. During the winter months, Emma finds it more difficult
to get work. The unemployment Emma experiences in the winter is
A) structural.
B) cyclical.
C) seasonal.
D) functional.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 127
Topic: Types of Unemployment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
30) Which of the following is an example of a worker experiencing frictional unemployment?
A) a worker who quits his job at the post office to find more interesting work
B) a computer programmer who loses her job because it is outsourced to India
C) an employee who is laid off because the economy is suffering a recession
D) an Air Canada pilot who loses her job because of lack of demand for air travel
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 126
Topic: Types of Unemployment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
31) An example of a seasonally unemployed worker would be
A) a software engineer who is laid off because of declining demand for the software he writes.
B) a day care provider who quits his job to go back to school.
C) a General Motors who employee loses her job because the company is downsizing its work
force.
D) a ski lift operator who loses his job when the snow melts in the spring.
E) a mother who quits her job to stay home with her children.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 127
Topic: Types of Unemployment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-41
Copyright © 2015 Pearson Canada Inc.
32) What are the three main kinds of unemployment?
A) frictional, seasonal, and cyclical
B) temporary, permanent, and volunteer
C) cyclical, structural, and temporary
D) structural, frictional, and cyclical
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 126-127
Topic: Types of Unemployment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
33) When the labour market is at full employment
A) there is only cyclical unemployment in the economy.
B) there is only structural unemployment in the economy.
C) the unemployment rate is 0%.
D) there is no cyclical unemployment in the economy.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 128
Topic: Full Employment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
34) When an economy is at its natural rate of unemployment, which of the following will be
true?
A) The unemployment rate will be 0%.
B) The labour force participation rate will be 100%.
C) The unemployment rate will be greater than 0%.
D) Only structural unemployment as a result of technological change will exist in the economy.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 128
Topic: Full Employment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-42
Copyright © 2015 Pearson Canada Inc.
35) The natural rate of unemployment is made up of
A) frictional, cyclical, and structural unemployment.
B) frictional and cyclical unemployment.
C) cyclical and structural unemployment.
D) frictional and structural unemployment.
E) seasonal and structural unemployment.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 128
Topic: Full Employment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
36) An increase in cyclical unemployment will result in
A) an increase in the natural rate of unemployment.
B) an increase in the unemployment rate.
C) an increase in structural unemployment.
D) a decrease in frictional unemployment.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 127
Topic: Full Employment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
37) We say that the economy is at full employment if the unemployment rate is equal to
A) zero.
B) the natural rate of unemployment.
C) the amount of cyclical unemployment.
D) the sum of frictional and cyclical unemployment.
E) the sum of structural and cyclical unemployment.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 128
Topic: Full Employment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-43
Copyright © 2015 Pearson Canada Inc.
38) In July 2011, Canada Post laid off 200 call-centre employees. The employees, who were laid
off due to the lingering effects of the 2008-2009 recession, would be considered
A) structurally unemployed.
B) frictionally unemployed.
C) seasonally unemployed.
D) cyclically unemployed.
Answer: D
Diff: 2
Type: MC
Page Ref: 128
Topic: Types of Unemployment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: Making the Connection: How Should We Categorize the Unemployment of
Laid-off Canada Post Employees?
39) The natural rate of unemployment consists of frictional unemployment plus cyclical
unemployment.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 128
Topic: Types of Unemployment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
40) Eliminating all structural unemployment would be good for the economy.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 126-127
Topic: Types of Unemployment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-44
Copyright © 2015 Pearson Canada Inc.
41) The full-employment rate of unemployment is zero.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 128
Topic: Full Employment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
42) Describe the three types of unemployment.
Answer: Frictional unemployment is short-term unemployment that arises from the process of
matching workers with jobs. Structural unemployment arises from a persistent mismatch
between the skills and attributes of workers and the requirements of jobs. Cyclical
unemployment is caused by a business cycle recession.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 126-127
Topic: Types of Unemployment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
43) Explain what economists mean by full employment and why this rate of unemployment is
not zero.
Answer: Full employment occurs in the macro economy when cyclical unemployment is zero.
The full-employment rate of unemployment is then made up of the frictional rate of
unemployment and the structural rate of unemployment. Because it will always take time to find
a job, frictional unemployment will never be zero. Also, because demand and technology are
constantly changing in an economy, structural unemployment will never be zero. That is, some
workers will always lose their jobs as the demands for the products they make fall or disappear
entirely.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 128
Topic: Full Employment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-45
Copyright © 2015 Pearson Canada Inc.
44) What is the natural rate of unemployment, and what types of unemployment constitute the
natural rate of unemployment?
Answer: The natural rate of unemployment is the rate of unemployment that exists in the
economy when cyclical unemployment is zero. This underlying level of unemployment in the
economy consists of frictional and structural unemployment. The natural rate of unemployment
is also known as the full-employment rate of unemployment.
Comment: Recurring
Diff: 1
Type: SA Page Ref: 128
Topic: Full Employment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5.3 Explaining Unemployment
1) An increase in Employment Insurance payments would, in effect, ________ the amount of
time spent searching for a job, which would increase ________ unemployment.
A) increase; cyclical
B) increase; frictional
C) decrease; cyclical
D) decrease; frictional
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 129
Topic: Government Policies
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Reflective Thinking
Special Feature: None
2) Which of the following would increase the unemployment rate?
A) a law making it illegal to work more than 35 hours per week
B) a cut in employment compensation
C) an increase in employment insurance payments
D) a decrease in the minimum wage
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 129
Topic: Government Policies
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Reflective Thinking
Special Feature: None
5-46
Copyright © 2015 Pearson Canada Inc.
3) Which of the following would decrease the unemployment rate?
A) an increase in the minimum wage
B) an increase in the efficiency wage
C) an increase in labour union membership
D) government aid to retrain unemployed workers
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 129
Topic: Government Policies
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Reflective Thinking
Special Feature: None
4) Which of the following policies would reduce structural unemployment?
A) an increase in the minimum wage
B) a job retraining program
C) expanding employment insurance to cover more workers
D) building an online job database that helps workers find jobs
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 129
Topic: Government Policies
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Reflective Thinking
Special Feature: None
5) Which of the following policies would reduce frictional unemployment?
A) a decrease in the minimum wage
B) a job retraining program
C) implementing an unemployment insurance policy
D) building an online job database that helps workers find jobs
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 129
Topic: Government Policies
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Reflective Thinking
Special Feature: None
5-47
Copyright © 2015 Pearson Canada Inc.
6) The Employment Insurance program has which of the following effects?
A) It decreases the amount of personal income of the unemployed.
B) It contributes to the severity of a recession or economic downturn.
C) It increases the amount of time spent searching for a job.
D) It lowers the overall unemployment rate.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 129
Topic: Government Policies
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Reflective Thinking
Special Feature: None
7) In Canada the Employment Insurance (EI) will tend to ________ the opportunity cost of
continuing to search for a job, and generally will ________ the unemployment rate.
A) lower; lower
B) lower; increase
C) increase; lower
D) increase; increase
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 129
Topic: Government Policies
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Reflective Thinking
Special Feature: None
8) The increased generosity of unemployment insurance programs in Canada as compared to the
United States should
A) decrease the duration of unemployment in Canada as compared to the United States.
B) increase the duration of unemployment in Canada as compared to the United States.
C) have no impact on the duration of unemployment in Canada.
D) raise the duration of unemployment in the United States.
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 129
Topic: Government Policies
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Analytic Skills
Special Feature: None
5-48
Copyright © 2015 Pearson Canada Inc.
9) If the minimum wage is set above the market wage,
A) the quantity of labour supplied will be below the quantity of labour demanded.
B) unemployment will rise.
C) highly-skilled workers will have a harder time finding jobs.
D) All of the above are correct.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 130
Topic: Government Policies
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Analytic Skills
Special Feature: None
10) Minimum wage laws cause unemployment because the legal minimum wage is set
A) below the market wage, causing labour demand to be greater than labour supply.
B) below the market wage, causing labour demand to be less than labour supply.
C) above the market wage, causing labour demand to be greater than labour supply.
D) above the market wage, causing labour demand to be less than labour supply.
E) too low.
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 130
Topic: Government Policies
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Reflective Thinking
Special Feature: None
11) Suppose more Canadian retail firms decided to pay efficiency wages. As a result, we would
expect
A) the labour force participation rate to fall.
B) the average wage rate to rise.
C) the average wage to fall.
D) long run unemployment trends to reverse.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 131
Topic: Labour Unions
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Analytic Skills
Special Feature: Making the Connection: Why Does Costco Pay Its Workers More than
Walmart?
5-49
Copyright © 2015 Pearson Canada Inc.
12) If firms pay what are called "efficiency wages," they pay wages that
A) motivate workers to increase their productivity.
B) are lower than average to ensure maximum profit.
C) will eventually lower the unemployment rate.
D) are mandated by the government.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 131
Topic: Efficiency Wages
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Reflective Thinking
Special Feature: None
13) Efficiency wages cause unemployment because
A) firms pay wages that are below the market wage, causing the quantity of labour demanded to
be greater than the quantity of labour supplied.
B) firms pay wages that are below the market wage, causing the quantity of labour demanded to
be less than the quantity of labour supplied.
C) firms pay wages that are above the market wage, causing the quantity of labour demanded to
be greater than the quantity of labour supplied.
D) firms pay wages that are above the market wage, causing the quantity of labour demanded to
be less than the quantity of labour supplied.
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 131
Topic: Efficiency Wages
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Reflective Thinking
Special Feature: None
14) The unemployment rate in Canada is typically higher for teenagers relative to other workers
in part because of the impacts of minimum wage laws.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 130
Topic: Government Policies
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Reflective Thinking
Special Feature: None
5-50
Copyright © 2015 Pearson Canada Inc.
15) Most economists believe that labour unions significantly increase the overall unemployment
rate in Canada.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 130
Topic: Labour Unions
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Reflective Thinking
Special Feature: None
16) Efficiency wage is another name for the minimum wage.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 130
Topic: Efficiency Wages
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Reflective Thinking
Special Feature: None
17) Discuss the likely impact of each of the following on the unemployment rate.
a. The length of time workers are eligible to receive Employment Insurance payments is cut in
half.
b. The government passes a law making labour unions illegal.
c. The minimum wage is raised by 50 percent.
d. The government funds an Internet site where companies can post job openings at no charge.
Answer:
a. The unemployment rate will likely decrease, since decreasing the time people are eligible to
receive Employment Insurance benefits will increase the opportunity cost of searching for a job.
b. This will likely have little effect on the unemployment rate as unions cover relatively little of
the Canadian labour force.
c. The unemployment rate will likely increase since an increase in minimum wage will raise the
wage above the market wage for some workers.
d. The unemployment rate will likely decrease, since making information on job openings more
available lowers the search involved in frictional unemployment.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 129-130
Topic: The Unemployment Rate
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Reflective Thinking
Special Feature: None
5-51
Copyright © 2015 Pearson Canada Inc.
18) What are some reasons why many economists still think Employment Insurance (EI) is a
good idea for Canada, despite the fact it prolongs job search and increases the unemployment
rate?
Answer: If not for the EI program, unemployed workers would suffer very large declines in their
income, which would lead them to greatly reduce spending, which would make any recession
worse. EI helps the unemployed maintain their incomes and spending, which also reduces the
personal hardship of being unemployed. Finally, EI helps both workers and firms make "good
matches." Allowing unemployed people spend more time searching for an appropriate job that
means more people find jobs that are appropriate to their skills and tastes. The better the match
between employer and employee, the more productive the economy will be.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 129-130
Topic: Government Policies
Learning Outcome: 5.3 Explain what factors determine the unemployment rate
AACSB: Reflective Thinking
Special Feature: None
19) The Employment Insurance program
A) increases the amount of time the unemployed spend searching for a job.
B) decreases the level of frictional unemployment.
C) pays the unemployed a benefit equal to twice the average wage.
D) eliminates structural unemployment.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 129
Topic: Government Policies
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-52
Copyright © 2015 Pearson Canada Inc.
20) By offering training to workers whose firms laid them off because of competition from
foreign firms, the federal government is attempting to reduce
A) frictional unemployment.
B) structural unemployment.
C) cyclical unemployment.
D) seasonal unemployment.
E) unnatural unemployment.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 129-130
Topic: Government Policies
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
21) Establishing a federal employment agency that speeds up the process of matching
unemployed workers with unfilled jobs is an attempt to lower
A) frictional unemployment.
B) structural unemployment.
C) cyclical unemployment.
D) seasonal unemployment.
E) unnatural unemployment.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 129-130
Topic: Government Policies
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-53
Copyright © 2015 Pearson Canada Inc.
22) Which of the following explains why Canada tends to have unemployment rates that are
higher than the United States?
A) Technological change occurs at a faster rate in Canada, so structural unemployment is higher
in Canada.
B) Canada offers more generous unemployment benefits than the United States.
C) Firms in Canada offer employees higher wages and higher benefits than do firms in the
United States.
D) The minimum wage in Canada is lower than it is in the United States.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 129-130
Topic: Government Policies
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
23) Despite increasing the unemployment rate, the Employment Insurance program can improve
the economy by
A) keeping unmotivated people out of the labour force.
B) allowing workers the time needed to find a job that is a good match for their skills.
C) increasing the need for government.
D) creating an incentive for workers to put a lot of effort into their jobs.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 129-130
Topic: Government Policies
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
Special Feature: None
5-54
Copyright © 2015 Pearson Canada Inc.
24) Except during recessions, workers in Canada are eligible for unemployment benefits for
about twice as long a period of time as workers in the United States. As a result,
A) the average duration of unemployment is longer in the United States than in Canada.
B) the unemployment rate in Canada is usually higher than in the United States.
C) the opportunity cost of job search in Canada is lower than in the United States.
D) frictional unemployment is higher, on average, in the United States than in Canada.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 129-130
Topic: Government Policies
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Multicultural and Diversity
Special Feature: None
25) Which of the following has a tendency to raise the unemployment rate?
A) implementing a minimum wage in an economy
B) reducing unemployment insurance in an economy
C) offering wages at the market-clearing rate
D) reducing labour unions' membership in an economy
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 130-131
Topic: Government Policies
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
26) An efficiency wage
A) is higher than the market wage and tends to increase productivity.
B) is lower than the market wage and tends to increase productivity.
C) is higher than the market wage and tends to decrease productivity.
D) is lower than the market wage and tends to decrease productivity.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 130-131
Topic: Efficiency Wages
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-55
Copyright © 2015 Pearson Canada Inc.
27) Why might firms pay wages that are above the equilibrium wage in a market?
A) to increase the productivity of their workers
B) to reduce the unemployment rate
C) to encourage workers to form labour unions
D) to reduce profit
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 130-131
Topic: Efficiency Wages
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
28) The equilibrium wage in a local labour market is $12 per hour. If a minimum wage of $15
per hour is imposed, which of the following will occur?
A) There will be an increase in unemployment.
B) There will be an increase in the quantity of labour demanded by firms.
C) There will be a decrease in the quantity of labour supplied by households.
D) All of the above will occur.
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 130
Topic: Government Policies
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-56
Copyright © 2015 Pearson Canada Inc.
Figure 5.1
29) Refer to Figure 5.1. Based on the graph of the labour market above, if a minimum wage of
$16 per hour is imposed, which of the following will result?
A) The quantity of labour demanded by firms will rise.
B) The quantity of labour demanded by firms will fall.
C) The unemployment rate will fall.
D) Both A and C will occur.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 130
Topic: Government Policies
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Analytic Skills
Special Feature: None
5-57
Copyright © 2015 Pearson Canada Inc.
30) Refer to Figure 5.1. Based on the graph of the labour market above, if a minimum wage is
set at $10 per hour, which of the following will occur?
A) The unemployment rate will rise.
B) The unemployment rate will fall.
C) The level of unemployment will rise, but the percentage of the labour force unemployed will
not change.
D) None of the above will occur.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 130
Topic: Government Policies
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Analytic Skills
Special Feature: None
31) Labour unions cause unemployment because the union contract wage is set
A) below the market wage, causing a shortage of labour.
B) below the market wage, causing a surplus of labour.
C) above the market wage, causing a surplus of labour.
D) above the market wage, causing a shortage of labour.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 130
Topic: Labour Unions
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
32) Observing that Costco pays its employees much more than Walmart does leads economists to
think
A) Costco is paying an efficiency wage in an effort to maximize profit.
B) Costco employees have a powerful union.
C) Costco's owners are not interested in maximizing profits.
D) Walmart is consistently breaking Canada's labour laws.
Answer: A
Diff: 1
Type: MC
Page Ref: 130
Topic: Efficiency Wages
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: Making the Connection: Why Does Costco Pay Its Workers More than
Walmart?
5-58
Copyright © 2015 Pearson Canada Inc.
33) The unemployment rate has historically been higher in Canada than in the United States.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 129-130
Topic: Government Policies
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
34) The unemployment rate is higher with a minimum wage law than it would be without a
minimum wage law.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 130
Topic: Government Policies
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
35) Paying efficiency wages are a way for a company to cut costs and become more efficient,
and are therefore lower than market wages.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 130-131
Topic: Efficiency Wages
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5-59
Copyright © 2015 Pearson Canada Inc.
36) What effect does the Employment Insurance program have on the unemployment rate?
Answer: The Employment Insurance program likely raises the unemployment rate. The
employment insurance payments lower the opportunity cost (the salary that the unemployed are
giving up by not working) of continuing to search for a job, which leads the unemployed to
spend more time searching for a job.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 129-130
Topic: Government Policies
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
37) Why would a firm pay efficiency wages?
Answer: An efficiency wage is a wage that is higher than the market wage. Firms pay efficiency
wages to raise productivity. Studies show that workers are motivated to work harder if they are
paid higher wages. Put differently, a firm does not monitor workers as closely in order to get
them to be more productive. The higher wage motivates them to be productive.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 130-131
Topic: Efficiency Wages
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
5.4 Measuring Inflation
1) The average price of goods and services in the economy is also known as
A) the price level.
B) the inflation rate.
C) a market basket.
D) the cost of living.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 131
Topic: Inflation Rate
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
5-60
Copyright © 2015 Pearson Canada Inc.
2) If the price level rose in three consecutive years from 100 to 120 to 140, then the annual
inflation rate over those years would
A) increase.
B) remain the same.
C) decrease.
D) equal 20%.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 133
Topic: Inflation Rate
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Analytic Skills
Special Feature: None
3) Which of the following is true about the consumer price index?
A) It accounts for people switching to goods whose prices have fallen.
B) It assumes that consumers purchase the same amount of each product in the market basket
each month.
C) It frequently updates the price changes of new products added to the market basket, as these
have a tendency to fall.
D) It filters out the part of price increases that occurs because of quality improvements in
products.
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 132-133
Topic: Consumer Price Index
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
4) Which of the following price indices comes closest to measuring the cost of living of the
typical household?
A) GDP deflator
B) producer price index
C) consumer price index
D) household price index
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 132-133
Topic: Consumer Price Index
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
5-61
Copyright © 2015 Pearson Canada Inc.
5) Which of the following would be the best measure of the cost of living?
A) real GDP
B) real GDP per person
C) GDP deflator
D) consumer price index
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 132-133
Topic: Consumer Price Index
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
6) The consumer price index is the
A) cost of a market basket of goods and services typically consumed in the base year.
B) cost of a market basket of goods and services typically consumed in the current period.
C) average of the prices of the goods and services purchased by a typical urban family of four.
D) average of the prices of new final goods and services produced in the economy over a period
of time.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 132-133
Topic: Consumer Price Index
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
5-62
Copyright © 2015 Pearson Canada Inc.
Table 5.2
Product
Milk
Bread
Quantity
50
100
Base Year (2002)
Price
$1.20
1.00
2014
Price
$1.50
1.10
7) Refer to Table 5.2. Assume the market basket for the consumer price index has two products
— bread and milk — with the above values in 2002 and 2014 for price and quantity. The
Consumer Price Index for 2014 equals
A) 118.
B) 116.
C) 86.
D) 85.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 133
Topic: Consumer Price Index
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Analytic Skills
Special Feature: None
Table 5.3
Product
Cokes
Hamburgers
CDs
Quantity
100
200
10
Base Year (2002)
Price
$0.50
2.00
20.00
2014
Price
$0.75
2.50
21.00
8) Refer to Table 5.3. Assume the market basket for the consumer price index has three products
— Cokes, hamburgers, and CDs — with the above values in 2002 and 2014 for price and
quantity. The Consumer Price Index for 2014 equals
A) 75.
B) 93.
C) 108.
D) 121.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 133
Topic: Consumer Price Index
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Analytic Skills
Special Feature: None
5-63
Copyright © 2015 Pearson Canada Inc.
Table 5.4
Product
Meat
Potatoes
Base Year (2002)
Quantity
100
200
Price
$10
2
2014
Quantity
120
180
Price
$12
3
9) Refer to Table 5.4. Assume the market basket for the consumer price index has two products
— meat and potatoes — with the above values in 2002 and 2014 for price and quantity. The
Consumer Price Index for 2011 equals
A) 125.
B) 129.
C) 135.
D) 141.
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 133
Topic: Consumer Price Index
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Analytic Skills
Special Feature: None
10) The percent increase in the CPI from one year to the next is a measure of the
A) GDP deflator.
B) unemployment rate.
C) real interest rate.
D) inflation rate.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 133
Topic: Consumer Price Index
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
5-64
Copyright © 2015 Pearson Canada Inc.
11) Assume the average annual CPI values for 2010 and 2011 were 207.3 and 215.3,
respectively. What was the percent increase in the CPI between these two years?
A) 0.96
B) 1.04
C) 3.86
D) 8.0
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 133
Topic: Consumer Price Index
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Analytic Skills
Special Feature: None
12) A consumer price index of 160 in 2025 with a base year of 2002 would mean that the cost of
the market basket
A) equaled $160 in 2025.
B) equaled $160 in 2002.
C) rose 160% from the cost of the market basket in the base year.
D) rose 60% from the cost of the market basket in the base year.
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 133
Topic: Inflation Rate
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Analytic Skills
Special Feature: None
5-65
Copyright © 2015 Pearson Canada Inc.
Table 5.5
Year
2010
2011
CPI
207
215
13) Refer to Table 5.5. Consider the above values of the consumer price index for 2010 and
2011. The inflation rate for 2011 was equal to
A) 215 percent.
B) 21.5 percent.
C) 8.0 percent.
D) 3.9 percent.
Answer: D
Diff: 2
Type: MC
Page Ref: 133
Topic: Inflation Rate
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Analytic Skills
Special Feature: Don't Let This Happen to You: Don't Miscalculate the Inflation Rate
Table 5.6
Year
1996
1997
1998
CPI
157
161
163
14) Refer to Table 5.6. Consider the above values of the consumer price index for 1996, 1997,
and 1998. The inflation rate for 1997 was equal to
A) 1.2 percent.
B) 2.0 percent.
C) 2.5 percent.
D) 4.0 percent.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 133
Topic: Inflation Rate
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Analytic Skills
Special Feature: None
5-66
Copyright © 2015 Pearson Canada Inc.
15) Your grandfather tells you that he earned $7,000/year in his first job in 1961. You earn
$45,000/year in your first job in 2014. You know that average prices have risen steadily since
1961. You earn
A) 9 times as much as your grandfather in terms of real income.
B) more than 9 times as much as your grandfather in terms of real income.
C) less than 9 times as much as your grandfather in terms of real income.
D) less than 9 times as much as your grandfather in terms of nominal income.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 133
Topic: Inflation Rate
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Analytic Skills
Special Feature: None
16) If we want to use a measure of inflation that foreshadows price changes before they affect
prices at the retail level, we would base our measure of inflation on
A) the producer price index.
B) the consumer price index.
C) the GDP deflator.
D) the household price index.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 135
Topic: Producer Price Index
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
17) The substitution bias in the consumer price index refers to the idea that consumers ________
the quantity of products they buy in response to price, and the CPI does not reflect this and
________ the cost of the market basket.
A) change; overestimates
B) change; underestimates
C) do not change; overestimates
D) do not change; underestimates
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 134
Topic: Is the CPI Accurate?
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
5-67
Copyright © 2015 Pearson Canada Inc.
18) The increase in quality bias in the consumer price index refers to the idea that price increases
in the CPI reflect pure inflation, but ________ quality increases. This causes the CPI to
________ the cost of the market basket.
A) also; understate
B) also; overstate
C) not; understate
D) not; overstate
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 134
Topic: Is the CPI Accurate?
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
19) The "new product bias" in the consumer price index refers to the idea that
A) consumers switch to new goods when the prices of old goods increase, and the CPI
overestimates the cost to consumers.
B) consumers switch to old goods when the prices of new goods increase, and the CPI
underestimates the cost to consumers.
C) consumers prefer new goods, even if they are worse in quality than old goods, and this causes
the CPI to underestimate the cost to consumers.
D) new products' prices often decrease after their initial introduction, and the CPI is adjusted
infrequently and overestimates the cost to consumers.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 134
Topic: Is the CPI Accurate?
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
5-68
Copyright © 2015 Pearson Canada Inc.
20) The consumer price index implicitly assumes that the demand curve for each good and
service in the representative market basket is
A) positively sloped.
B) negatively sloped.
C) vertical.
D) horizontal.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 133-134
Topic: Is the CPI Accurate?
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
21) Most economists believe that the biases in the consumer price index cause the CPI to
overstate the true inflation rate by about
A) one-half to one percentage point.
B) one to two percentage points.
C) one quarter percentage point.
D) one and one-half percentage points.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 134
Topic: Is the CPI Accurate?
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
22) Which of the following would be a consequence of substitution bias in the CPI?
A) Social Security payments would not adequately compensate retired workers for inflation.
B) Businesses would overcompensate employees for inflation when giving the cost of living
rises.
C) The inflation rate based on the CPI would underestimate the true level of inflation.
D) Judges would award child support payments that would not adequately keep up with the true
cost of inflation.
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 134
Topic: Is the CPI Accurate?
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Analytic Skills
Special Feature: None
5-69
Copyright © 2015 Pearson Canada Inc.
23) Statistics Canada surveys 16,758 Canadian households on their spending habits. The results
are used to construct a typical basket of goods and services purchased by a typical household.
Which of the following is not one of the broad categories of the basket?
A) alcohol and tobacco
B) health and personal care
C) stocks and savings
D) clothing and footwear
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 132
Topic: Consumer Confidence
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
24) The producer price index measures the prices that firms
A) pay for imported natural resources that go into the production process.
B) receive for the goods and services they export.
C) receive for the goods and services they use at all stages of production.
D) pay for labour, whether or not the labour is foreign or domestic.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 134
Topic: Producer Price Index
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
25) The inflation rate measures the average prices of goods and services in the economy.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 131
Topic: Inflation Rate
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
5-70
Copyright © 2015 Pearson Canada Inc.
26) Shelter is the largest component of the Canadian CPI market basket.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 132
Topic: Consumer Price Index
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
27) The GDP deflator is the best measure that reflects the prices of goods and services purchased
by the typical household.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 132-133
Topic: Price Indexes
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
28) Why does the substitution bias cause the consumer price index to overstate inflation and the
cost of living? Why does the increase in quality bias cause the consumer price index to overstate
inflation and the cost of living?
Answer: The substitution bias causes the CPI to overstate inflation and the cost of living because
the CPI, being based on a fixed market basket of goods and services, implicitly assumes that
consumers do not switch away from products whose prices are rising and into products whose
prices are falling (or rising less). Consumers dodge some price increases by switching to other
products, therefore decreasing their cost of living below what the CPI indicates.
The increase in quality bias causes the CPI to overstate inflation and the cost of living
because a portion of the price increase of many goods and services is due to an increase in
quality. Statistics tries to filter out the portion of the price increase due to quality, but does not
fully adjust the price increase for quality improvements.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 134
Topic: Is the CPI Accurate?
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Reflective Thinking
Special Feature: None
5-71
Copyright © 2015 Pearson Canada Inc.
Table 5.7
Product
Tacos
Earplugs
Toothbrushes
Quantity
5
10
3
Base Year
Price (2002) Price (2013) Price (2014)
$1.50
$2.00
$2.25
6.00
7.50
7.00
2.50
3.50
3.50
29) Refer to Table 5.7. Consider a simple economy that produces only three products: tacos,
earplugs, and toothbrushes. Use the information in the table to calculate the inflation rate for
2014, as measured by the consumer price index.
Answer:
Total expenditures for 2002 = (5 × $1.50) + (10 × $6.00) + (3 × $2.50) = $75.00.
Total expenditures for 2013 = (5 × $2.00) + (10 × $7.50) + (3 × $3.50) = $95.50.
Total expenditures for 2014 = (5 × $2.25) + (10 × $7.00) + (3 × $3.50) = $91.75.
The CPI for 2013 = [($95.50/$75.00) × 100] = 127.33;
CPI for 2014 = [($91.75/$75.00) × 100] = 122.33.
So, the inflation rate for 2014 = [((122.33 − 127.33)/127.33) × 100)] = −3.9%.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 133
Topic: Inflation Rate
Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are
computed
AACSB: Analytic Skills
Special Feature: None
30) The broadest measure of the price level that includes all final goods and services is
A) the producer price index.
B) the consumer price index.
C) the GDP deflator.
D) the wholesale price index.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 132
Topic: Price Indexes
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
5-72
Copyright © 2015 Pearson Canada Inc.
31) The most widely used measure of inflation is based on which of the following price indices?
A) the producer price index
B) the consumer price index
C) the GDP deflator
D) the wholesale price index
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 132-133
Topic: Consumer Price Index
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
32) The CPI is also referred to as
A) the GDP deflator.
B) the inflation-consumption index.
C) the cost-of-living index.
D) the producer price index.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 132-133
Topic: Consumer Price Index
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
33) Which of the following is the smallest portion of the market basket of goods that makes up
the CPI?
A) shelter
B) food
C) transportation
D) alcohol and tobacco
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 132
Topic: Consumer Price Index
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
5-73
Copyright © 2015 Pearson Canada Inc.
Table 5.8
Year
2014
2013
CPI
(2002 = 100)
124.5
122.7
34) Refer to Table 5.8. Suppose that the data in the table above reflect price levels in the
economy. What is the inflation rate between 2013 and 2014?
A) 1.5%
B) 1.8%
C) 22.7%
D) 24.5%
E) 101%
Answer: A
Diff: 3
Type: MC
Page Ref: 133
Topic: Inflation Rate
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: Don't Let This Happen to You: Don't Miscalculate the Inflation Rate
Table 5.9
Year
2002
2003
CPI
(2002 = 100)
100
120
35) Refer to Table 5.9. Suppose that the data in the table above reflect the price levels in the
economy. What is the inflation rate in between 2002 and 2003?
A) 2%
B) 5%
C) 10%
D) 12%
E) 20%
Answer: E
Diff: 2
Type: MC
Page Ref: 133
Topic: Inflation Rate
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: Don't Let This Happen to You: Don't Miscalculate the Inflation Rate
5-74
Copyright © 2015 Pearson Canada Inc.
Table 5.10
Year
2010
2011
CPI
(2002 = 100)
100
113
36) Refer to Table 5.10. Suppose that the data in the table above reflect the price levels in the
economy. Given that data, we can say that the cost of living rose by ________ between 2010 and
2011.
A) 2%
B) 5%
C) 8%
D) 11%
E) 13%
Answer: E
Diff: 2
Type: MC
Page Ref: 133
Topic: Inflation Rate
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: Don't Let This Happen to You: Don't Miscalculate the Inflation Rate
37) Monthly expenditures for a family of 4 in 2010 averaged $1,400. In 2011, the cost of the
same purchases was $1,500. If 2010 is the base year, what was the CPI in 2011?
A) 110
B) 107
C) 100
D) 93
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 133
Topic: Consumer Price Index
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: None
5-75
Copyright © 2015 Pearson Canada Inc.
38) If the CPI changes from 125 to 120 between 2010 and 2011, how did prices change between
2010 and 2011?
A) Prices increased by 5%.
B) Prices decreased by 5%.
C) Prices increased by 25%.
D) Prices decreased by 4%.
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 133
Topic: Inflation Rate
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: None
39) Which of the following describes the accuracy of the Consumer Price Index?
A) Changes in the CPI accurately reflect the true rate of inflation.
B) Changes in the CPI understate the true rate of inflation.
C) Changes in the CPI overstate the true rate of inflation.
D) Changes in the CPI are unrelated to the true rate of inflation.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 133-134
Topic: Is the CPI Accurate?
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
40) If the CPI rises from 206.7 to 212.7 between two consecutive years, by how much has the
cost of living changed between these two years?
A) The cost of living has increased by 6%.
B) The cost of living has increased by 2.9%.
C) The cost of living has increased by 12.7%.
D) The cost of living has decreased by 6%.
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 133
Topic: Inflation Rate
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: None
5-76
Copyright © 2015 Pearson Canada Inc.
41) If consumers purchase fewer of those products that increase most in price and more of those
products that decrease in price as compared to the CPI basket, then
A) changes in the CPI accurately reflect the true rate of inflation.
B) changes in the CPI understate the true rate of inflation.
C) changes in the CPI overstate the true rate of inflation.
D) changes in the CPI are unrelated to the true rate of inflation.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 133-134
Topic: Is the CPI Accurate?
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
42) Most economists believe that biases cause changes in the CPI to overstate the inflation rate
by ________ percentage points.
A) 0.1 to 0.2
B) 0.2 to 2.0
C) 0.4
D) 0.5 to 1.0
E) 1.0 to 3.0
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 133-134
Topic: Is the CPI Accurate?
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
43) The formula for calculating the CPI is
A) (expenditures in the current year/expenditures in the base year) × 100.
B) (expenditures in the current year × expenditures in the base year)/100.
C) (expenditures in the base year/expenditures in the current year).
D) (expenditures in the base year × 100)/(expenditures in the current year).
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 133
Topic: Consumer Price Index
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
5-77
Copyright © 2015 Pearson Canada Inc.
44) When the price of gasoline rises, some consumers begin riding their bikes more frequently or
riding the bus instead of driving their cars. The fact that the CPI does not fully account for such
changes in consumer behaviour is called
A) outlet bias.
B) increase in quality bias.
C) substitution bias.
D) discrimination bias.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 134
Topic: Is the CPI Accurate?
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
45) The base period for CPI calculations is generally 2002. In 2014, 55% of Canadians had a
smartphone, but in 2002 almost no one had a smartphone. This potential for bias in the CPI is
referred to as ________ bias and results in ________.
A) outlet; the CPI underestimating the true change in the cost of living
B) new product; the CPI overestimating the true change in the cost of living
C) outlet; the CPI overestimating the true change in the cost of living
D) new product; the CPI underestimating the true change in the cost of living
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 134
Topic: Is the CPI Accurate?
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
5-78
Copyright © 2015 Pearson Canada Inc.
46) What is outlet bias?
A) the tendency for households to spend more money over time
B) the tendency for households to spend their money at discount stores as prices rise
C) the tendency for the quality of products to improve over time even though the CPI does not
measure changes in quality
D) the tendency for consumers to purchase newer, more technologically advanced products even
though they have higher prices
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 134
Topic: Is the CPI Accurate?
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
47) In 1986, an Apple IIe computer with 65 kilobytes of memory cost around $1,500. Today, a
$1,500 Apple iMac computer comes with 8 gigabytes of memory. This illustrates the potential
for what kind of bias in CPI calculations?
A) new product bias
B) increase in quality bias
C) substitution bias
D) outlet bias
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 134
Topic: Is the CPI Accurate?
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
5-79
Copyright © 2015 Pearson Canada Inc.
Table 5.11
Product
Computers
Books
Burgers
Total
Quantity
(2011)
1
10
50
Price (2011)
$1,200
25
3
Expenditure
(2011)
$1,200
250
150
$1,600
Price
(2016)
$900
30
4
Expenditure
(on base year
quantities)
(2016)
$900
300
200
$1,400
48) Refer to Table 5.11. Suppose an economy has only three goods and the typical family
purchases the amounts given in the table above. If 2011 is the base year, then what is the CPI for
2016?
A) 14.3
B) 87.5
C) 114.3
D) 160
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 133
Topic: Consumer Price Index
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: None
5-80
Copyright © 2015 Pearson Canada Inc.
Table 5.12
Product
Hair cuts
Backpacks
Tacos
Total
Quantity
(2011)
6
4
100
Price
(2011)
$50
25
1
Expenditure
(2011)
$300
100
100
$500
Price
(2015)
$70
30
5
Expenditure
(on base year
quantities)
(2015)
$420
120
500
$1,040
49) Refer to Table 5.12. Suppose an economy has only three goods and the typical family
purchases the amounts given in the table above. If 2011 is the base year, then what is the CPI for
2015?
A) 40.08
B) 100
C) 180
D) 208
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 133
Topic: Consumer Price Index
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: None
50) The PPI is the
A) price parity index.
B) prime producer index.
C) producer price index.
D) production performance indicator.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 134
Topic: Producer Price Index
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
5-81
Copyright © 2015 Pearson Canada Inc.
51) What does the PPI measure?
A) the average change in the prices paid for all goods produced in the economy over a given year
B) the average of the prices received by producers of goods and services at all stages of the
production process
C) the level of production of goods and services generated in the economy in a given year
D) the difference between the prices consumers pay for goods and services and the prices
producers pay for goods and services
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 134
Topic: Producer Price Index
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
52) The inflation rate measures the percentage increase in the price level from one year to the
next.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 133
Topic: Inflation Rate
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
53) If the CPI falls from 142 to 140 between two consecutive years, this implies that prices fell
by 2% between those two years.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 133
Topic: Inflation Rate
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: None
5-82
Copyright © 2015 Pearson Canada Inc.
54) The producer price index tracks the prices firms receive for goods and services at all stages
of production.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 134
Topic: Producer Price Index
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
55) List three different price indices and explain how they differ in terms of the market basket on
which they are based.
Answer: Three examples of price indices are the GDP deflator, the consumer price index, and
the producer price index. All three differ by the kinds of goods that are contained in the market
basket that is used to calculate the average level of prices. The GDP deflator is based on the
average price of all final goods and services produced. The consumer price index is based on the
average price of goods/services purchased by the typical urban family. The producer price index
is based on the prices received by producers of goods and services at all stages of the production
process.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 131-134
Topic: Price Indexes
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
56) Explain how the CPI is constructed.
Answer: Statistics Canada surveys a sample of Canadian households to determine their spending
habits and to construct a listing or market basket of these goods. The survey is also used to
determine the importance of the items in the consumer's budget. Each month Statistics Canada
collects the prices of the goods in the market basket. A weighted average is taken of those prices,
with the more important items receiving higher weights. A base year is chosen and the CPI is set
to 100 in the base year. In every other year, the CPI is calculated as the ratio of the cost of the
market basket in that year, divided by the cost of the market basket in the base year, times 100.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 132-133
Topic: Consumer Price Index
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
5-83
Copyright © 2015 Pearson Canada Inc.
Table 5.13
Product
Burritos
Flashlights
Golf balls
Quantity
10
15
8
Base Year
Price (2002) Price (2011) Price (2012)
$1.00
$1.50
$1.75
5.00
7.00
6.75
2.00
3.00
3.50
57) Refer to Table 5.13. Consider a simple economy that produces only three products: burritos,
flashlights, and golf balls. Use the information in the table to calculate the inflation rate for 2012,
as measured by the consumer price index.
Answer:
Total expenditures for 2002 = (10 × $1.00) + (15 × $5.00) + (8 × $2.00) = $101.00
Total expenditures for 2011 = (10 × $1.50) + (15 × $7.00) + (8 × $3.00) = $144.00
Total expenditures for 2012 = (10 × $1.75) + (15 × $6.75) + (8 × $3.50) = $146.75
The CPI for 2011 = [($144.00/$101.00) × 100] = 142.57
The CPI for 2012 = [($146.75/$101.00) × 100] = 145.30
So, the inflation rate for 2012 = [((145.30 − 142.57)/142.57) × 100)] =1.9%.
Comment: Recurring
Diff: 3
Type: SA Page Ref: 132-133
Topic: Inflation Rate
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: None
5.5 Using Price Indexes to Adjust for the Effects of Inflation
1) The real wage equals the nominal wage ________ the CPI, all times 100.
A) divided by
B) times
C) minus
D) plus
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 135
Topic: Adjusting for Inflation
Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation
AACSB: Reflective Thinking
Special Feature: None
5-84
Copyright © 2015 Pearson Canada Inc.
2) If your nominal wage rises faster than the price level, we can say your real wage has
________ and the purchasing power of your income has ________.
A) fallen; fallen
B) fallen; risen
C) risen; risen
D) risen; fallen
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 135
Topic: Adjusting for Inflation
Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation
AACSB: Reflective Thinking
Special Feature: None
3) You earned $30,000 in 1990, and your salary rose to $80,000 in 2011. If the CPI rose from 82
to 202 between 1990 and 2011, which of the following is true?
A) There was deflation between 1990 and 2011.
B) The purchasing power of your salary fell between 1990 and 2011.
C) The purchasing power of your salary remained constant between 1990 and 2011.
D) The purchasing power of your salary increased between 1900 and 2011.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 135
Topic: Adjusting for Inflation
Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation
AACSB: Analytic Skills
Special Feature: None
5-85
Copyright © 2015 Pearson Canada Inc.
Table 5.14
Year
1956
2012
Nominal Average
Hourly Earnings
$1.53
22.72
CPI (2002 = 100)
14.3
121.7
The table above reports the nominal average hourly wage and the consumer price index for 1956
and 2012.
4) Refer to Table 5.14. The real average hourly earnings for 1956 in 2002 dollars equals
A) $0.22.
B) $10.70.
C) $13.02.
D) $21.88.
Answer: B
Diff: 2
Type: MC
Page Ref: 135
Topic: Adjusting for Inflation
Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real Average Hourly Wages
5) Refer to Table 5.14. The percentage change in real average wage from 1956 to 2012 equals
A) 2.0 percent
B) 21.7 percent.
C) 74.5 percent.
D) 1300.9 percent.
Answer: C
Diff: 3
Type: MC
Page Ref: 135
Topic: Adjusting for Inflation
Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real Average Hourly Wages
6) Refer to Table 5.14. The real average hourly earnings for 1956 in 2012 dollars equal
A) $1.53.
B) $8.51.
C) $10.67.
D) $13.02
Answer: D
Diff: 3
Type: MC
Page Ref: 135
Topic: Adjusting for Inflation
Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real Average Hourly Wages
5-86
Copyright © 2015 Pearson Canada Inc.
Table 5.15
Year
2009
2010
2011
Nominal Average
Hourly Earnings
$10
10
12
CPI
100
105
110
7) Refer to Table 5.15. Looking at the table above, real average hourly earnings in 2009 were
A) $9.
B) $9.52.
C) $10.
D) $12.63.
Answer: C
Diff: 2
Type: MC
Page Ref: 135-136
Topic: Adjusting for Inflation
Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real Average Hourly Wages
8) Refer to Table 5.15. Looking at the table above, real average hourly earnings were equal to
________ in 2010.
A) $9
B) $9.52
C) $10
D) $12
Answer: B
Diff: 2
Type: MC
Page Ref: 135-136
Topic: Adjusting for Inflation
Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real Average Hourly Wages
9) Suppose your grandfather earned a salary of $12,000 in 1964. If the CPI is 31 in 1964 and 219
in 2014, then the value of your grandfather's salary in 2014 dollars is approximately
A) $84,775.
B) $63,830.
C) $37,200.
D) $26,280.
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 135
Topic: Adjusting for Inflation
Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation
AACSB: Analytic Skills
Special Feature: None
5-87
Copyright © 2015 Pearson Canada Inc.
10) Nominal income is equal to real income if the CPI is less than 100.
Answer: FALSE
Diff: 1
Type: TF Page Ref: 135
Topic: Adjusting for Inflation
Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation
AACSB: Reflective Thinking
Special Feature: None
11) Currently, the base year for the CPI is 2002.
Answer: TRUE
Diff: 1
Type: TF Page Ref: 135
Topic: Adjusting for Inflation
Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation
AACSB: Reflective Thinking
Special Feature: None
5-88
Copyright © 2015 Pearson Canada Inc.
Table 5.16
Year
1989
2009
Median Salary:
New York Yankees
$500,000
5,200,000
CPI
124
216
Salaries in major league baseball have soared over the last 30 to 40 years. Some of the salary
increase is due to inflation. The table above reports the consumer price index and the median
nominal salary of the New York Yankees for 1989 and 2009.
Source: USA Today Salaries Database, asp.usatoday.com/sports/baseball/salaries/default.aspx
12) Refer to Table 5.16. Calculate the real median salary of the New York Yankees in both
1982-1984 dollars and 2009 dollars. Calculate the percentage increase in the median salary of the
Yankees from 1989 to 2009 in both nominal terms and in real terms.
Answer:
Real median salary =
× 100.
Real median salary in 2009 dollars =
Real median salary in 1982-1984 dollars ×
Year
1989
2009
Median
Salary: New
CPI
Real Median Real Median
York
(1982-1984 = Salary (1982Salary
Yankees
100)
1984 dollars) (2009 dollars)
$500,000
124
$403,226
$870,968
5,200,000
216
2,407,407
5,200,000
In nominal terms, the median salary increased
In real terms, the median salary increased
× 100 = 1,040 percent
× 100 = 497 percent
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 135
Topic: Adjusting for Inflation
Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation
AACSB: Analytic Skills
Special Feature: None
5-89
Copyright © 2015 Pearson Canada Inc.
13) The CPI in 1997 was 90.4, and the CPI in 2014 was 125.2. If you earned a salary of $60,000
in 1997, what would be a salary with equivalent purchasing power in 2014?
A) $43,322
B) $75,120
C) $83,100
D) $127,214
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 135
Topic: Adjusting for Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: None
14) If your nominal wage rises more slowly than the price level, we can say your real wage has
________ and the purchasing power of a dollar has ________.
A) fallen; fallen
B) fallen; risen
C) risen; risen
D) risen; fallen
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 135
Topic: Adjusting for Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
5-90
Copyright © 2015 Pearson Canada Inc.
Table 5.17
Year
2012
2013
2014
Nominal Average
Hourly Earnings
$23.50
24.00
24.50
CPI
(2002 = 100)
121.7
122.8
125.2
15) Refer to Table 5.17. Looking at the table above, real wages ________ from 2012 to 2013,
and real wages ________ from 2013 to 2014.
A) rose; rose
B) rose; fell
C) fell; rose
D) fell; fell
Answer: B
Diff: 2
Type: MC
Page Ref: 135-136
Topic: Adjusting for Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real Hourly Wages
Table 5.18
Year
2011
2012
2013
Nominal Average
Hourly Earnings
$23.00
23.50
24.00
CPI
(2002 = 100)
119.9
121.7
122.8
16) Refer to Table 5.18. Looking at the table above, the real average hourly wage in 2011 was
A) $18.40 in 2002 dollars.
B) $19.18 in 2002 dollars.
C) $22.45 in 2002 dollars.
D) $23.00 in 2002 dollars.
Answer: B
Diff: 2
Type: MC
Page Ref: 135-136
Topic: Adjusting for Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real Hourly Wages
5-91
Copyright © 2015 Pearson Canada Inc.
17) Refer to Table 5.18. Looking at the table above, real average hourly earnings between 2011
and 2012 changed by
A) 0.7%.
B) 1.5%.
C) 2.2%.
D) 5%.
Answer: A
Diff: 3
Type: MC
Page Ref: 135-136
Topic: Adjusting for Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real Hourly Wages
18) Between 2014 and 2015, the CPI of a small nation rose from 182 to 185. If household
incomes rose by 3% during that period of time, which of the following is true?
A) The purchasing power of household income rose between 2011 and 2012.
B) The purchasing power of household income fell between 2011 and 2012.
C) The purchasing power of household income remained constant between 2011 and 2012.
D) The CPI cannot be used to determine how the purchasing power of household income
changes over time.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 135
Topic: Adjusting for Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: None
5-92
Copyright © 2015 Pearson Canada Inc.
Table 5.19
Year
2011
2012
2013
Nominal Average Hourly
Earnings
$23.00
23.50
24.00
CPI
(2002 = 100)
119.9
121.7
122.8
19) Refer to Table 5.19. Looking at the table above, what is the rate of growth of real average
hourly earnings from 2012 to 2013?
A) 1.2%
B) 2%
C) 4.3%
D) -1%
Answer: A
Diff: 3
Type: MC
Page Ref: 135-136
Topic: Adjusting for Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real Hourly Wages
20) Refer to Table 5.19. Looking at the table above, what is the approximate rate of growth of
real average hourly earnings from 2011 to 2012?
A) 0.5%
B) 2%
C) -2%
D) -0.5%
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 135
Topic: Adjusting for Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: None
5-93
Copyright © 2015 Pearson Canada Inc.
21) Refer to Table 5.19. Looking at the table above, what is the rate of growth of the average
price level from 2011 to 2012?
A) 0.9%
B) 1.5%
C) 2%
D) 2.1%
E) 19%
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 135
Topic: Adjusting for Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: None
22) Refer to Table 5.19. Looking at the table above, what is the rate of growth of the average
price level from 2012 to 2013?
A) 0.9%
B) 1.5%
C) 2%
D) 2.6%
E) 5.25%
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 135
Topic: Adjusting for Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: None
23) To obtain real average hourly earnings, nominal average hourly earnings are multiplied by
the CPI.
Answer: FALSE
Diff: 1
Type: TF Page Ref: 135
Topic: Adjusting for Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
5-94
Copyright © 2015 Pearson Canada Inc.
24) The CPI in 2014 was 125.2, while the CPI in 1991 was 82.8. If you had $5,000 in 1981, its
equivalent purchasing power in 2014 would be $3306.71.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 135
Topic: Adjusting for Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: None
Table 5.19
Year
2011
2012
2013
Nominal Average Hourly
Earnings
$23.00
23.50
24.00
CPI
(2002 = 100)
119.9
121.7
122.8
25) Refer to Table 5.19. Using the above table, calculate real average hourly earnings for 2011,
2012, and 2013. Calculate the rate of growth of real average hourly earnings from 2012 to 2013.
Answer:
Real average hourly earnings in 2011 are
× 100 = $19.18 in 2002 dollars.
Real average hourly earnings in 2012 are
× 100 = $19.31 in 2002 dollars
Real average hourly earnings in 2013 are
× 100 = $19.54 in 2002 dollars.
The rate of growth of real average hourly earnings from 2012 to 2013 is
× 100% = 1.2%.
Comment: Recurring
Diff: 3
Type: SA Page Ref: 135
Topic: Adjusting for Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: None
5-95
Copyright © 2015 Pearson Canada Inc.
Table 5.20
Year
1981
2014
Nominal Minimum
Wage
$3.50
11.00
CPI
(2002 = 100)
49.5
125.2
26) Refer to Table 5.20. The table above lists the actual minimum wage and CPI in 1981 and in
2014. Using the above table, calculate the real minimum wage for 1981 and 2014. Calculate the
rate of growth of the real minimum wage from 1981 to 2014. Are workers better off in terms of
the purchasing power of a dollar in 1981 or 2014? Explain why.
Answer:
The real minimum wage in 1981 is
× 100 = $7.07 in 2002 dollars.
The real minimum wage in 2014 is
× 100 = $8.79 in 2002 dollars
The rate of growth of the real wage from 1981 to 2014 is
× 100 = 24.3%
Workers who earned the minimum wage were better off in 2014 as compared to 1981. The value
of the real minimum wage was higher in 2014. It has increased by 24.3% from 1981 to 2014.
The nominal minimum wage rose faster than the general price level.
Diff: 3
Type: SA Page Ref: 135
Topic: Adjusting for Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real Hourly Wages
5.6 Real versus Nominal Interest Rates
1) The nominal interest rate equals the real interest rate ________ the inflation rate.
A) times
B) divided by
C) plus
D) minus
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate
AACSB: Reflective Thinking
Special Feature: None
5-96
Copyright © 2015 Pearson Canada Inc.
2) The real interest rate equals the nominal interest rate ________ the inflation rate.
A) times
B) divided by
C) plus
D) minus
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate
AACSB: Reflective Thinking
Special Feature: None
3) The stated interest rate on a loan is the
A) real interest rate.
B) nominal interest rate.
C) actual inflation rate.
D) expected inflation rate.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate
AACSB: Reflective Thinking
Special Feature: None
4) If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of
interest?
A) -9.5%
B) -3.5%
C) 1.5%
D) 3.5%
E) 9.5%
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate
AACSB: Analytic Skills
Special Feature: None
5-97
Copyright © 2015 Pearson Canada Inc.
5) Imagine that you borrow $5,000 for one year and at the end of the year you repay the $5,000
plus $600 of interest. If the inflation rate was 4%, what was the real interest rate you paid?
A) 16 percent
B) 12 percent
C) 8 percent
D) 6 percent
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate
AACSB: Reflective Thinking
Special Feature: None
6) Imagine that you borrow $1,000 for one year and at the end of the year you repay the $1,000
plus $100 of interest. If the inflation rate was 7%, what was the real interest rate you paid?
A) 17 percent
B) 10 percent
C) 7 percent
D) 3 percent
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate
AACSB: Analytic Skills
Special Feature: None
7) Suppose you borrow $1,000 at an interest rate of 12 percent. If the expected real interest rate
is 5 percent, then the rate of inflation over the upcoming year that would be most beneficial to
you would be a rate of inflation
A) equal to 0 percent.
B) greater than 7 percent.
C) equal to 7 percent.
D) less than 7 percent.
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate
AACSB: Analytic Skills
Special Feature: None
5-98
Copyright © 2015 Pearson Canada Inc.
8) Suppose you lend $1,000 at an interest rate of 10 percent over the next year. If the expected
real interest rate at the beginning of the loan contract is 4 percent, then what rate of inflation over
the upcoming year would be most beneficial to you as the lender? An inflation rate
A) equal to 0 percent.
B) greater than 6 percent.
C) equal to 6 percent.
D) equal to 4 percent.
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate
AACSB: Analytic Skills
Special Feature: None
9) You lend $5,000 to a friend for one year at a nominal interest rate of 10%. Inflation during
that year is 5%. As a result, you will receive ________ at the end of the year, but that money has
a purchasing power of ________.
A) $5,050; $5,025
B) $5,100; $5,050
C) $5,500; $5,250
D) $6,000; $5,500
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate
AACSB: Analytic Skills
Special Feature: None
10) When deflation occurs,
A) the real interest rate is greater than the nominal interest rate.
B) the nominal interest rate is greater than the real interest rate.
C) the nominal interest rate is equal to the real interest rate and inflation is negative.
D) the nominal interest rate is equal to the real interest rate and inflation is positive.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 137
Topic: Deflation
Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate
AACSB: Reflective Thinking
Special Feature: None
5-99
Copyright © 2015 Pearson Canada Inc.
11) When prices are rising, which of the following will be true?
A) The real interest rate will be lower than the nominal interest rate.
B) The real interest rate will be negative.
C) The real interest rate will be higher than the nominal interest rate.
D) The nominal interest rate will be negative.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate
AACSB: Reflective Thinking
Special Feature: None
12) The nominal interest rate plus the inflation rate equals the real interest rate.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate
AACSB: Reflective Thinking
Special Feature: None
13) If inflationary expectations are increasing, we would expect that the nominal interest rate
would also be increasing, holding all else constant.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate
AACSB: Reflective Thinking
Special Feature: None
14) Real interest rates at times have been negative. Why would anyone lending money agree to a
negative real interest rate?
Answer: The lender did not agree to a negative real interest rate, instead unanticipated inflation
occurred. If the actual inflation rate exceeds the anticipated inflation rate, the actual real interest
rate received by lenders and paid by borrowers can end up negative.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate
AACSB: Analytic Skills
Special Feature: None
5-100
Copyright © 2015 Pearson Canada Inc.
15) During the 1990s, Japan experienced periods of deflation and very low nominal interest
rates, approaching zero percent. Why would lenders of money agree to a nominal interest rate of
almost zero?
Answer: With the deflation, the real interest rate exceeded the nominal interest rate. Lenders
were making their decisions based on the higher real interest rate, not the very low nominal
interest rate.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate
AACSB: Analytic Skills
Special Feature: None
16) During a deflationary period,
A) the nominal interest rate is less than the real interest rate.
B) the real interest rate is less than the nominal interest rate.
C) the price level rises.
D) the nominal interest rate does not change.
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Updated: Yes
Learning Outcome: Macro 12: Explain how monetary policy influences interest rates, aggregate
demand, real GDP, and inflation
AACSB: Reflective Thinking
Special Feature: None
17) The real rate of interest is
A) the nominal interest rate plus the inflation rate.
B) the nominal interest rate minus the inflation rate.
C) the interest rate determined by the supply and demand in the money market.
D) the nominal interest rate.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Updated: Yes
Learning Outcome: Macro 12: Explain how monetary policy influences interest rates, aggregate
demand, real GDP, and inflation
AACSB: Reflective Thinking
Special Feature: None
5-101
Copyright © 2015 Pearson Canada Inc.
18) If the nominal interest rate is 6% and the inflation rate is 9%, then the real interest rate is
A) -3%.
B) 3%.
C) 6.67%.
D) 15%.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Updated: Yes
Learning Outcome: Macro 12: Explain how monetary policy influences interest rates, aggregate
demand, real GDP, and inflation
AACSB: Analytic Skills
Special Feature: None
19) If you want to earn a real interest rate of 3% on money you lend, and you expect that
inflation will be 2%, what nominal rate of interest will you charge?
A) 1%
B) 5%
C) 6%
D) 9%
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Updated: Yes
Learning Outcome: Macro 12: Explain how monetary policy influences interest rates, aggregate
demand, real GDP, and inflation
AACSB: Analytic Skills
Special Feature: None
20) If the nominal interest rate is 6% and the inflation rate is 2%, then the real interest rate is
A) 8%.
B) 4%.
C) 3%.
D) 2%.
E) 1%.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Updated: Yes
Learning Outcome: Macro 12: Explain how monetary policy influences interest rates, aggregate
demand, real GDP, and inflation
AACSB: Analytic Skills
Special Feature: None
5-102
Copyright © 2015 Pearson Canada Inc.
21) Deflation occurs when
A) there is a sustained increase in the price level.
B) there is a one-time increase in the price level.
C) there is a decline in the price level.
D) there is a decrease in the expected rate of inflation.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 136
Topic: Deflation
Updated: Yes
Learning Outcome: Macro 12: Explain how monetary policy influences interest rates, aggregate
demand, real GDP, and inflation
AACSB: Reflective Thinking
Special Feature: None
22) You lend $5,000 to a friend for one year at a nominal interest rate of 10%. The CPI over that
year rises from 180 to 190. What is the real rate of interest you will earn?
A) 0%
B) 4.4%
C) 5.5%
D) 5.8%
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Updated: Yes
Learning Outcome: Macro 12: Explain how monetary policy influences interest rates, aggregate
demand, real GDP, and inflation
AACSB: Analytic Skills
Special Feature: None
23) You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. If inflation
over the year is 2%, what is the real interest rate you are paying?
A) 2%
B) 2.5%
C) 3%
D) 5%
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Updated: Yes
Learning Outcome: Macro 12: Explain how monetary policy influences interest rates, aggregate
demand, real GDP, and inflation
AACSB: Analytic Skills
Special Feature: None
5-103
Copyright © 2015 Pearson Canada Inc.
24) You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. The CPI over
that year rises from 180 to 200. What is the real interest rate you are paying?
A) 15%
B) 5%
C) -1.1%
D) -6.1%
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Updated: Yes
Learning Outcome: Macro 12: Explain how monetary policy influences interest rates, aggregate
demand, real GDP, and inflation
AACSB: Analytic Skills
Special Feature: None
25) The nominal interest rate will be less than the real interest rate when
A) the rate of inflation is positive but decreasing.
B) the rate of inflation is positive and increasing.
C) the rate of inflation is negative.
D) the real interest rate is negative.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 136-137
Topic: Real vs. Nominal Interest Rates
Updated: Yes
Learning Outcome: Macro 12: Explain how monetary policy influences interest rates, aggregate
demand, real GDP, and inflation
AACSB: Reflective Thinking
Special Feature: None
5-104
Copyright © 2015 Pearson Canada Inc.
26) You agree to lend $1,000 for one year at a nominal interest rate of 10%. You anticipate that
inflation will be 4% over that year. If inflation is instead 3% over that year, which of the
following is true?
A) The real interest rate you earn on your money is lower than you expected.
B) The purchasing power of the money that will be repaid to you will be lower than you
expected.
C) The person who borrowed the $1,000 will be worse off as a result of the unanticipated
decrease in inflation.
D) The real interest rate you earn on your money will be negative.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 136-137
Topic: Real vs. Nominal Interest Rates
Updated: Yes
Learning Outcome: Macro 12: Explain how monetary policy influences interest rates, aggregate
demand, real GDP, and inflation
AACSB: Analytic Skills
Special Feature: None
27) The nominal interest rate minus the inflation rate equals the real interest rate.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 136
Topic: Real vs. Nominal Interest Rates
Updated: Yes
Learning Outcome: Macro 12: Explain how monetary policy influences interest rates, aggregate
demand, real GDP, and inflation
AACSB: Reflective Thinking
Special Feature: None
28) If inflation is higher than expected, this helps borrowers (by reducing the real interest rate
they pay) and hurts lenders (by reducing the real interest rate they receive).
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 136-137
Topic: Real vs. Nominal Interest Rates
Updated: Yes
Learning Outcome: Macro 12: Explain how monetary policy influences interest rates, aggregate
demand, real GDP, and inflation
AACSB: Reflective Thinking
Special Feature: None
5-105
Copyright © 2015 Pearson Canada Inc.
29) What is the difference between the nominal interest rate and the real interest rate?
Answer: The nominal interest rate is the stated interest rate on a loan, while the real interest rate
is the nominal interest rate minus the inflation rate.
Comment: Recurring
Diff: 1
Type: SA Page Ref: 136-137
Topic: Real vs. Nominal Interest Rates
Updated: Yes
Learning Outcome: Macro 12: Explain how monetary policy influences interest rates, aggregate
demand, real GDP, and inflation
AACSB: Reflective Thinking
Special Feature: None
30) Suppose you obtain a fixed rate mortgage during a period of relatively high inflation. During
the next ten years, inflation falls. Are you a winner or a loser due to inflation? Explain why.
Answer: You would be a loser under this scenario. Your mortgage rate is the sum of the real rate
of interest plus the amount of inflation that was expected over the life of the mortgage. When
inflation is high, people's expectations of future inflation are high. In those circumstances, your
fixed mortgage rate contains a high expected-inflation premium. Therefore, as inflation falls, the
real rate of interest on your mortgage increases.
Comment: Recurring
Diff: 3
Type: SA Page Ref: 136-137
Topic: Real vs. Nominal Interest Rates
Updated: Yes
Learning Outcome: Macro 12: Explain how monetary policy influences interest rates, aggregate
demand, real GDP, and inflation
AACSB: Reflective Thinking
Special Feature: None
5.7 Does Inflation Impose Costs on the Economy?
1) Suppose that in 2016, all prices in the economy double and that all wages and salaries have
also doubled. In 2016 you
A) are worse off than you were in 2015 as you can no longer afford to buy as many goods and
services.
B) are better off than you were in 2015 as your salary is higher than it was in 2015 and you can
now buy more goods and services.
C) are no better off or worse off than you were in 2015 as the purchasing power of your salary
has remained the same.
D) cannot determine whether you are better off or worse off than you were in 2015 because the
purchasing power of your salary cannot be determined.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 137
Topic: Inflation and the Distribution of Income
Learning Outcome: 5.7 Discuss the problems inflation can cause
AACSB: Reflective Thinking
Special Feature: None
5-106
Copyright © 2015 Pearson Canada Inc.
2) Which of the following describes a situation in which the person is hurt by inflation?
A) a retiree whose pension is adjusted for inflation
B) a person who borrows money during a period when inflation is underpredicted
C) a person who lends money during a period when inflation is overpredicted
D) a person paid a fixed income during an inflationary period
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 138
Topic: Inflation and the Distribution of Income
Learning Outcome: 5.7 Discuss the problems inflation can cause
AACSB: Analytic Skills
Special Feature: None
3) If inflation is positive and is perfectly anticipated
A) those that borrow money lose.
B) those that lend money lose.
C) those that hold paper money lose.
D) no one in the economy loses.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 138
Topic: Anticipated Inflation
Learning Outcome: 5.7 Discuss the problems inflation can cause
AACSB: Reflective Thinking
Special Feature: None
4) Suppose that at the beginning of a loan contract, the real interest rate is 4% and expected
inflation is currently 6%. If actual inflation turns out to be 7% over the loan contract period, then
A) borrowers gain 1% of the loan value.
B) lenders gain 1% of the loan value.
C) borrowers lose 3% of the loan value.
D) lenders gain 3% of the loan value.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 139
Topic: Unanticipated Inflation
Learning Outcome: 5.7 Discuss the problems inflation can cause
AACSB: Analytic Skills
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
5) The cost to firms of changing prices
A) is small even when there is rapid inflation.
B) is called a menu cost.
C) does not exist if inflation is perfectly anticipated.
D) all of the above
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 138
Topic: Anticipated Inflation
Learning Outcome: 5.7 Discuss the problems inflation can cause
AACSB: Reflective Thinking
Special Feature: None
6) When actual inflation is less than expected inflation,
A) borrowers lose and lenders gain.
B) borrowers gain and lenders lose.
C) borrowers and lenders both gain.
D) borrowers and lenders both lose.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 138
Topic: Inflation and the Distribution of Income
Learning Outcome: 5.7 Discuss the problems inflation can cause
AACSB: Reflective Thinking
Special Feature: None
7) Which of the following is not an example of inflation causing a redistribution of income
because the inflation was unanticipated?
A) A firm signs a 3-year contract with a union based on a 2 percent anticipated rate of inflation
per year, and the actual rate of inflation ends up being 7 percent per year.
B) A worker receives a raise in salary that is less than the rate of inflation because management
underpredicted inflation.
C) Firms have to hire an extra worker to change prices in its store because of inflation.
D) A bank collects a lower amount of interest from a loan because inflation was underpredicted.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 138
Topic: Inflation and the Distribution of Income
Learning Outcome: 5.7 Discuss the problems inflation can cause
AACSB: Analytic Skills
Special Feature: None
5-108
Copyright © 2015 Pearson Canada Inc.
8) In August 2011, Royal Bank noted that employment in the manufacturing sector increased,
much better than expected — the rate of growth was the fastest in 3 months. Which of the
following factors is attributed to the gains in employment in Canadian manufacturing?
A) a decline in the Purchasing Manager's Index
B) an earthquake and tsunami in Japan disrupting automotive supply chains
C) Canadian firms depleting inventories to fill orders for a second month in a row
D) wildfires in Alberta leading to lower production levels in the oil sands
Answer: C
Diff: 2
Type: MC
Page Ref: 140
Topic: The Unemployment Rate
Learning Outcome: 5.7 Discuss the problems inflation can cause
AACSB: Reflective Thinking
Special Feature: An Inside LOOK: The Link between the Demand for Manufactured Products
and Employment.
9) The costs to firms of changing prices are called menu costs.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 138
Topic: Anticipated Inflation
Learning Outcome: 5.7 Discuss the problems inflation can cause
AACSB: Reflective Thinking
Special Feature: None
10) If inflation is unanticipated, no redistribution of income can occur.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 139
Topic: Unanticipated Inflation
Learning Outcome: 5.7 Discuss the problems inflation can cause
AACSB: Reflective Thinking
Special Feature: None
11) If inflation is anticipated, some effects of inflation on the redistribution of income can be
avoided.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 138
Topic: Anticipated Inflation
Learning Outcome: 5.7 Discuss the problems inflation can cause
AACSB: Reflective Thinking
Special Feature: None
5-109
Copyright © 2015 Pearson Canada Inc.
12) Describe how inflation can be costly even if it is anticipated.
Answer: First, there will be redistribution as some incomes fall behind even an anticipated level
of inflation. Second, firms and individuals must hold money to perform transactions. Those
holding money lose purchasing power at a rate equal to inflation. Third, firms must pay
individuals to change prices. These costs, called menu costs, can be substantial at very high
levels of inflation. Fourth, investors have to pay higher taxes on interest and capital gains income
as the government taxes nominal interest and capital gains income. Investors then lose real aftertax income.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 138
Topic: Anticipated Inflation
Learning Outcome: 5.7 Discuss the problems inflation can cause
AACSB: Reflective Thinking
Special Feature: None
13) When the actual inflation rate turns out to be greater than the expected inflation rate, who
gains — the borrower or the lender — and who loses? Explain why.
Answer: The borrower gains because he pays back the loan in cheaper dollars — dollars that
have lost more purchasing power than was expected. The lender loses because she receives
dollars that have lost more purchasing power than was expected.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 138
Topic: Inflation and the Distribution of Income
Learning Outcome: 5.7 Discuss the problems inflation can cause
AACSB: Reflective Thinking
Special Feature: None
14) Explain whether you agree or disagree with the following statement: "The reason that
inflation is bad is because it increases the cost of living — the costs of goods and services we
buy — without increasing income in general."
Answer: Disagree. Inflation, in general, must increase both our cost of living and nominal
income. The increases in the prices of goods and services will be paid to the factors of
production. Since the payments to the factors of production make up national income, nominal
income will increase, in general, along with the cost of living.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 138
Topic: Inflation and the Distribution of Income
Learning Outcome: 5.7 Discuss the problems inflation can cause
AACSB: Analytic Skills
Special Feature: None
5-110
Copyright © 2015 Pearson Canada Inc.
15) Which of the following individuals would be most negatively affected by anticipated
inflation?
A) a retired railroad engineer who receives a fixed income payment every month
B) a union contractor whose pay is adjusted based on changes in the CPI
C) a full-time employee at a pizza parlour who makes more than the minimum wage
D) a student who borrows $10,000 at a nominal interest rate of 5% to finance educational
expenses
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 138
Topic: Anticipated Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
16) If inflation is completely anticipated,
A) no one loses in the economy.
B) borrowers lose in the economy.
C) lenders lose in the economy.
D) firms lose because they incur menu costs.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 138
Topic: Anticipated Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
17) If inflation increases unexpectedly, then
A) borrowers pay a higher real interest rate than they expected.
B) lenders receive a lower real interest rate than they expected.
C) lenders gain and borrowers gain.
D) neither borrowers nor lenders lose.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 139
Topic: Unanticipated Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
5-111
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18) Which of the following do not suffer the costs of inflation?
A) persons on fixed incomes
B) persons whose incomes rise more rapidly than inflation
C) firms that have to devote more time and labour to raising prices
D) investors who have to pay higher taxes because of the inflation
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 138-139
Topic: Inflation and the Distribution of Income
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
19) Inflation that is ________ than what is expected benefits ________ and hurts ________.
A) less; lenders; borrowers
B) less; borrowers; lenders
C) greater; lenders; borrowers
D) greater; lenders; no one
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 139
Topic: Inflation and the Distribution of Income
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
20) The costs to firms of changing prices are called
A) redistribution costs.
B) menu costs.
C) anticipation costs.
D) money illusion costs.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 138
Topic: Anticipated Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
5-112
Copyright © 2015 Pearson Canada Inc.
21) What are menu costs?
A) the full list of a firm's costs of production
B) the costs to a firm of changing prices
C) the cost to a household of borrowing money when there is deflation
D) the opportunity cost of dining in a restaurant instead of at home
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 138
Topic: Anticipated Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
22) Which of the following is not a cost posed by inflation?
A) Inflation reduces the affordability of goods and services to the average consumer.
B) The money that consumers and firms hold loses its purchasing power.
C) Firms must pay for changing prices on products and printing new catalogues.
D) Banks can lose if they under predict inflation and charge an interest rate that does not
completely compensate for inflation.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 138-139
Topic: Inflation and the Distribution of Income
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
5-113
Copyright © 2015 Pearson Canada Inc.
23) During the financial crisis of 2007 and the following global recession, many economists
were concerned that countries like Canada might enter a period of deflation. This would have
been a large problem because it leads some consumers to ________ and because it ________.
A) postpone purchases while they wait for prices to fall even lower; would increase the burden
on borrowers.
B) demand higher wages in anticipation of prices eventually rising again; would increase
manufacturing since firms could afford to hire more labour.
C) borrow more money since money was now cheap; would reduce the amount of money
consumers would have to pay back on their outstanding loans.
D) increase purchases to take advantage of the falling prices; would increase the burden on
lenders.
Answer: A
Diff: 2
Type: MC
Page Ref: 138-139
Topic: Deflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: Making the Connection: What's So Bad about Falling Prices?
24) In August 2011, the Manufacturing Purchasing Managers' Index for Canada was 54.9. Based
on this index, we would expect employment in manufacturing to ________ in the last part of
2011.
A) increase
B) decrease
C) remain constant
D) fall and then rise
Answer: A
Diff: 2
Type: MC
Page Ref: 140-141
Topic: The Unemployment Rate
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
Special Feature: An Inside LOOK: The Link between the Demand for Manufactured Products
and Employment.
25) The problem with inflation is that as prices rise, consumers can no longer afford to buy as
many goods and services.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 138-139
Topic: Inflation and the Distribution of Income
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
5-114
Copyright © 2015 Pearson Canada Inc.
26) Inflation redistributes income to a greater extent when the inflation is unanticipated
compared to when the inflation is anticipated.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 138-139
Topic: Inflation and the Distribution of Income
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
27) There are no costs to inflation if it is fully anticipated.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 138
Topic: Anticipated Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
28) Explain why you would rather be a borrower during a period of unexpected rising inflation,
and a lender during a period of unexpected declining inflation.
Answer: The nominal interest rate includes a charge to compensate the lender for the loss in
purchasing power due to inflation. If inflation unexpectedly rises, the lender does not get
compensated enough for the loss in purchasing power. Likewise, the borrower pays too little to
compensate the lender for inflation. So it is better to be a borrower in times of unexpected rising
inflation.
When inflation unexpectedly falls, then the lender gets compensated too much for inflation
and the borrower pays too much for inflation. So it is better to be a lender than a borrower during
a period of unexpected declining inflation.
Comment: Recurring
Diff: 3
Type: SA Page Ref: 138-139
Topic: Unanticipated Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
5-115
Copyright © 2015 Pearson Canada Inc.
29) Describe how a lender can lose during inflation if the inflation is unanticipated and the loan
is a fixed-interest-rate loan. How would a variable-interest-rate loan (one that adjusts over the
contract period) eliminate these losses?
Answer: Lenders require compensation for inflation when charging interest. The nominal
interest rate (also called the market interest rate) they charge equals the real rate of interest plus
the expected inflation over the loan contract period. The interest rate they charge is determined at
the beginning of the loan period, so the charge for inflation is a prediction of what the lender
thinks inflation will be over the contract period. If the loan has a fixed rate, the interest rate does
not change over the period of the loan. If the lender underpredicts inflation, then the lender will
not be compensated enough for the loss in purchasing power due to inflation. The lender will
lose to the extent of the underprediction.
If the loan is a variable-rate loan, the interest rate can be adjusted upwards if the lender
underpredicts inflation. This can lower the loss to the lender. The variable rate automatically
adjusts for mistakes in predicting inflation. The more frequently the rate can be adjusted, the less
the lender's losses.
Comment: Recurring
Diff: 3
Type: SA Page Ref: 138-139
Topic: Unanticipated Inflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
5-116
Copyright © 2015 Pearson Canada Inc.
Macroeconomics, Canadian Edition (Hubbard et al.)
Chapter 6 Economic Growth, the Financial System, and Business Cycles
6.1 Long-Run Economic Growth
1) Which of the following statements describes the experiences of Bombardier since it was
established in 1942?
A) strong uninterrupted growth in demand
B) growth interrupted by periods of business cycle recession
C) little or no growth in the long run, and unaffected by the business cycle
D) little or no growth in the long run, but very vulnerable to the business cycle
Answer: B
Diff: 1
Type: MC
Page Ref: 147
Topic: Long-Run Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Economic Growth and the Business Cycle at Bombardier
2) Technological advances generally result in
A) decreased incomes.
B) increased life expectancy.
C) increased infant mortality rates.
D) increased average number of hours worked per day.
Answer: B
Diff: 1
Type: MC
Page Ref: 149-150
Topic: Determinants of Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: Making the Connection: Economic Prosperity and Health
3) A good measure of the standard of living is
A) real GDP per capita.
B) nominal GDP per capita.
C) total real GDP.
D) total nominal GDP.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 148
Topic: Long-Run Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
6-1
Copyright © 2015 Pearson Canada Inc.
4) Since 1961, real GDP per capita has ________ and this measure ________ the actual growth
in standards of living in Canada over this time.
A) increased; understates
B) increased; overstates
C) decreased; understates
D) decreased; overstates
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 148-149
Topic: Long-Run Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
5) Since 1961, real GDP in Canada has grown
A) more rapidly than the population.
B) more slowly than the population.
C) as rapidly as the population.
D) in a random unpredictable manner relative to the population.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 1418-149
Topic: Long-Run Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
6) If real GDP per capita measured in 2007 dollars was $16,000 in 1961 and $47,000 in 2012, we
would say that in the year 2012, the average Canadian could buy approximately ________ times
as many goods and services as the average Canadian in 1961.
A) 0.3
B) 2
C) 3
D) 12
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 148-149
Topic: Long-Run Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Analytic Skills
Special Feature: None
6-2
Copyright © 2015 Pearson Canada Inc.
7) If real GDP in a small country in 2014 is $8 billion and real GDP in the same country in 2015
is $8.3 billion, the growth rate of real GDP between 2014 and 2015
A) is 3.0%.
B) is 3.6%.
C) is 3.75%.
D) cannot be determined from the information given.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 151
Topic: Calculating Growth Rates
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Analytic Skills
Special Feature: None
8) If real GDP per capita doubles between 2005 and 2020, what is the average annual growth rate
of real GDP per capita?
A) 4.7%
B) 10.5%
C) 15%
D) 21%
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 151
Topic: The Rule of 70
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Analytic Skills
Special Feature: None
9) If you invest $10,000 in a bond that earns 8% interest per year, how many years will it take to
double your money?
A) 1 year and 3 months
B) 2 years and 6 months
C) 8 years
D) 8 years and 9 months
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 151
Topic: The Rule of 70
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Analytic Skills
Special Feature: None
6-3
Copyright © 2015 Pearson Canada Inc.
10) If the growth rate of real GDP rises from 3% to 4% per year, then the number of years
required to double real GDP will decrease from
A) 23.3 years to 17.5 years.
B) 28.0 years to 21.0 years.
C) 11.2 years to 10.8 years.
D) 23.3 years to 20.6 years.
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 151
Topic: The Rule of 70
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Analytic Skills
Special Feature: None
Table 6.1
Year
2009
2010
2011
2012
Real GDP (billions
of 2007 dollars)
$1489
1553
1598
1645
11) Refer to Table 6.1. Using the table above, what is the approximate growth rate of real GDP
from 2011 to 2012?
A) 1%
B) 2%
C) 3%
D) 4%
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 151
Topic: Calculating Growth Rates
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Analytic Skills
Special Feature: None
6-4
Copyright © 2015 Pearson Canada Inc.
12) Refer to Table 6.1. Using the table above, what is the approximate average annual growth
rate from 2009 to 2012?
A) 2%
B) 3%
C) 4%
D) 6%
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 151
Topic: Calculating Growth Rates
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Analytic Skills
Special Feature: None
13) Increases in real GDP since 1961 can actually underestimate growth in the standard of living
for Canadians because
A) the level of pollution in 1961 was much higher than it is today.
B) the crime rate was higher in 1961 than it is today.
C) goods and services are more expensive today as compared to 1961.
D) the quality of health care that exists today was not available in 1961.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 148
Topic: Long-Run Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
14) People born in wealthier countries can expect
A) to live shorter lives than those born in poorer countries.
B) to live just as long as those born in poorer countries because wealth and life expectancy are
unrelated.
C) to live longer than those born in poorer countries because wealthy countries can provide more
health care.
D) to live shorter lives than those born in the same country 40 years ago.
Answer: C
Diff: 1
Type: MC
Page Ref: 149-150
Topic: Long-Run Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: Making the Connection: Economic Prosperity and Health
6-5
Copyright © 2015 Pearson Canada Inc.
15) If real GDP grows by 3% in 2013, 3.2% in 2014, and 2.5% in 2015, what is the average
annual growth rate of real GDP?
A) 2.6%
B) 2.9%
C) 3.1%
D) 4.2%
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 151
Topic: Calculating Growth Rates
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Analytic Skills
Special Feature: None
16) Countries with high rates of economic growth tend to have
A) a labour force that is more productive.
B) a lower life expectancy at birth.
C) low rates of technological advancement.
D) a declining incidence of business cycle fluctuations.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 151
Topic: Labour Productivity
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
17) According to the "Rule of 70," how many years will it take for real GDP per capita to double
when the growth rate of real GDP per capita is 5%?
A) less than 1 year
B) 5 years
C) 14 years
D) 35 years
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 151
Topic: The Rule of 70
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Analytic Skills
Special Feature: None
6-6
Copyright © 2015 Pearson Canada Inc.
18) The quantity of goods and services that can be produced by one worker or by one hour of
work is referred to as
A) technology.
B) labour productivity.
C) real GDP.
D) human capital.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 151
Topic: Labour Productivity
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
19) Which of the following increases labour productivity?
A) an increase in the aggregate hours of work
B) decreases in the availability of computers and factory buildings
C) inventions of new machinery, equipment, or software
D) a decline in the health of the population
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 151-152
Topic: Labour Productivity
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
20) The total amount of physical capital available in a country is know as the country's
A) labour productivity.
B) savings.
C) investment.
D) capital stock.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 151-152
Topic: Determinants of Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
6-7
Copyright © 2015 Pearson Canada Inc.
21) What two factors are the keys to determining labour productivity?
A) the business cycle and the growth rate of real GDP
B) the growth rate of real GDP and the interest rate
C) technology and the quantity of capital per hour worked
D) the average level of education of the workforce and the price level
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 151-152
Topic: Labour Productivity
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
22) If labour productivity growth slows down in a country, this will
A) accelerate the increase in real GDP per capita.
B) accelerate the increase in nominal GDP.
C) slow down the increase in real GDP per capita.
D) slow down the increase in nominal GDP.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 151-152
Topic: Labour Productivity
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
23) If labour productivity growth slows down in a country, this means that the growth rate in
________ has declined.
A) labour force participation
B) the quantity of goods or services that can be produced by one hour of work
C) the working-age population
D) nominal GDP
Answer: B
Diff: 2
Type: MC
Page Ref: 151-152
Topic: Labour Productivity
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
6-8
Copyright © 2015 Pearson Canada Inc.
24) Which of the following is an example of human capital?
A) a computer
B) a factory building
C) a university or college education
D) a software program
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 152
Topic: Determinants of Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
25) Human capital refers to which of the following?
A) the quantity of goods and services that can be produced by one worker or by one hour of
work
B) the accumulated knowledge and skills workers acquire from education and training or from
their life experiences
C) manufactured goods that are used to produce other goods and services
D) physical equipment that is made by human labourers, not machines
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 152
Topic: Determinants of Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
26) Long-run economic growth requires all of the following except
A) technological change.
B) increases in capital per hour worked.
C) government provision of secure property rights.
D) political instability.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 151-153
Topic: Determinants of Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
6-9
Copyright © 2015 Pearson Canada Inc.
27) Which of the following would contribute to a sustained high rate of economic growth in the
long run in an economy?
A) growth in capital per hour accompanied by technological change
B) increases in labour force participation rates as workers who are out of the labour force pursue
rising wages
C) a shift of workers in the economy from the agricultural sector to the nonagricultural sector
D) an influx of immigrant labour into an economy without any accompanying technological
change
Answer: A
Diff: 2
Type: MC
Page Ref: 152-153
Topic: Determinants of Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Role of Technological Change in Growth
28) Botswana's rapid growth can be explained by
A) protection of private property and avoiding political instability.
B) investment in human capital from 1960 through 2009.
C) the movement of workers from the agricultural sector to the manufacturing sector.
D) an increase in labour force participation.
Answer: A
Diff: 2
Type: MC
Page Ref: 153-154
Topic: Determinants of Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: Making the Connection: Rapid Economic Growth in Botswana?
29) Which of the following does not describe governmental policy actions that are helpful in
supporting growth in an economy? Governmental policies that
A) avoid playing any role in developing communication systems.
B) provide secure rights to private property.
C) establish an independent court system that enforces contracts.
D) facilitate the development of an efficient financial system.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 153
Topic: Determinants of Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
6-10
Copyright © 2015 Pearson Canada Inc.
30) Potential GDP refers to
A) the level of GDP attained when all firms are producing at capacity.
B) the level of GDP attained by the country with the highest growth in real GDP in a given year.
C) the difference between the highest level of real GDP per quarter and the lowest level of real
GDP per quarter within any given year.
D) the extent to which real GDP is above or below nominal GDP.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 154
Topic: Potential GDP
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
31) The output gap is
A) negative if potential GDP is smaller than real GDP.
B) a measure of potential output.
C) negative if potential GDP is larger than real GDP.
D) shrinking all the time.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 155
Topic: Potential GDP
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
32) Actual real GDP will be above potential GDP if
A) firms are producing below capacity.
B) firms are producing at capacity.
C) firms are producing above capacity.
D) inflation is rising.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 154-155
Topic: Potential GDP
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
6-11
Copyright © 2015 Pearson Canada Inc.
33) If the federal government regulated airline ticket prices to prevent them from falling during a
recession, there would be a ________ of airline tickets which would likely ________ the airline
profits.
A) shortage; increase
B) shortage; reduce
C) surplus; increase
D) surplus; reduce
Answer: D
Diff: 2
Type: MC
Page Ref: 168-169
Topic: Determinants of Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: An Inside LOOK: Bombardier and the Global Recession
34) According to the "Rule of 70," it will take 4 years for real GDP per capita to double when the
growth rate of real GDP per capita is
A) 4 percent.
B) 12.25 percent.
C) 17.5 percent.
D) 28 percent.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 151
Topic: The Rule of 70
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Analytic Skills
Special Feature: None
35) Centrally-planned economies tend to grow more quickly than market economies.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 152
Topic: Long-Run Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
36) Accumulating a greater number of inputs will ensure that an economy will experience
economic growth.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 152
Topic: Determinants of Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
6-12
Copyright © 2015 Pearson Canada Inc.
37) Increases in capital per hour worked cannot sustain high rates of economic growth unless
accompanied by technological change.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 151-152
Topic: Determinants of Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
38) Potential GDP is the maximum output a firm is capable of producing.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 154-155
Topic: Potential GDP
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
39) The growth rate of real GDP in Canada rises from 4.2% to 4.4%. Explain and calculate how
this increase in the growth rate of real GDP affects the number of years it will take for real GDP
to double.
Answer: The "Rule of 70" states that the number of years it takes for GDP to double is equal to
70 divided by the growth rate of real GDP. Given this formula, at a growth rate of 4.2%, it will
take 70/4.2 = 16.67 years for GDP to double. If the growth rate increases by two-tenths of a
percent (to 4.4%), the number of years it will take for GDP to double will decrease to 70/4.4 =
15.9 years.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 151
Topic: The Rule of 70
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Analytic Skills
Special Feature: None
40) How is economic growth connected to life expectancy? Based on this connection, in what
country would you expect to have a longer life expectancy, Canada or India? Explain.
Answer: Countries with the lowest levels of GDP per capita also have the shortest life
expectancies. Technological advances in medicine, agriculture, and water purification improve
nutrition and increase incomes. Since economic growth in Canada has historically been greater
than that in India, we would expect Canadian residents to have a longer life expectancy than
residents of India. However, as India's economy begins to grow more dramatically, life
expectancy in India is rapidly approaching that of Canada.
Diff: 2
Type: ES
Page Ref: 149-150
Topic: Determinants of Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: Making the Connection: Economic Prosperity and Health
6-13
Copyright © 2015 Pearson Canada Inc.
41) What is "human capital," and how does human capital affect labour productivity and
economic growth?
Answer: Human capital is the accumulated knowledge and skills workers acquire from
education and training or from their life experiences. Increases in human capital increase labour
productivity, which will eventually increase real GDP per capita.
Diff: 1
Type: ES
Page Ref: 151-152
Topic: Determinants of Economic Growth
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Role of Technological Change in Growth
42) What factors increase potential GDP? Include a definition of potential GDP in your answer.
Answer: Potential GDP is the level of GDP attained when all firms are producing at capacity.
Growth in potential GDP is determined by growth in the labour force and the capital stock and
by technological change. Capital investments accompany growth in the labour force,
encouraging technological progress and increasing potential GDP.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 154-155
Topic: Potential GDP
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
43) When potential GDP increases, is it necessarily the case that real GDP increases as well?
Explain.
Answer: An increase in potential GDP is a result of an expanding labour force, growth in the
capital stock, and technological change. The actual level of real GDP may be higher or lower
than potential GDP. If firms are all producing at capacity, we would expect potential GDP and
real GDP to be equal. If firms are producing below capacity, we would expect real GDP to be
below potential GDP. And if firms are temporarily producing above capacity, real GDP will be
above potential GDP.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 154-155
Topic: Potential GDP
Learning Outcome: 6.1 Discuss the importance of long-run economic growth
AACSB: Reflective Thinking
Special Feature: None
6-14
Copyright © 2015 Pearson Canada Inc.
44) The only way the standard of living of the average person in a country can increase is if
________ increases faster than ________.
A) production; population
B) population; GDP per capita
C) population; production
D) population; income
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 148
Topic: Long-Run Economic Growth
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
45) When production in an economy grows more quickly than the population in that economy,
which of the following must be occurring?
A) Real GDP is falling.
B) Incomes are growing at a slower rate than the population.
C) Real GDP per capita is rising.
D) Living standards are falling.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 148
Topic: Long-Run Economic Growth
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
46) Which of the following describes the growth in real GDP per person in Canada from 1960 to
the present?
A) It has decreased.
B) It has increased by three times.
C) It has doubled.
D) It has increased by four times.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 149
Topic: Long-Run Economic Growth
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
Special Feature: None
6-15
Copyright © 2015 Pearson Canada Inc.
47) The best measure of the standard of living is
A) nominal GDP.
B) real GDP.
C) nominal GDP per capita.
D) real GDP per capita.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 148-149
Topic: Long-Run Economic Growth
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
48) According to Robert Fogel, economic growth ________ health, and health ________
economic growth.
A) improves; worsens
B) improves; improves
C) worsens; improves
D) worsens; worsens
Answer: B
Diff: 1
Type: MC
Page Ref: 149-150
Topic: Long-Run Economic Growth
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: Making the Connection: Economic Prosperity and Health
49) Suppose that real GDP for 2010 was $1,000 billion and real GDP for 2011 was $1,100
billion. What is the rate of growth of real GDP between 2010 and 2011?
A) 1%
B) 2%
C) 5%
D) 10%
Answer: D
Diff: 1
Type: MC
Page Ref: 151
Topic: Calculating Growth Rates
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
6-16
Copyright © 2015 Pearson Canada Inc.
50) Suppose that real GDP for 2010 was $1,000 billion and real GDP for 2011 was $950 billion.
What is the rate of growth of real GDP between 2010 and 2011?
A) -10%
B) -5%
C) -2%
D) -1%
Answer: B
Diff: 1
Type: MC
Page Ref: 151
Topic: Calculating Growth Rates
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
51) If GDP grew 3% in 1990, 2.2% in 1991, and 2.5% in 1992, what is the average annual
growth rate over this period?
A) 5%
B) 4%
C) 2.6%
D) -2.2%
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 151
Topic: Calculating Growth Rates
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
6-17
Copyright © 2015 Pearson Canada Inc.
Table 6.2
Year
2010
2011
2012
2013
Real GDP (billions
of 2007 dollars)
$1,600
1,650
1,675
1,700
52) Refer to Table 6.2. Using the table above, what is the approximate growth rate of real GDP
from 2010 to 2011?
A) -4%
B) -3%
C) 3%
D) 4%
Answer: C
Diff: 2
Type: MC
Page Ref: 151
Topic: Calculating Growth Rates
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
53) Refer to Table 6.2. Using the table above, what is the approximate growth rate of real GDP
from 2011 to 2012?
A) -1.5%
B) -1%
C) 1%
D) 1.5%
Answer: D
Diff: 2
Type: MC
Page Ref: 151
Topic: Calculating Growth Rates
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
6-18
Copyright © 2015 Pearson Canada Inc.
54) Refer to Table 6.2. Using the table above, what is the approximate average annual growth
rate from 2010 to 2013?
A) -1%
B) 1%
C) 2%
D) 3%
Answer: C
Diff: 2
Type: MC
Page Ref: 151
Topic: Calculating Growth Rates
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
55) If GDP grows at a rate of 3% per year, approximately how long will it take for GDP to
double in size?
A) 12 years
B) 21 years
C) 23 years
D) 35 years
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 151
Topic: The Rule of 70
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
56) If an economy is growing at a rate of 2.5% per year, how long will it take the economy to
double in size?
A) 60 years
B) 43 years
C) 36 years
D) 28 years
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 151
Topic: The Rule of 70
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
6-19
Copyright © 2015 Pearson Canada Inc.
57) The rule of 70 states that
A) it takes an economy 70 years to double its real GDP.
B) the number of years it takes an economy to double in size is 70 divided by the growth rate.
C) the number of years it takes an economy to double in size is the growth rate times 70.
D) the number of years it takes an economy to double in size is the growth rate divided by 70.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 151
Topic: The Rule of 70
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
58) If, between 2001 and 2011, the economy's real GDP grew from $20 billion to $40 billion,
what was the average annual growth rate in the economy?
A) 3%
B) 7%
C) 20%
D) 100%
Answer: B
Diff: 2
Type: MC
Page Ref: 151
Topic: The Rule of 70
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
59) If GDP is currently $1.7 trillion and is growing at a rate of 2.3% per year, how long will it
take GDP to reach $3.4 trillion?
A) about 15 years
B) about 17 years
C) about 25 years
D) about 30 years
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 151
Topic: The Rule of 70
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
6-20
Copyright © 2015 Pearson Canada Inc.
60) Labour productivity is
A) the quantity of output produced in one hour by several workers.
B) the quantity of capital one worker can produce in one day.
C) the quantity of output produced by one worker or by one hour of work.
D) the quantity of output produced in one hour by one machine.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 151
Topic: Labour Productivity
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
61) Labour productivity will increase if the ________ increases and ________.
A) quantity of capital per hour worked; technology improves
B) quantity of labour per unit of capital; technology improves
C) quantity of capital per hour worked; immigration increases while capital is fixed
D) quantity of labour per unit of capital; immigration increases while capital is fixed
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 152
Topic: Labour Productivity
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
62) An increase in labour productivity
A) allows the average consumer to increase consumption.
B) will increase the labour force participation rate.
C) will create short-run, but not long-run, economic growth.
D) will increase output and decrease wages in the long run.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 151-152
Topic: Labour Productivity
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
6-21
Copyright © 2015 Pearson Canada Inc.
63) ________ depend on increases in labour productivity.
A) Advances in technology
B) Increases in real GDP per capita
C) Decreases in the inflation rate
D) Decreases in the unemployment rate
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 151-152
Topic: Labour Productivity
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
64) Workers in high-income countries have ________ to work with than do workers in lowincome countries.
A) less physical capital
B) more physical capital
C) more labour
D) more labour and less physical capital
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 151-152
Topic: Determinants of Economic Growth
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
65) What is human capital?
A) a slang term for the underground labour market
B) manufactured goods that are used to produce other goods
C) accumulated knowledge and skills acquired by a worker
D) the manager or owner of a business
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 152
Topic: Determinants of Economic Growth
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-22
Copyright © 2015 Pearson Canada Inc.
66) Which of the following is most likely to be able to sustain economic growth in an economy?
A) sustained increases in the labour force participation rate
B) technological change
C) increases in capital per hour worked
D) accumulations of economic resources
Answer: B
Diff: 2
Type: MC
Page Ref: 152-153
Topic: Determinants of Economic Growth
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Role of Technological Change in Growth
67) If, as economist Alwyn Young has suggested, high growth rates in Singapore are not a result
of technological progress, how are growth rates in Singapore expected to change over time?
A) Without technological progress, the high growth rates cannot be sustained.
B) As long as the labour force participation rate is rising, growth can still continue, despite a lack
of technological progress.
C) As long as the amount of capital per hour worked continues to expand, the growth rate in
Singapore will continue to rise at an increasing rate.
D) Agricultural workers will continue to expand their productivity, thereby allowing Singapore
to achieve growth rates above those of higher-income countries.
Answer: A
Diff: 2
Type: MC
Page Ref: 152-153
Topic: Determinants of Economic Growth
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Role of Technological Change in Growth
68) Economists point to the "pro-growth" policies of the government of which African country in
explaining a high growth rate relative to other African countries?
A) South Africa
B) Botswana
C) Mali
D) Malawi
Answer: B
Diff: 1
Type: MC
Page Ref: 153-154
Topic: Determinants of Economic Growth
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
Special Feature: Making the Connection: Rapid Economic Growth in Botswana?
6-23
Copyright © 2015 Pearson Canada Inc.
69) Which of the following will result in an increase in labour productivity?
A) a decrease in the number of people attending institutions of higher education
B) a decline in the amount of human capital per worker
C) an increase in technology
D) a decline in the capital stock per hour worked
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 152
Topic: Labour Productivity
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
70) Potential GDP is defined as
A) the maximum GDP that the economy can produce.
B) the amount of GDP produced if there is no frictional unemployment.
C) the level of GDP attained when all firms are producing at capacity.
D) the amount of GDP produced if there is no structural unemployment.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 154
Topic: Potential GDP
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
71) Potential GDP is estimated to grow at a rate of 2% in Canada. Actual GDP in Canada
A) always grows at a slower rate than potential GDP.
B) always grows at a faster rate than potential GDP.
C) always grows at the same rate as potential GDP.
D) is the same as potential GDP if all firms in the economy are working at capacity.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 151-154
Topic: Potential GDP
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-24
Copyright © 2015 Pearson Canada Inc.
72) Potential GDP in Canada
A) does not change over time.
B) grows as the economy grows.
C) changes over a given business cycle.
D) declines over time.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 154-155
Topic: Potential GDP
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
73) Potential GDP is always greater than real GDP in an economy.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 154-155
Topic: Potential GDP
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
74) The key to sustained economic growth is increasing labour productivity.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 151-152
Topic: Labour Productivity
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
75) Market economies tend to grow more quickly than centrally-planned economies.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 151-153
Topic: Long-Run Economic Growth
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-25
Copyright © 2015 Pearson Canada Inc.
76) Economic growth depends more on technological change than on increases in capital per
hour worked.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 151-153
Topic: Long-Run Economic Growth
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
77) Explain why a centrally-planned economy might not grow as rapidly as a market economy.
Answer: Technological change is very important for growth. Simply accumulating inputs will
not ensure growth unless technological change occurs. This is essentially what happened in the
Soviet Union. The former Soviet Union failed to enhance growth when it simply increased its
capital to labour ratio because it did not foster technological change at the same time. In a market
economy, entrepreneurs make decisions about employing technology and seeking innovation. If
the entrepreneur makes a correct decision, then he or she stands to make a large profit. In a
centrally planned economy, these decisions are made by managers employed by the government.
If the innovation works out, the manager may not reap any sort of benefit from it. Likewise, if
the innovation fails, the manager's financial position is unaffected. Because of this, managers
employed by the central government may be slower to adopt new technologies as compared to
entrepreneurs in a market economy. The profit incentive spurs entrepreneurs in market
economies to move more quickly.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 151-153
Topic: Determinants of Economic Growth
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-26
Copyright © 2015 Pearson Canada Inc.
78) Use the rule of 70 to illustrate how small differences in growth rates can have a large impact
on how rapidly the standard of living in a country increases.
Answer: The rule of 70 refers to a calculation that determines, for a given growth rate, the
number of years it will take for real GDP to double in an economy. The formula is as follows:
Number of years to double =
.
If the growth rate is 1%, it will take 70 years for GDP to double. If the growth rate is 2%, GDP
will double in 70/2 years = 35 years. A small increase in the growth rate (from 1% to 2%) cuts
the years it takes for the economy to double in half. If the growth rate is 5%, GDP will double in
14 years. So when the rate of growth jumps 3 more percentage points, GDP doubles in less than
half the time as when growth was 2%
Comment: Recurring
Diff: 1
Type: SA Page Ref: 151
Topic: The Rule of 70
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
79) Suppose you are a famous international economic advisor. You have been asked to asses the
possibilities for growth in an African country. It is a country abundant in labour and some natural
resources. The capital to labour ratio is low. It has a free market economy. You have found that
this country does not have a very strong banking system, however the political system is stable
and the government does a good job of protecting property rights. Assess this country's prospects
for growth. Recommend two things that would enhance the country's growth.
Answer: The prospects for this country's growth are fairly good. It has a lot of labour and natural
resources. Having abundant factors of production can contribute to strong growth. The free
market system is also another characteristic that should help enhance economic growth.
Entrepreneurs can respond quickly and adopt technological innovations. We know that
technological change can increase labour productivity. Also, the fact that the government
enforces property rights can help the free market to flourish. The political stability of the
government is also a good sign. Investors won't be afraid to risk investing in the country. Two
things the country could do to increase growth would be to raise the capital-to-labour ratio and
develop the financial sector. The country could increase the capital-to-labour ratio by attracting
foreign investment, or perhaps by giving tax breaks to firms that increase the amount they invest.
This is probably one of the most effective ways to increase growth.
Comment: Recurring
Diff: 3
Type: SA Page Ref: 151-154
Topic: Determinants of Economic Growth
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-27
Copyright © 2015 Pearson Canada Inc.
80) Outline the various actions the government sector could take to promote growth.
Answer: The government should secure private property rights. Private property rights are
crucial for a smoothly functioning market system. The government should create a court system
that will enforce contracts. It should also assist in the development of the country's financial
system. Additional endeavors include strengthening the education, communication, and
transportation systems.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 151-154
Topic: Determinants of Economic Growth
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6.2 Saving, Investment, and the Financial System
1) Increasing the amount of consumption spending and reducing the amount of savings
________ investment expenditures, and ________ long-run economic growth in the economy.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: D
Diff: 2
Type: MC
Page Ref: 166
Topic: Determinants of Economic Growth
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: Economics in Your Life: Do You Help the Economy More if You Spend or if
You Save?
2) A firm can fund an expansion of its operations by
A) issuing bonds.
B) buying stock.
C) paying dividends.
D) loaning money.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 155
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
6-28
Copyright © 2015 Pearson Canada Inc.
3) Liquidity refers to
A) the ability to purchase a very small share of a company.
B) the ease with which an asset can be converted into a different asset.
C) the number of times a dollar changes hands in the creation of GDP in an economy.
D) the number of shares of stock a corporation issues.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 156
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
4) Which of the following is most liquid?
A) a mutual fund share
B) a government bond
C) a corporate bond
D) a five dollar bill
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 156
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
5) Financial securities that represent promises to repay a fixed amount of funds are known as
A) bonds.
B) stocks.
C) pension funds.
D) insurance premiums.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 155
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
6-29
Copyright © 2015 Pearson Canada Inc.
6) One difference between stocks and bonds is that
A) stocks are financial securities, while bonds are labour market securities.
B) stocks are usually issued in electronic form, while bonds are usually issued in paper form.
C) stocks represent ownership in companies, while bonds represent ownership in banks.
D) stocks do not involve a promise to repay a purchaser of the stock, while bonds represent a
promise to repay the purchase price of the bond.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 155
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
7) In a closed economy, which of the following components of GDP is not included?
A) investment
B) government spending
C) net exports
D) consumption
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 157
Topic: Open and Closed Economies
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
8) In a closed economy, which of the following equations reflects investment? (Y = GDP,
C = Consumption, G = Government purchases, T = Taxes, and TR = Transfers)
A) Y - C - G
B) Y - C - T
C) Y - T + TR
D) C + G -T
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Open and Closed Economies
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-30
Copyright © 2015 Pearson Canada Inc.
9) In a closed economy, private saving is equal to which of the following? (Y = GDP,
C = Consumption, G = Government purchases, T = Taxes, and TR = Transfers)
A) Y - C - T
B) Y - G - T
C) Y - G - T + TR
D) Y + TR - C - T
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Open and Closed Economies
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
10) In a closed economy, public saving is equal to which of the following? (Y = GDP,
C = Consumption, G = Government purchases, T = Taxes, and TR = Transfers)
A) Y - C - T
B) Y - G - T
C) T - G - TR
D) Y - C - T + TR
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Open and Closed Economies
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-31
Copyright © 2015 Pearson Canada Inc.
Scenario 6.1
Consider the following data for a closed economy:
Y = $1 200 billion
C = $800 billion
I = $200 billion
G = $200 billion
TR = $200 billion
T = $300 billion
11) Refer to Scenario 6.1. Based on the information above, what is the level of private saving in
the economy?
A) $100 billion
B) $300 billion
C) $400 billion
D) $800 billion
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
12) Refer to Scenario 6.1. Based on the information above, what is the level of public saving?
A) $0
B) $100 billion (a surplus of $100 billion)
C) $200 billion (a surplus of $200 billion)
D) negative $100 billion (a deficit of $100 billion)
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-32
Copyright © 2015 Pearson Canada Inc.
13) In a closed economy, public saving plus private saving is equal to
A) investment.
B) taxes minus transfers.
C) the budget surplus.
D) the budget deficit.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Open and Closed Economies
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
14) Under which of the following circumstances would the government be running a deficit?
A) G = $5 trillion
T = $5 trillion
TR = $1 trillion
B) G = $5 trillion
T = $7 trillion
TR = $1 trillion
C) G = $7 trillion
T = $7 trillion
TR = $0
D) G = $7 trillion
T = $10 trillion
TR = $3 trillion
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-33
Copyright © 2015 Pearson Canada Inc.
15) Under which of the following circumstances would private saving be positive in a closed
economy?
A) Y = $10 trillion
C = $5 trillion
TR = $2 trillion
G = $2 trillion
public saving = $1 trillion
B) Y = $9 trillion
C = $5 trillion
TR = $1 trillion
G = $1 trillion
public saving = $3 trillion
C) Y = $8 trillion
C = $2 trillion
TR = $4 trillion
G = $2 trillion
public saving = $4 trillion
D) Y = $6 trillion
C = $2 trillion
TR = $8 trillion
G = $3 trillion
public saving = $1 trillion
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-34
Copyright © 2015 Pearson Canada Inc.
16) What is investment in a closed economy if you have the following economic data?
Y = $10 trillion
C = $5 trillion
TR = $2 trillion
G = $2 trillion
A) $2 trillion
B) $3 trillion
C) $5 trillion
D) cannot be determined without information on taxes (T)
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
17) There is a government budget surplus if
A) T - TR > G.
B) G > T.
C) G > TR.
D) TR < T.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
18) If government saving is negative, then
A) T > TR.
B) G > T.
C) T - TR < G.
D) Y + TR < C - T.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-35
Copyright © 2015 Pearson Canada Inc.
19) When the government runs a budget deficit, we would expect to see that
A) private saving will fall.
B) investment will fall.
C) G + TR < T.
D) public saving is positive.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
20) There is a federal budget deficit when
A) the government spends less that it collects in taxes.
B) the government spends more that it collects in taxes.
C) the government spends the same amount it collects in taxes.
D) taxes are too high.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
21) If government purchases are $400 million, taxes are $700 million, and transfers are $200
million, which of the following is true?
A) Public saving is $500 million.
B) The budget deficit is $100 million.
C) The budget deficit is $500 million.
D) Public saving is $100 million.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-36
Copyright © 2015 Pearson Canada Inc.
22) Which of the following will increase investment spending in the economy, holding
everything else constant?
A) an increase in the federal government surplus
B) an increase in the budget deficit
C) an increase in consumer dissavings
D) an increase in transfer payments
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
23) Borrowers are ________ of loanable funds, and lenders are ________ of loanable funds.
A) demanders; suppliers
B) suppliers; demanders
C) suppliers; suppliers
D) demanders; demanders
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 158
Topic: Demand and Supply of Loanable Funds
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
24) The demand for loanable funds is downward sloping because the ________ the interest rate,
the ________ the number of profitable investment projects a firm can undertake, and the
________ the quantity demanded of loanable funds.
A) lower; greater; greater
B) lower; smaller; greater
C) greater; greater; greater
D) greater; smaller; greater
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 158
Topic: Demand and Supply of Loanable Funds
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
6-37
Copyright © 2015 Pearson Canada Inc.
25) A government budget surplus from reduced government spending (no change in net taxes)
will ________ the level of investment in the economy and ________ the level of saving (private
plus public) in the economy.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 161
Topic: Crowding Out
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
26) If consumers decide to be more frugal and save more out of their income, then this will cause
A) a shift in the supply curve for loanable funds to the right.
B) a shift in the supply curve for loanable funds to the left.
C) a movement to the right along the supply curve for loanable funds.
D) a movement to the left along the supply curve for loanable funds.
Answer: A
Diff: 1
Type: MC
Page Ref: 158
Topic: Demand and Supply of Loanable Funds
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: Solved Problem: How Does a Consumption Tax Affect Saving, Investment, the
Interest Rate, and Economic Growth?
27) An increase in the demand for loanable funds will occur if there is
A) an increase in the real interest rate.
B) a decrease in the real interest rate.
C) an increase in expected profits from firm investment projects.
D) an increase in the nominal interest rate accompanied by an equal increase in inflation.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 158
Topic: Demand and Supply of Loanable Funds
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-38
Copyright © 2015 Pearson Canada Inc.
28) Which of the following would you expect to increase the equilibrium interest rate?
A) an increase in the percentage of income after net taxes that households save
B) an increase in the budget deficit
C) a decrease in the profitability of investment projects firms are considering
D) a change from an income tax to a consumption tax
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 158-159
Topic: Demand and Supply of Loanable Funds
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
Figure 6.1
29) Refer to Figure 6.1. Which of the following is consistent with the graph depicted above?
A) An expected recession decreases the profitability of new investment.
B) Technological change increases the profitability of new investment.
C) The government runs a budget surplus.
D) Households become spendthrifts and begin to save less.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157-159
Topic: Demand and Supply of Loanable Funds
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-39
Copyright © 2015 Pearson Canada Inc.
Figure 6.2
30) Refer to Figure 6.2. Which of the following is consistent with the graph depicted above?
A) An expected expansion increases the profitability of new investment.
B) The government runs a budget surplus.
C) There is a shift from an income tax to a consumption tax.
D) New government regulations decrease the profitability of new investment.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157-159
Topic: Demand and Supply of Loanable Funds
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-40
Copyright © 2015 Pearson Canada Inc.
Figure 6.3
31) Refer to Figure 6.3. Which of the following is consistent with the graph depicted above?
A) Taxes are changed so that real interest income is taxed rather than nominal interest income.
B) An expected recession decreases the profitability of new investment.
C) The government runs a budget deficit.
D) Technological change increases the profitability of new investment.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157-159
Topic: Demand and Supply of Loanable Funds
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-41
Copyright © 2015 Pearson Canada Inc.
Figure 6.4
32) Refer to Figure 6.4. Which of the following is consistent with the graph depicted?
A) an increase in household income
B) an increase in transfer payments to households
C) an increase in the proportion of income after net taxes used for consumption
D) an increase in tax revenues collected by the government
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157-159
Topic: Demand and Supply of Loanable Funds
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
33) In comparison to a government that runs a balanced budget, when the government runs a
budget deficit,
A) the equilibrium interest rate will fall.
B) business investment will fall.
C) household savings will fall.
D) none of the above
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 161
Topic: Crowding Out
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
6-42
Copyright © 2015 Pearson Canada Inc.
34) The response of investment spending to an increase in the government budget deficit is
called
A) expansionary investment.
B) private dissaving.
C) crowding out.
D) income minus net taxes.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 161
Topic: Crowding Out
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
Figure 6.5
35) Refer to Figure 6.5. "Crowding out" of firm investment as a result of a budget deficit is
illustrated by the movement from ________ in the graph above.
A) A to B
B) B to A
C) B to C
D) C to A
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 160-161
Topic: Crowding Out
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-43
Copyright © 2015 Pearson Canada Inc.
36) How will an increase in the government budget surplus as a result of lower government
spending (with no change in net taxes) affect private saving in the economy?
A) Private saving will increase by the amount of increase in the budget surplus.
B) Private saving will decrease by the amount of increase in the budget surplus.
C) Private saving will decrease by less than the amount of increase in the budget surplus.
D) Private saving will be unaffected by the increase in the budget surplus.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 160-161
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
37) How would the equilibrium interest rate respond to a change from an income tax to a
consumption tax?
A) The equilibrium interest rate would rise.
B) The equilibrium interest rate would fall.
C) The equilibrium interest rate would be unaffected.
D) The equilibrium interest rate may rise or fall based on whether the demand or supply of
loanable funds changes.
Answer: B
Diff: 2
Type: MC
Page Ref: 161-162
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: Solved Problem: How Does a Consumption Tax Affect Saving, Investment, the
Interest Rate, and Economic Growth?
38) How would the equilibrium quantity of loanable funds respond to a change from an income
tax to a consumption tax?
A) The equilibrium quantity of loanable funds would rise.
B) The equilibrium quantity of loanable funds would fall.
C) The equilibrium quantity of loanable funds would be unaffected.
D) The equilibrium quantity of loanable funds may rise or fall based on whether household
saving increases or decreases as a result of the change from an income tax to a consumption tax.
Answer: A
Diff: 2
Type: MC
Page Ref: 161-162
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: Solved Problem: How Does a Consumption Tax Affect Saving, Investment, the
Interest Rate, and Economic Growth?
6-44
Copyright © 2015 Pearson Canada Inc.
39) Which of the following would encourage economic growth through increases in the capital
stock?
A) a change from an income tax to a consumption tax
B) an increase in household saving
C) a decrease in the government deficit
D) all of the above
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 158-161
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
40) If net taxes fall by $80 billion, we would expect
A) the government deficit to fall by $80 billion.
B) household saving to rise by $80 billion.
C) household saving to rise by less than $80 billion.
D) household saving to fall by more than $80 billion.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 160-161
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
41) Which of the following will not occur as the result of a decrease in net taxes?
A) decreased household saving
B) decreased government saving
C) a shift to the left of the supply curve for loanable funds
D) all of the above
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 158-161
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-45
Copyright © 2015 Pearson Canada Inc.
42) If, in an economy experiencing inflation, the government decided to tax real interest income
rather than nominal interest income, this change would cause the real interest rate to ________
and the equilibrium quantity of loanable funds to ________.
A) fall; rise
B) fall; fall
C) rise; fall
D) rise; rise
Answer: A
Diff: 2
Type: MC
Page Ref: 161-162
Topic: Demand and Supply of Loanable Funds
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: Solved Problem: How Does a Consumption Tax Affect Saving, Investment, the
Interest Rate, and Economic Growth?
43) Countries without well-developed financial systems are able to sustain high levels of
economic growth.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 155-157
Topic: Long-Run Economic Growth
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
44) In an open economy, there is interaction with other economies in terms of both trading of
goods and services and borrowing and lending.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 156-157
Topic: Open and Closed Economies
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
6-46
Copyright © 2015 Pearson Canada Inc.
45) If there is public dissaving, investment spending in the economy will decline, holding
everything else constant.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 157
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
46) An increase in the real interest rate will decrease consumption and investment.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 158-159
Topic: Demand and Supply of Loanable Funds
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: None
47) Use the equations for public and private saving to demonstrate how total saving in the
economy equals investment.
Answer: Private saving is equal to Y + TR - C - T, and public saving is equal to T - G - TR.
Adding private saving and public saving together yields (Y + TR - C - T) + (T - G - TR) =
Y - C - G. In a closed economy (with no net exports), Y = C + I + G, so Y - C - G = I, and the sum
of public and private saving is equal to investment.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-47
Copyright © 2015 Pearson Canada Inc.
48) Consider the following data for a closed economy:
a. Y = $12 trillion
b. C = $8 trillion
c. I = $3 trillion
d. TR = $2 trillion
e. T = $3 trillion
Use the data provided to calculate the level of private saving and the level of public saving and
demonstrate their relationship to investment.
Answer: Private saving is equal to Y + TR - C - T, and public saving is equal to T - G - TR.
Plugging in the appropriate numbers for private saving, private saving = Y + TR - C - T = $12t +
$2t - $8t - $3t = $3 trillion. Using the identity for output in a closed economy, G = Y - C - I =
$12t - $8t - $3t = $1t, so public saving = $3t - $1t - $2t = $0. Adding together private saving of
$3 trillion and public saving of $0 yields saving of $3 trillion, which is exactly equal to
investment of $3 trillion.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-48
Copyright © 2015 Pearson Canada Inc.
49) Explain and show graphically how an increase in household saving affects the equilibrium
interest rate and the equilibrium quantity of loanable funds.
Answer: An increase in household saving increases the supply of loanable funds, shifting the
supply curve for loanable funds to the right, as shown below. The increase in the supply of
loanable funds results in a decrease in the equilibrium interest rate and an increase in the
equilibrium quantity of loanable funds.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 159-160
Topic: Demand and Supply of Loanable Funds
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-49
Copyright © 2015 Pearson Canada Inc.
50) Explain and show graphically how government deficits can "crowd out" private investment.
Answer: When the government runs a deficit public saving falls, reducing the supply of loanable
funds and shifting the supply curve for loanable funds to the left, as shown below. The decrease
in the supply of loanable funds results in an increase in the equilibrium interest rate and a
decrease in the equilibrium quantity of loanable funds, moving from point A to point B below. As
the equilibrium interest rate rises, the quantity of loanable funds demanded by firms for
investments in capital decreases. Increased government deficits raise interest rates, thereby
"crowding out" private investment by firms.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 159-160
Topic: Demand and Supply of Loanable Funds
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
6-50
Copyright © 2015 Pearson Canada Inc.
51) Explain and show graphically how an increase in government spending affects the
equilibrium interest rate in the market for loanable funds.
Answer: When government spending increases, government saving (T - G - TR) falls. This
decrease in government saving shifts the supply curve for loanable funds to the left, increasing
the equilibrium interest rate as shown below.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 159-160
Topic: Demand and Supply of Loanable Funds
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Analytic Skills
Special Feature: None
52) If net taxes rise by $150 billion would you expect household saving to fall by $150 billion,
by more than $150 billion, or by less than $150 billion?
Answer: Private saving is equal to Y - C - T, so if taxes increase private saving will fall. When
taxes increase, however, disposable income also falls, so households will consume less. With the
increase in taxes and the decrease in consumption, saving will fall, but buy less than $150
billion. Some of the decrease in taxes will be reflected by reduced consumption, not simply
reduced saving.
Diff: 3
Type: ES
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic
growth
AACSB: Reflective Thinking
Special Feature: Solved Problem: How Does a Consumption Tax Affect Saving, Investment, the
Interest Rate, and Economic Growth?
6-51
Copyright © 2015 Pearson Canada Inc.
53) ________ are financial securities that represent partial ownership of a firm.
A) Stocks
B) Bonds
C) Treasury bills
D) Certificates of deposit
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 155
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 5: Describe the key components and functions of a financial system
AACSB: Reflective Thinking
Special Feature: None
54) ________ are financial securities that represent promises to repay a fixed amount of funds.
A) Stocks
B) Bonds
C) Interest rates
D) Mutual funds
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 155
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 5: Describe the key components and functions of a financial system
AACSB: Reflective Thinking
Special Feature: None
55) What is one difference between stocks and bonds?
A) Bonds earn a higher rate of return than stocks.
B) Stocks earn a higher rate of return than bonds.
C) Bonds are purchased at a bank, while stocks are purchased through the federal government.
D) Stocks represent partial ownership in a firm, while bonds do not.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 155
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 5: Describe the key components and functions of a financial system
AACSB: Reflective Thinking
Special Feature: None
6-52
Copyright © 2015 Pearson Canada Inc.
56) Which one of the following is not considered a financial intermediary?
A) a bank
B) a pension fund
C) an insurance company
D) a credit counsellor
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 155
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 5: Describe the key components and functions of a financial system
AACSB: Reflective Thinking
Special Feature: None
57) ________ is the ease with which a financial security can be exchanged for another.
A) Risk
B) The face value
C) Liquidity
D) The rate of return
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 156
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 5: Describe the key components and functions of a financial system
AACSB: Reflective Thinking
Special Feature: None
58) Which of the following financial securities is most liquid?
A) a savings account
B) a share of stock
C) a cashier's cheque
D) a $20 bill
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 156
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 5: Describe the key components and functions of a financial system
AACSB: Reflective Thinking
Special Feature: None
6-53
Copyright © 2015 Pearson Canada Inc.
59) Which of the following is not one of the key services provided by the financial system?
A) decreasing taxes
B) risk sharing
C) liquidity
D) generating information
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 155-156
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 5: Describe the key components and functions of a financial system
AACSB: Reflective Thinking
Special Feature: None
60) A financial intermediary's main function is to match ________ with excess funds to
________ with shortages of funds.
A) savers; borrowers
B) borrowers; savers
C) governments; households
D) firms; insurance companies
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 155
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 5: Describe the key components and functions of a financial system
AACSB: Reflective Thinking
Special Feature: None
61) A country with no trade and no borrowing and lending relationships with other countries is
known as a(n)
A) planned economy.
B) market economy.
C) open economy.
D) closed economy.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 157
Topic: Open and Closed Economies
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-54
Copyright © 2015 Pearson Canada Inc.
62) In a closed economy,
A) I = Y - C - G.
B) I = Y + C - G.
C) I = Y - C + G.
D) I = Y + C + G.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Open and Closed Economies
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
63) Private saving is defined as
A) Y + TR - C - T.
B) T + G + TR.
C) T - G + TR.
D) Y + TR + C - T.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
64) Public saving in the economy can be increased by
A) lowering taxes.
B) raising government spending.
C) raising taxes.
D) raising transfer payments.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-55
Copyright © 2015 Pearson Canada Inc.
65) If real GDP in a closed economy is $40 billion, consumption is $20 billion, and government
purchases are $10 billion, what is investment?
A) $10 billion
B) $30 billion
C) $40 billion
D) $70 billion
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
66) If, in a closed economy, real GDP is $30 billion, consumption is $20 billion, and government
purchases are $5 billion, what is total saving in the economy?
A) $5 billion
B) $15 billion
C) $45 billion
D) $55 billion
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
67) In a closed economy, what is the relationship between saving and investment?
A) Saving is greater than investment.
B) Investment is greater than saving.
C) Investment is equal to saving.
D) Investment may be greater or smaller than saving.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Open and Closed Economies
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-56
Copyright © 2015 Pearson Canada Inc.
68) The sum of public and private saving in an economy is equal to
A) Y - C - T.
B) T - TR - G.
C) Y - C - G.
D) I - C - G.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
69) When the government runs a deficit, which of the following is true?
A) T > TR - G
B) G > T + TR
C) G > TR - T
D) T < G + TR
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
70) If taxes are less than transfers plus government spending, then
A) there is positive saving.
B) there is a balanced budget.
C) there is a budget surplus.
D) there is public dissaving.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
6-57
Copyright © 2015 Pearson Canada Inc.
71) There is public dissaving if
A) G + TR > T.
B) G + TR < T.
C) TR > G + T.
D) TR < G + T.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
72) Which of the following would increase public saving?
A) an increase in taxes
B) an increase in transfers
C) an increase in government purchases
D) All of the above would increase public saving.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
73) An increase in government purchases, ceteris paribus, will
A) increase public saving.
B) increase the supply of loanable funds.
C) reduce investment.
D) reduce real GDP.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157-158
Topic: Crowding Out
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-58
Copyright © 2015 Pearson Canada Inc.
74) The budget deficit is defined as
A) T - (G + TR), and this is negative.
B) T - (G + TR), and this is positive.
C) T + (G - TR), and this is negative.
D) T + (G + TR), and this is negative.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157-158
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
75) Which of the following statements about the federal budget deficit is true?
A) In 1985, the federal budget was balanced.
B) In 2000, the federal budget was in surplus.
C) In 2010, the federal budget was in surplus.
D) In 2014, the federal budget was in surplus.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 157
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
Special Feature: None
76) The federal budget deficit can be reduced by
A) raising taxes.
B) raising government spending.
C) raising transfer payments.
D) higher interest rates.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 157-158
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-59
Copyright © 2015 Pearson Canada Inc.
77) An increase in public saving has what impact on the market for loanable funds?
A) The supply of loanable funds increases.
B) The demand for loanable funds increases.
C) The supply of loanable funds decreases.
D) The demand for loanable funds decreases.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 158-159
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
78) The demand for loanable funds has a ________ slope because the lower the interest rate, the
________ the number of profitable investment projects, and the ________ the quantity of
loanable funds demanded.
A) negative; greater; greater
B) negative; greater; lower
C) negative; lower; greater
D) positive; lower; lower
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 158-159
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
79) An increase in the real interest rate does which of the following?
A) reduces the demand for loanable funds
B) reduces saving
C) reduces consumption spending
D) increases the demand for loanable funds
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 158-159
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
6-60
Copyright © 2015 Pearson Canada Inc.
80) The demand for loanable funds is determined by the willingness of ________ to borrow
money to engage in new investment projects.
A) government
B) households
C) banks
D) firms
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 158-159
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
81) Using the market for loanable funds, which of the following has the potential to raise the real
interest rate?
A) an increase in the demand for loanable funds
B) an increase in the quantity of loanable funds demanded
C) an increase in the supply of loanable funds
D) an increase in the quantity of loanable funds supplied
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 158-159
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Analytic Skills
Special Feature: None
82) An increase in the real interest rate results in which of the following?
A) an increase in the demand for loanable funds
B) a decrease in the demand for loanable funds
C) an increase in the quantity of loanable funds supplied
D) Both B and C will occur as a result of an increase in the real interest rate.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 158-159
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
6-61
Copyright © 2015 Pearson Canada Inc.
83) A decrease in the real interest rate will
A) increase consumption and reduce investment.
B) increase saving and investment.
C) decrease investment and government spending.
D) increase consumption and investment.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 158-159
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
84) The supply of loanable funds has a ________ slope because the greater the interest rate, the
________ the reward to saving, and the ________ the quantity of loanable funds supplied.
A) positive; lower; lower
B) positive; greater; lower
C) negative; lower; greater
D) positive; greater; greater
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 158-159
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
85) Equilibrium in the loanable funds market determines
A) the nominal interest rate.
B) the current interest rate.
C) the real interest rate.
D) the expected interest rate.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 158-159
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
6-62
Copyright © 2015 Pearson Canada Inc.
86) If technological change increases the profitability of new investments for firms, then the
________ curve for loanable funds will shift to the ________.
A) supply: right
B) supply; left
C) demand; right
D) demand; left
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 158-160
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Analytic Skills
Special Feature: None
87) Because ________ in the government budget deficit increase the real interest rate, budget
deficits can ________ firm investment.
A) increases; increase
B) decreases; increase
C) decreases; decrease
D) increases; decrease
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 161
Topic: Crowding Out
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-63
Copyright © 2015 Pearson Canada Inc.
88) Ebenezer Scrooge's (the main character in Charles Dickens' A Christmas Carol) change in
behaviour from miser to spender might actually be detrimental to the economy because
A) Scrooge's miserly saving helped contribute to the production of investment goods rather than
consumption goods.
B) Scrooge was happiest when he was saving money, and happiness is the key to economic
growth.
C) saving has to be greater than consumption for the economy to grow.
D) Scrooge's consumption habits were more detrimental to the environment than were his earlier
saving habits.
Answer: A
Diff: 2
Type: MC
Page Ref: 166
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: Economics in Your Life: Do You Help the Economy More if You Spend or if
You Save?
89) If technological change increases the profitability of new investment for firms, then the
________ curve for loanable funds will shift to the ________ and the equilibrium real interest
rate will ________.
A) supply; right; fall
B) supply; left; rise
C) demand; right; rise
D) demand; left; fall
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 159-160
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Analytic Skills
Special Feature: None
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Figure 6.6
90) Refer to Figure 6.6. The loanable funds market is in equilibrium, as shown in the figure
above. An increase in the supply of loanable funds could result in which of the following
combinations of the real interest rate and quantity of loanable funds at a new equilibrium?
A) The real interest rate is 5 percent, and the quantity of loanable funds is $150 million.
B) The real interest rate is 5 percent, and the quantity of loanable funds is $90 million.
C) The real interest rate is 3 percent, and the quantity of loanable funds is $150 million.
D) The real interest rate is 3 percent, and the quantity of loanable funds is $90 million.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 159-160
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Analytic Skills
Special Feature: None
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91) Refer to Figure 6.6. The loanable funds market is in equilibrium, as shown in the figure
above. As a result of an increase in the government budget deficit, the ________ for loanable
funds will ________, thereby ________ the equilibrium real interest rate and ________ the
equilibrium quantity of loanable funds.
A) demand; rise; increasing; decreasing
B) supply; rise; decreasing; increasing
C) demand; fall; decreasing; decreasing
D) supply; fall; increasing; decreasing
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 159-160
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Analytic Skills
Special Feature: None
92) Refer to Figure 6.6. The loanable funds market is given in the figure above. If the current
real interest rate is 5 percent, which of the following is true?
A) The loanable funds market is in equilibrium.
B) There is a surplus of loanable funds in the market.
C) There is a shortage of loanable funds in the market.
D) The quantity of loanable funds being demanded in the market is less than $90 million.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 159-160
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
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93) Refer to Figure 6.6. The market is in equilibrium. If the government budget deficit rises,
which of the following would you expect to see?
A) The quantity of loanable funds demanded by firms will rise above $120 million.
B) The quantity of loanable funds demanded by firms will fall below $120 million.
C) The budget deficit will have no impact on the quantity of loanable funds demanded by firms.
D) The interest rate will fall below 4 percent.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 159-160
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Analytic Skills
Special Feature: None
94) An increase in the government budget deficit will shift the ________ curve for loanable
funds to the ________ and the equilibrium real interest rate will ________.
A) supply; right; fall
B) supply; left; rise
C) demand; right; rise
D) demand; left; fall
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 159-161
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Analytic Skills
Special Feature: None
95) An increase in the government budget surplus will shift the ________ curve for loanable
funds to the ________ and the equilibrium real interest rate will ________.
A) supply; right; fall
B) supply; left; rise
C) demand; right; rise
D) demand; left; fall
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 159-161
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Analytic Skills
Special Feature: None
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96) Which of the following will increase the real interest rate?
A) an increase in the supply of loanable funds
B) an increase in household saving
C) an increase in the demand for loanable funds
D) an increase in the budget surplus
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 158-161
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Analytic Skills
Special Feature: None
97) What is the main difference between a consumption tax and an income tax?
A) A consumption tax requires households to pay taxes only on the income they have left after
consumption, while an income tax requires households pay taxes on all earned income before
consumption.
B) A consumption tax requires households to pay taxes only on the income they spend, while an
income tax requires households pay taxes on all earned income.
C) A consumption tax always generates less revenue than an income tax.
D) There is no difference between a consumption tax and an income tax.
Answer: B
Diff: 1
Type: MC
Page Ref: 161-162
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: Solved Problem: How Does a Consumption Tax Affect Saving, Investment, the
Interest Rate, and Economic Growth?
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98) Which of the following would occur if the federal government of Canada cut all income
taxes to zero and increased the GST (the federal consumption tax) to make up for the lost
revenue?
A) Consumption would increase.
B) The supply of loanable funds would decrease.
C) Saving would increase.
D) Tax revenues would rise.
Answer: C
Diff: 1
Type: MC
Page Ref: 161-162
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: Solved Problem: How Does a Consumption Tax Affect Saving, Investment, the
Interest Rate, and Economic Growth?
99) Retained earnings are sufficient to finance a firm's rapid expansion in a high-growth
economy.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 155
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 5: Describe the key components and functions of a financial system
AACSB: Reflective Thinking
Special Feature: None
100) Financial markets and financial intermediaries comprise the financial system.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 155
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 5: Describe the key components and functions of a financial system
AACSB: Reflective Thinking
Special Feature: None
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101) Empirical evidence shows that the impact of government budget deficits and surpluses on
the equilibrium interest rate is quite large.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 161
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
102) In an open economy, the relationship between GDP (Y) and expenditures is Y = C + I + G.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 157
Topic: Open and Closed Economies
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
103) In 2006, the federal government ended the special tax treatment of dividends paid by
income trusts, essentially raising the marginal tax rate on dividends. Using the loanable funds
market, describe what will happen to saving, investment, economic growth, the real interest rate,
and the quantity of loanable funds exchanged.
Answer: Dividends are the portion of corporate profits paid to shareholders. When taxes on
dividends are increased, this reduces the after-tax rate of return on stocks that offer dividends.
Because the return to saving would decrease, saving will decrease and the supply of loanable
funds will decrease. The shift to the left by the supply curve for loanable funds should raise the
real interest rate and decrease the quantity of loanable funds exchanged. This will reduce
investment spending in the economy. As investment spending shrinks, the capital stock and
capital per hour worked should fall, and the rate of economic growth should decrease.
Comment: Recurring
Diff: 3
Type: SA Page Ref: 157-161
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Analytic Skills
Special Feature: None
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104) Carefully define the two categories of saving in the economy.
Answer: There are two categories of saving in the economy: private saving by households and
public saving by the government. Private saving is what is left of income after consumption
expenditures and income taxes. Public saving is the amount of tax revenue that the government
collects minus government expenditures and transfer payments.
Comment: Recurring
Diff: 1
Type: SA Page Ref: 157
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
105) Using equations for public and private saving, show that saving must equal investment in a
closed economy. Begin with the expression for total saving in the economy.
Answer: Start with the expression of total saving in the economy. This is the sum of private
saving and public saving:
S = Sprivate + Spublic
(1)
where private saving is:
Sprivate = Y + TR - C - T.
(2)
This states that private saving is what is left over from household income after consumption
expenditures (C) and taxes (T) are subtracted and transfers (TR) are added.
Public saving is:
Spublic = T - G- TR.
(3)
Public saving is what is left over after government spending (G) and transfer payments (TR) are
subtracted from taxes (T).
Combining (2) and (3) into (1) we get
S = Y + TR - C - T + T - G- TR. Note that taxes and transfers cancel each other out, leaving:
S = Y - C - G.
(4)
Because we know that income (Y) is exactly equal to production or
Y = C + I + G in a closed economy, we can substitute the right-hand side of this expression into
(4), and we get S = C + I + G - C - G. The consumption values cancel, as does the level of
government spending, leaving S = I.
Comment: Recurring
Diff: 3
Type: SA Page Ref: 157
Topic: Open and Closed Economies
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
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106) Explain why increasing the government budget deficit can decrease investment spending.
Answer: Saving must equal investment in the economy; that is, S = I. Saving in the economy is
equal to the sum of private saving plus public saving or
S = Sprivate + Spublic, and because saving must equal investment we get:
I = Sprivate + Spublic.
Interpreting this expression, the larger saving is in the economy, the larger investment. One way
to increase saving is to increase public saving. Public saving is
Spublic = T - G - TR. The budget deficit is defined as the difference between taxes (T) and
government spending plus transfers. When the expression for public saving is negative, the
government is running a deficit. When this occurs, the total amount of saving in the economy
falls. Since the total amount of saving in the economy equals investment, investment falls.
Comment: Recurring
Diff: 3
Type: SA Page Ref: 157-161
Topic: Saving, Investment, and the Financial System
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
107) How does a decrease in the tax rate on income earned on saving affect saving, investment,
the interest rate, and economic growth?
Answer: One determinant of the amount of household saving is the interest rate or the after-tax
rate of return that households earn on the amount that they save. The higher the rate of return, the
more the household will save. Individuals care about the rate of return that they earn from saving
after taxes. Decreasing the tax rate on income earned from saving will increase the after-tax
return from saving.
Since the after-tax rate of return rises for every dollar invested, the supply of loanable funds
will increase, shifting the curve for loanable funds to the right. If the supply curve for loanable
funds shifts to the right, this will lower the interest rate. As the interest rate declines, more
investment projects become profitable. Firms will respond by increasing the amount of
investment. This will raise the amount of capital available per worker. As the capital-to-labour
ratio increases, so does labour productivity and growth in the economy.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 157-161
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Analytic Skills
Special Feature: None
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108) Explain why the demand curve for loanable funds has a negative slope.
Answer: The demand for loanable funds reflects the willingness of firms to borrow the money
that they need to launch new investment projects, such as building a new factory or overhauling
the equipment that they use for production. Most firms do not have the funds internally in
retained earnings to finance these projects, so they must borrow them. Firms undertake these
ventures in order to earn profit. Each of these projects has a rate of return. It is profitable for a
firm to undertake a project as long as the rate of return of the project exceeds the cost of
borrowing, or the interest rate. That is, if a firm expects to earn a 12% return on opening a new
factory, the project will be profitable if the firm can borrow the funds at a rate less than 12%. As
the interest rate falls, more investment projects become viable for the firm, so as the interest rate
falls, the quantity of loanable funds demanded rises because the will firm require more loanable
funds to invest in these newly profitable projects.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 158-159
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
109) Explain and show graphically how a decrease in household saving affects the equilibrium
interest rate and the equilibrium quantity of loanable funds.
Answer: A decrease in household saving decreases the supply of loanable funds, shifting the
supply curve for loanable funds to the left, as shown below. The decrease in the supply of
loanable funds results in an increase in the equilibrium interest rate and a decrease in the
equilibrium quantity of loanable funds.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 158-161
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Analytic Skills
Special Feature: None
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110) Explain and show graphically how a decrease in government spending affects the
equilibrium interest rate and equilibrium quantity of loanable funds in the market for loanable
funds.
Answer: When government spending decreases, government saving (T - G - TR) rises. This
increase in government saving shifts the supply curve for loanable funds to the right, decreasing
the equilibrium interest rate and increasing the equilibrium quantity of loanable funds, as shown
below.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 158-161
Topic: Demand and Supply of Loanable Funds
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Analytic Skills
Special Feature: None
6.3 The Business Cycle
1) Which of the following explains the cause of the change in the unemployment rate at the end
of a recession?
A) Firms are hesitant to rehire laid off workers as they continue to operate below capacity.
B) Firms rapidly hire new workers at the first sign of on an increase in demand for their goods.
C) Discouraged workers return to the labour force and this makes the unemployment rate fall.
D) Discouraged workers leave the labour force and this makes the unemployment rate rise.
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 165
Topic: The Effects of Recession on the Economy
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
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2) During the expansion phase of the business cycle, which of the following eventually
increases?
A) production
B) employment
C) income
D) all of the above
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 163
Topic: The Effects of Expansion on the Economy
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
3) During the recession phase of the business cycle
A) production is usually rising.
B) interest rates are usually falling.
C) unemployment is usually falling.
D) income is usually rising.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 162
Topic: The Effects of Recession on the Economy
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
4) The period between a business cycle peak and a business cycle trough is called
A) expansion.
B) recession.
C) diffusion.
D) recalculation.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 162
Topic: The Business Cycle
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
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5) In Canada, from 2001 to 2007, the business cycle was in a period of
A) expansion.
B) recession.
C) trough.
D) peak.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 163
Topic: The Business Cycle
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
6) The period of expansion ends with a ________ and the period of recession ends with a
________.
A) business cycle peak; business cycle trough
B) business cycle trough; business cycle peak
C) business cycle peak; business cycle peak
D) business cycle trough; business cycle trough
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 163
Topic: The Business Cycle
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
7) What is the name of the organization that officially defines business cycle peaks and troughs
in Canada?
A) the Bureau of Labour Statistics
B) the Bank of Canada
C) Statistics Canada
D) There is no such organization in Canada.
Answer: D
Diff: 1
Type: MC
Page Ref: 163
Topic: The Business Cycle
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
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8) As the economy nears the end of an expansion, which of the following do we typically see?
A) rising firm profits
B) rising levels of firm investment
C) rising interest rates
D) falling wages relative to output prices
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 163-164
Topic: The Effects of Expansion on the Economy
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
9) As the economy nears the end of a recession, which of the following do we typically see?
A) further decreases in consumer spending
B) increased spending on capital goods by firms
C) increasing interest rates
D) all of the above
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 163-164
Topic: The Effects of Recession on the Economy
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
10) The demand for durable goods
A) has decreased over time.
B) declines by a greater percentage than does GDP during a recession.
C) declines by a smaller percentage than does GDP during a recession.
D) rises by a greater percentage than does GDP during a recession.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 163-164
Topic: The Business Cycle and Durable Goods
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
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11) Purchases of which of the following goods would be dramatically reduced during a
recession?
A) tomatoes
B) ink pens
C) gasoline
D) refrigerators
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 163-164
Topic: The Business Cycle and Durable Goods
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
12) During a recession, spending on ________ tends to fall more dramatically than spending on
________.
A) necessities; luxuries
B) durable goods; nondurable goods
C) nondurable goods; durable goods
D) food; cars
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 163-164
Topic: The Business Cycle and Durable Goods
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
13) Purchases of Huggies diapers should
A) remain fairly constant over the business cycle.
B) increase in recessions and decrease in expansions.
C) decrease in recessions and increase in expansions.
D) increase in recessions and remain constant in expansions.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 163-164
Topic: The Business Cycle and Durable Goods
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
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14) The effect of a recession on a company like Bombardier is such that
A) sales decline more sharply for Bombardier as compared to firms that do not produce durable
goods.
B) profits fall less sharply as compared to firms that do not produce durable goods.
C) the decline in sales is more short-lived as compared to firms that do not produce durable
goods.
D) there is no difference in the impact of the recession on its profits as compared to firms that do
not produce durable goods.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 163-164
Topic: The Business Cycle and Durable Goods
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
15) Inflation tends to ________ during the expansion phase of the business cycle and ________
during the recession phase of the business cycle.
A) increase; decrease
B) decrease; increase
C) decrease; decrease further
D) increase; increase further
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 164
Topic: The Business Cycle
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
16) Which of the following is a correct statement?
A) Inflation is measured as the percent change in the CPI.
B) The CPI is a widely used measure of the inflation rate.
C) Real GDP is our best measure of economic growth.
D) The PPI measures inflation as experienced by producers.
Answer: A
Diff: 1
Type: MC
Page Ref: 165
Topic: The Effects of Expansion on the Economy
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: Don't Let This Happen to You: Don't Confuse the Price Level and the Inflation
Rate
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17) When the economy enters a recessionary phase of the business cycle, unemployment tends to
A) decrease.
B) increase.
C) be unchanged.
D) change in the same direction as the rate of inflation.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 165
Topic: The Effects of Recession on the Economy
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
18) Typically, as an economy begins to emerge from a recessionary phase of the business cycle
A) unemployment falls immediately.
B) unemployment continues to rise.
C) inflation begins to fall.
D) investment begins to fall.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 165
Topic: The Effects of Recession on the Economy
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
19) Most economists believe that the return of ________ during the 2008-2009 recession is a key
reason why the recession was so severe.
A) high tariffs
B) financial instability
C) rapid inflation
D) high interest rates
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 162
Topic: The Business Cycle Since the 1950s
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
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20) According to the commonly used definition, Canada has experienced ________ recession(s)
since 1980.
A) 1
B) 2
C) 3
D) 4
Answer: C
Diff: 1
Type: MC
Page Ref: 163
Topic: The Business Cycle
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
21) Canada was in recession during
A) 2007-2009.
B) 2008-2009.
C) 2007-2008.
D) 2008 until today.
Answer: B
Diff: 1
Type: MC
Page Ref: 163
Topic: The Business Cycle
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
22) Economists have not found a way to predict when recessions will begin and end.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 163
Topic: The Business Cycle
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
23) The commonly accepted definition of a recession is at least two consecutive quarters of
falling real GDP.
Answer: TRUE
Diff: 2
Type: TF Page Ref: 163
Topic: Defining a Recession
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
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24) At the end of an expansion, wages of workers are usually rising faster than prices.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 163-164
Topic: The Effects of Expansion on the Economy
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
25) In Canada, since the 1970s, expansions are more common than recessions.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 162
Topic: The Business Cycle Since the 1950s
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
26) Explain how unemployment changes over the business cycle. Why do these changes occur?
Answer: Unemployment will fall during an expansion and rise during a recession. When the
economy begins slowing down during a recession, firms cut back on production and workers get
laid off. But it doesn't stop there. The unemployment rate typically rises even after the end of the
recession. This happens for a couple of different reasons. First, it reflects the behaviour of
discouraged workers. When the economy goes into recession, the number of discouraged
workers rises. When a discouraged worker drops out of the labour force, this actually lowers the
unemployment rate. During the recession, the unemployment rate does not rise as much as it
would if we counted discouraged workers as unemployed. When the recovery begins, these
former discouraged workers enter back into the labour force and start searching for work again.
This influx of people without jobs into the labour force raises the unemployment rate.
Second, firms are reluctant to start adding back workers when the recovery begins to take
hold. They are cautious and want to be sure that the recession is over. They work their workers
overtime rather than add new workers. Both these effects, discouraged workers re-entering the
labour market and firm's reluctance to hire in the early part of a recovery, contribute to keeping
the unemployment rate high.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 165
Topic: The Business Cycle
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Reflective Thinking
Special Feature: None
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27) How are unemployment, inflation, and the business cycle related?
Answer: A recessionary phase of a business cycle usually begins with decreased investment
spending by firms or with reductions in consumption spending. As spending decreases firm sales
decrease, and firms begin laying off workers, thereby increasing unemployment. As firms find it
more difficult to sell their goods they will also find it more difficult to raise prices and the rate of
inflation will be relatively low. As the economy moves toward the expansionary phase of the
business cycle firms begin to increase investment spending, households begin to increase their
spending, and unemployment begins to fall. As spending increases producers find it easier to
raise prices and the rate of inflation tends to rise during this expansionary phase.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 165
Topic: The Business Cycle
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Analytic Skills
Special Feature: None
28) How have government policies and programs affected the volatility of the business cycle in
Canada? Explain and provide at least two specific examples of policies or programs that may
have had an impact.
Answer: Government programs like Employment Insurance and other income support programs
have helped to shorten recessions since they provide additional income to individuals who might
not otherwise be able to continue consumption spending. Since the Great Depression the federal
government has also become more actively committed to maintaining low unemployment, which
may have reduced the severity of recessions and prolonged expansions.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 162
Topic: The Business Cycle
Learning Outcome: 6.3 Explain what happens during the business cycle
AACSB: Analytic Skills
Special Feature: None
29) During the expansion phase of the business cycle,
A) production increases.
B) employment decreases.
C) income decreases.
D) unemployment increases.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 162-163
Topic: The Effects of Expansion on the Economy
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
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30) A period of expansion in the business cycle ends when
A) real GDP is equal to potential GDP.
B) the business cycle reaches its peak.
C) the business cycle reaches its trough.
D) real GDP is less than potential GDP.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 162-163
Topic: The Business Cycle
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
31) When the economy reaches a trough in a business cycle, which of the following will occur?
A) Income, production, and employment will continue to fall.
B) Income, production, and employment will begin to rise.
C) Income and production will rise, but employment will continue to fall.
D) Employment rises, but income and production will continue to fall.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 162-163
Topic: The Business Cycle
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
32) ________ officially decides when a recession begins and ends.
A) The Minister of Finance
B) Statistics Canada
C) The Bank of Canada
D) None of the above
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 163
Topic: Defining a Recession
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
Special Feature: None
6-84
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33) A(n) ________ comes to an end with a business cycle ________.
A) recession; peak
B) recession; trough
C) expansion; trough
D) expansion; bubble
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 162-163
Topic: The Business Cycle
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
34) The generally accepted definition of a recession is
A) two consecutive quarters of declining real GDP.
B) two consecutive quarters of declining nominal GDP.
C) a significant decline in activity visible in industrial production, employment, real income, and
wholesale/retail trade lasting more than a few months.
D) a significant decline in inflation and unemployment lasting more than a few months.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 162-163
Topic: Defining a Recession
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
35) Which of the following might make it a good idea for a business to expand during a
recession?
A) The cost of capital is typically low during a recession.
B) It is often difficult to find skilled workers during a recession.
C) Most other business are expanding at the same time.
D) Consumers have increased their savings, meaning they have more to spend.
Answer: A
Diff: 2
Type: MC
Page Ref: 163-164
Topic: Defining a Recession
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-85
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36) As the economy nears the end of an expansion, interest rates usually ________, and wages
rise more ________ than prices.
A) rise; rapidly
B) rise; slowly
C) fall; rapidly
D) fall; slowly
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 163-164
Topic: The Effects of Expansion on the Economy
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
37) A recession begins with a(n) ________ in spending by firms on capital goods and a(n)
________ in spending on durable goods by households.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 163-164
Topic: The Effects of Recession on the Economy
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
38) Which of the following goods would see the largest decline in demand during a recession?
A) automobiles
B) food
C) clothing
D) haircuts
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 163
Topic: The Business Cycle and Durable Goods
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-86
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39) When a recession ends,
A) interest rates decrease.
B) households decrease spending on durable goods.
C) the household sector decreases spending substantially.
D) firms increase the amount of borrowing.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 163-164
Topic: The Business Cycle
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
40) Because Bombardier produces expensive durable goods, the demand for their goods
A) is likely to increase during recession.
B) declines when incomes in the economy are rising.
C) is consistently high, regardless of the state of the economy.
D) tends to follow the business cycle.
Answer: D
Diff: 1
Type: MC
Page Ref: 147
Topic: The Business Cycle and Durable Goods
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Growth and the Business Cycle at Bombardier
41) For the recessions in Canada since the 1980s,
A) cyclical unemployment has been nonexistent.
B) unemployment rises as the recession comes to an end.
C) unemployment falls 6 months after a recession begins.
D) unemployment peaks 6 months after the peak of the business cycle.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 165.
Topic: What Happens During a Recession
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
Special Feature: None
6-87
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42) For the recessions in Canada since the 1980s,
A) inflation has been nonexistent.
B) the inflation rate rises as a recession begins.
C) the inflation rate peaks just before a recession.
D) deflation occurs.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 164
Topic: What Happens During a Recession
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
Special Feature: None
43) Recessions cause the unemployment rate to ________ and the inflation rate to ________.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 164-165
Topic: The Effects of Recession on the Economy
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
44) During an expansion, how do inflation and unemployment typically change?
A) Inflation and unemployment both rise.
B) Inflation and unemployment both fall.
C) Inflation falls and unemployment rises.
D) Inflation rises and unemployment falls.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 164-165
Topic: The Effects of Expansion on the Economy
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-88
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45) Between 1980 and 2013, the average length of recessions in Canada was
A) about one month.
B) about three months.
C) about eighteen months.
D) about three years.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 164-165
Topic: What Happens During a Recession
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
Special Feature: None
46) Inflation is measured
A) using the level of the consumer price index.
B) as the percentage change in the consumer price index.
C) using the level of real GDP.
D) as the percentage change in real GDP.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 164
Topic: The Effects of Expansion on the Economy
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
47) If the CPI is currently 202, what does this tell you about inflation between last year and this
year?
A) There was deflation in the economy between this year and last year.
B) Inflation in the economy between this year and last year was 2%.
C) Inflation in the economy between this year and last year was 102%.
D) The CPI measures only the level of prices in a given year, not the percentage change in prices
from one year to the next.
Answer: D
Diff: 1
Type: MC
Page Ref: 165
Topic: The Effects of Expansion on the Economy
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: Don't Let This Happen to You: Don't Confuse the Price Level and the Inflation
Rate
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48) Since 1980, recessions in Canada
A) have not occurred.
B) have only occurred once.
C) have only occurred twice.
D) have only occurred three times.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 164-165
Topic: What Happens During a Recession
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
Special Feature: None
49) Since 1980,
A) economic expansions in Canada have been so short that expansions barely exist.
B) the average length of expansions in Canada has become shorter.
C) the average length of expansions in Canada has become longer.
D) the average length of expansions in Canada has remained about the same.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 164-165
Topic: What Happens During a Recession
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
Special Feature: None
50) Which of the following explains why the unemployment rate tends to rise as a recession
ends?
A) Discouraged workers begin to search for jobs.
B) The federal government uses a different definition of "unemployed" during recession.
C) Employment insurance tends to be more generous during recessions.
D) The birth rate tends to rise during recessions.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 165
Topic: What Happens During a Recession
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-90
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51) Which of the following indicates that the Canadian economy has become more stable since
1980?
A) longer recessions
B) shorter expansions
C) less severe fluctuations in real GDP
D) All of the above indicate that the Canadian economy has become more stable since 1980.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 164-165
Topic: What Happens During a Recession
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
52) If you spend more of your income on consumption goods, which of the following will occur?
A) The production of investment goods will fall.
B) Economic growth will be stimulated.
C) Investments in education will rise.
D) For every dollar you spend on consumption, real GDP will fall by a dollar.
Answer: A
Diff: 2
Type: MC
Page Ref: 166
Topic: Determinants of Economic Growth
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: Economics in Your Life: Do You Help the Economy More if You Spend or if
You Save?
53) Since 1980,
A) the Canadian economy has spent more time in expansion than in recession.
B) the Canadian economy has spent more in time in recession than expansion.
C) the Canadian economy has spent equal time in recession and expansion.
D) the Canadian economy has experienced almost no economic growth.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 163-165
Topic: What Happens During a Recession
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
Special Feature: None
6-91
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54) Which of the following is a true statement about the length of recessions and expansions in
the Canadian economy?
A) After 1980, the length of expansions equaled the length of recessions.
B) After 1980, the length of expansions was much less than the length of recessions.
C) After 1980, the length of expansions was much longer than the length of recessions.
D) After 1980, the length of expansions was brief and almost nonexistent.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 163-165
Topic: What Happens During a Recession
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
Special Feature: None
55) All else equal, the falling demand for air travel in 2011 caused the demand curve for
Bombardier's CRJ aircraft to shift to the ________, resulting in ________ prices and ________
production of CRJs.
A) right; lower; higher
B) left; lower; lower
C) right; higher; higher
D) left; higher; lower
Answer: B
Diff: 2
Type: MC
Page Ref: 168-169
Topic: Determinants of Economic Growth
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
Special Feature: An Inside LOOK: Bombardier and the Global Recession
56) The lengths of the recession and expansion phases and which sectors of the economy are
most affected will rarely be the same in any two business cycles.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 162-163
Topic: The Business Cycle
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-92
Copyright © 2015 Pearson Canada Inc.
57) A period of economic expansion ends with a business cycle trough.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 162-163
Topic: The Business Cycle
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
58) The Canadian economy has been more stable since 1995.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 164-165
Topic: What Happens During a Recession
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
Special Feature: None
59) Inflation usually increases during a recession and decreases during an expansion.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 164-165
Topic: The Effects of Expansion on the Economy
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
6-93
Copyright © 2015 Pearson Canada Inc.
60) Suppose you are employed by a large corporation to forecast the state of the economy. You
are asked to look at macroeconomic data to evaluate whether the economy is entering a
recession. Which data do you look at? How does the economy behave at the onset of a recession?
Answer: Since the generally agreed definition of a recession is two consecutive quarters of
negative real GDP growth, looking at data on real GDP would be essential. You would likely
want to consider spending on capital goods by firms, as capital spending tends to fall as the
economy enters a recession. Consumer spending can also be used as an indicator of the future
state of the economy, as consumers cut back on their purchases of durables—like cars—at the
beginning of a recession. We've also seen that inflation tends to rise as the economy nears a
recession and then falls fairly quickly. Finally, a series of layoffs would also be a potential
indicator of a coming recession.
Comment: Recurring
Diff: 3
Type: SA Page Ref: 163-164
Topic: The Effects of Recession on the Economy
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
61) What type of consumer goods are most affected by the business cycle: durable goods or
nondurable goods? Why?
Answer: Some workers lose income during a recession and cut back on their spending. Other
workers fear losing their jobs or may suffer wage cuts. These workers also reduce their spending.
When they cut back on their spending, workers are more likely to cut back on consumer durable
goods. Consumer durable goods such as automobiles, appliances, and furniture, are goods that
are expected to last for three or more years. Since these goods last three or more years, the
consumer can continue to use these goods for some time. The consumer will put off trying to
replace these expensive goods until his/her income position is stronger and job security more
assured.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 163-164
Topic: The Business Cycle and Durable Goods
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
6-94
Copyright © 2015 Pearson Canada Inc.
62) Explain what happens to inflation during the business cycle. Give an intuitive explanation as
to why inflation changes the way it does over the business cycle.
Answer: Inflation will rise during an expansion and fall during a recession. Inflation usually
rises near the end of an expansion. Recessions consistently lower the inflation rate. The business
cycle has this effect on inflation because spending is usually strong during an expansion and
firms will find it easier to raise prices. During a recession, the opposite is true. Spending by firms
and households is weak and firms might not be able to sell their goods if they aggressively raise
prices.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 164
Topic: The Business Cycle
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: None
6-95
Copyright © 2015 Pearson Canada Inc.
Macroeconomics, Canadian Edition (Hubbard et al.)
Chapter 7 Long-Run Economic Growth: Sources and Policies
7.1 Economic Growth over Time and around the World
1) China's economy has grown tremendously from 1979 to the present. The reason the article
gives for this growth is
A) the introduction of the centrally planned economy in 1978.
B) the introduction of market-oriented reforms in 1978.
C) the introduction of the social networking site, MySpace.
D) the total lack of governmental intervention in the economy.
Answer: B
Diff: 1
Type: MC
Page Ref: 175
Topic: Economic Growth Over Time
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Google's Dilemma in China
2) Some factors currently exist that inhibit the growth rate of the Chinese economy. The main
reason given is
A) the introduction of free-market reforms.
B) the introduction of the relatively new resource of entrepreneurship.
C) the lack of laws that predictably enforce property rights.
D) the total lack of governmental intervention in the market place.
Answer: C
Diff: 1
Type: MC
Page Ref: 175
Topic: Economic Growth Over Time
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Google's Dilemma in China
3) The rapid growth of the Chinese economy should
A) benefit Canadian consumers, as they have access to less expensive consumer goods.
B) make it more difficult for citizens of Canada to find a job.
C) not affect the mix of jobs available to citizens of Canada.
D) A and B
Answer: A
Diff: 2
Type: MC
Page Ref: 175
Topic: Economic Growth Over Time
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: Economics in Your Life: Would You Be Better Off without China?
7-1
Copyright © 2015 Pearson Canada Inc.
4) The Industrial Revolution began in
A) England around 1750.
B) the United States around 1820.
C) Canada around 1867.
D) Germany around 1780.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 177
Topic: Economic Growth from 1,000,000 B.C. to the Present
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: None
5) Suppose that in 2011 real GDP grew in Estonia by 3% and that the population increased by
5%. Therefore in 2011, Estonia experienced
A) economic growth, but not an increase in living standards.
B) economic growth and an increase in living standards.
C) no economic growth, but an increase in living standards.
D) no economic growth and no increase in living standards.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 178
Topic: Why Do Growth Rates Matter?
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: None
6) The period of time from 1,000,000 B.C. to 1300 A.D. was a period of
A) no sustained economic growth.
B) slow and steady economic growth.
C) moderate economic growth.
D) rapid and sustained economic growth.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 176
Topic: Economic Growth from 1,000,000 B.C. to the Present
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: None
7-2
Copyright © 2015 Pearson Canada Inc.
7) Significant economic growth did not begin in the world until
A) 1000 A.D.
B) 1750 A.D.
C) 1820 A.D.
D) the 20th century A.D.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 176-177
Topic: Economic Growth from 1,000,000 B.C. to the Present
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: None
8) According to Douglass North, the Industrial Revolution occurred in England because
A) the British Parliament took control of the government and could credibly commit to
upholding property rights.
B) the British monarchy took control of the government and pledged not to raise taxes arbitrarily.
C) the British courts became tied to the king and began to refuse to enforce property rights.
D) the British Parliament instituted a command economy structure and implemented a planned
economy.
Answer: A
Diff: 2
Type: MC
Page Ref: 177
Topic: Economic Growth from 1,000,000 B.C. to the Present
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: Making the Connection: Why Did the Industrial Revolution Begin in England?
9) Growth in real GDP per capita for the world economy was greatest during
A) the seventeenth century.
B) the eighteenth century.
C) the nineteenth century.
D) the twentieth century.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 178
Topic: Economic Growth from 1,000,000 B.C. to the Present
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: None
7-3
Copyright © 2015 Pearson Canada Inc.
10) If Canada and Bolivia have annual per capita growth rates of 3.2% and 1.35%, respectively,
and if Canada's per capita GDP is higher, then in the long run
A) real GDP per capita in Canada will always be 1.9% higher than real GDP per capital in
Bolivia.
B) the difference between the level of real GDP per capita in Canada and real GDP per capita in
Bolivia will shrink over time.
C) the difference between the level of real GDP per capita in Canada and real GDP per capita in
Bolivia will increase over time.
D) the difference between the level of real GDP per capita in Canada and real GDP per capita in
Bolivia will always be $1.9 trillion.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 179
Topic: The Rich Get Richer
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: None
11) If real GDP per capita in Canada is $8,000, what will real GDP per capita in Canada be after
5 years if real GDP per capita grows at an annual rate of 3.2%?
A) $8,520
B) $9,280
C) $9,365
D) $10,560
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 178
Topic: Economic Growth Over Time
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Analytic Skills
Special Feature: None
7-4
Copyright © 2015 Pearson Canada Inc.
12) If real GDP per capita in Ireland is estimated to be $7,400 in 2012, what will real GDP per
capita be in 2017 if real GDP per capita grows at an annual rate of 2.8%?
A) $7,607
B) $8,496
C) $9,472
D) $20,720
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 178
Topic: Economic Growth Over Time
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Analytic Skills
Special Feature: None
13) If real GDP per capita in Canada is $8,000 in 2011, and if real GDP per capita is $12,000 in
2021, what is the average annual percent change in the growth rate of GDP per capita between
2011 and 2021?
A) 3.33%
B) 5%
C) 33%
D) 50%
Answer: B
Diff: 2
Type: MC
Page Ref: 179
Topic: Economic Growth Over Time
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Analytic Skills
Special Feature: Don't Let This Happen to You: Don't Confuse the Average Annual Percentage
Change with the Total Percentage Change
14) If real GDP per capita in Canada is $8,000 in 2011, and if real GDP per capita is $12,000 in
2021, what is the total percent change in the growth rate of GDP per capita between 2011 and
2021?
A) 3.33%
B) 5%
C) 33%
D) 50%
Answer: D
Diff: 2
Type: MC
Page Ref: 179
Topic: Economic Growth Over Time
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Analytic Skills
Special Feature: Don't Let This Happen to You: Don't Confuse the Average Annual Percentage
Change with the Total Percentage Change
7-5
Copyright © 2015 Pearson Canada Inc.
15) Increasing the growth rate of GDP per capita and sustaining this growth rate in an economy
can
A) increase infant mortality.
B) increase standards of living.
C) increase the level of poverty.
D) lower life expectancy.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 178-179
Topic: Why Do Growth Rates Matter?
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: None
16) Between 1960 and 2010, deaths rates among children have
A) declined in most high-income countries and have risen in most low-income countries.
B) declined in nearly all countries, including most low-income countries.
C) remained relatively unchanged in most high-income countries and have declined in most lowincome countries.
D) declined in most high-income countries and have remained relatively unchanged in most lowincome countries.
Answer: B
Diff: 1
Type: MC
Page Ref: 178-179
Topic: Why Do Growth Rates Matter?
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: Making the Connection: Is Income All That Matters?
17) Small differences in economic growth rates result in small differences in living standards.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 178
Topic: Small Differences in Growth Rates Are Important
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: None
7-6
Copyright © 2015 Pearson Canada Inc.
18) An economy that grows too slowly fails to raise living standards.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 178-179
Topic: Why Do Growth Rates Matter?
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: None
19) Most of the countries of Africa are considered newly industrializing countries.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 179
Topic: The Rich Get Richer
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: None
20) What features made England in the eighteenth century the place where the Industrial
Revolution occurred?
Answer: The British Parliament had just gained control over the government from the king;
British courts became independent of the king, upheld property rights and protected wealth, and
markets in England at the time were "efficient" in that prices for the same products were the
same across regions after accounting for transportation costs.
Diff: 2
Type: ES
Page Ref: 177
Topic: Economic Growth Over Time
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: Making the Connection: Why Did the Industrial Revolution Begin in England?
21) What are some of the reasons used to explain improvements in health, education, democracy,
and political stability in many low-income countries?
Answer: Reasons include increases in technology and knowledge, such as the development in
inexpensive vaccines or the use of mosquito nets, and changes in attitudes, such as placing
greater value on education or increasing support for political freedoms.
Diff: 2
Type: ES
Page Ref: 180-181
Topic: Economic Growth Over Time
Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe
global trends in economic growth
AACSB: Reflective Thinking
Special Feature: Making the Connection: Is Income All That Matters?
7-7
Copyright © 2015 Pearson Canada Inc.
22) Which of the following accurately describes economic growth and standards of living
between 1,000,000 B.C. and 1300 A.D.?
A) Standards of living in 1300 A.D. were substantially better than what they were in 1,000,000
B.C.
B) Standards of living substantially declined from 1,000,000 B.C. to 1300 A.D.
C) Significant economic growth took place between 1,000,000 B.C. and 1300 A.D.
D) No sustained economic growth occurred between 1,000,000 B.C. and 1300 A.D.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 176-177
Topic: Economic Growth from 1,000,000 B.C. to the Present
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
23) Entrepreneurship in China is
A) a relatively new practice.
B) the most fundamental tenet of the Communist government.
C) a result of government-controlled production.
D) the cause of China's relatively low growth rates in recent years.
Answer: A
Diff: 2
Type: MC
Page Ref: 175
Topic: The Chinese Economic Miracle
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: Chapter Opener: Google's Dilemma in China
24) The best measure of a country's standard of living is
A) GDP per labour hour.
B) GDP per unit of capital.
C) GDP per capita.
D) total nominal GDP.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 176-177
Topic: Economic Growth from 1,000,000 B.C. to the Present
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
7-8
Copyright © 2015 Pearson Canada Inc.
25) If a country's real GDP is rising by 3% per year while its population is rising at 5% per year,
which of the following is true?
A) The country's standard of living is falling.
B) The country's standard of living is rising.
C) Growth in nominal GDP outweighs growth in the population.
D) Growth in nominal GDP is less than the growth in the population.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 178
Topic: Why Do Growth Rates Matter?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
Table 7.1
Country
Sweden
Ireland
GDP
(billions of dollars)
$385
223
Population
(millions of people)
9.05
4.21
26) Refer to Table 7.1. Based on the table above, which country has a higher standard of living
and why?
A) Sweden has a higher standard of living because its GDP is higher.
B) Ireland has a higher standard of living because its GDP per capita is higher.
C) Sweden has a higher standard of living because its GDP per capita is higher.
D) Ireland has a higher standard of living because growth in GDP is greater in Ireland than in
Sweden.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 178-179
Topic: Why Do Growth Rates Matter?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
7-9
Copyright © 2015 Pearson Canada Inc.
27) According to the World Bank, in 2013 China's GDP was approximately $9.24 trillion (in
U.S. dollars). That same year, India's GDP was approximately $3.88 trillion (also in U.S.
dollars). With which of the following populations would China's standard of living have been
considered higher than India's that year?
A) China's population = 1.4 billion; India's population = 1.3 billion
B) China's population = 5.3 billion; India's population = 1.4 billion
C) China's population = 500 million; India's population = 125 million
D) China's population = 2.0 billion; India's population = 0.7 billion
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 178
Topic: Economic Growth Over Time
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
28) The Industrial Revolution
A) marked the beginning of significant economic growth in the world.
B) started in France around the year 1750.
C) produced goods exclusively using human or animal power.
D) had no impact on standards of living in the world.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 177-178
Topic: Economic Growth from 1,000,000 B.C. to the Present
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: Making the Connection: Why Did the Industrial Revolution Begin in England?
29) Which of the following is not a reason why the Industrial Revolution occurred when and
where it did?
A) The British government was committed to upholding private property rights.
B) The British government was able to eliminate arbitrary increases in taxes.
C) The British government was able to more easily seize wealth.
D) Institutional changes by the British government helped protect wealth.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 176-177
Topic: Economic Growth from 1,000,000 B.C. to the Present
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: Making the Connection: Why Did the Industrial Revolution Begin in England?
7-10
Copyright © 2015 Pearson Canada Inc.
30) During which of the following periods was growth in GDP per capita the fastest?
A) prior to 500 A.D.
B) 500 A.D. to 1800 A.D.
C) 1800-1900 A.D.
D) 1900-2000 A.D.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 176-177
Topic: Economic Growth from 1,000,000 B.C. to the Present
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
Special Feature: None
31) In the long run, ________ differences in economic growth rates result in ________
differences in GDP per capita.
A) large; small
B) large; no
C) small; large
D) small; no
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 178
Topic: Small Differences in Growth Rates Are Important
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
32) GDP in a country grew from $10 billion to $14 billion over the span of 5 years. The average
annual growth rate of GDP was
A) 4%.
B) 7%.
C) 10%.
D) 40%.
Answer: B
Diff: 1
Type: MC
Page Ref: 179
Topic: Economic Growth Over Time
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: Don't Let This Happen to You: Don't Confuse the Average Annual Percentage
Change with the Total Percentage Change
7-11
Copyright © 2015 Pearson Canada Inc.
33) GDP in a country grew from $10 billion to $14 billion over the span of 5 years. The total
percentage change in GDP was
A) 4%.
B) 7%.
C) 10%.
D) 40%.
Answer: D
Diff: 1
Type: MC
Page Ref: 179
Topic: Economic Growth Over Time
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: Don't Let This Happen to You: Don't Confuse the Average Annual Percentage
Change with the Total Percentage Change
34) If GDP per capita rises by 2% between 2015 and 2016, which of the following is necessarily
true?
A) Real GDP has risen by more than 2%.
B) The population has decreased.
C) The population has increased, but by less than 2%.
D) None of the above is necessarily true.
Answer: D
Diff: 3
Type: MC
Page Ref: 178-179
Topic: Economic Growth Over Time
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
35) The key factors in raising standards of living in low-income countries have been increases in
A) capital accumulation and the money supply.
B) technology and knowledge.
C) foreign aid and population.
D) income and government ownership of resources.
Answer: B
Diff: 1
Type: MC
Page Ref: 178-179
Topic: Why Do Growth Rates Matter?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: Making the Connection: Is Income All That Matters?
7-12
Copyright © 2015 Pearson Canada Inc.
36) ________ is considered a high-income country, ________ a developing country, and
________ a newly industrializing country.
A) Japan; Hong Kong; South Korea
B) The United States; Somalia; Taiwan
C) Canada; France; Singapore
D) Honduras; New Zealand; South Korea
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 179-180
Topic: The Rich Get Richer
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
37) Which of the following countries had the lowest GDP per capita in 2010?
A) France
B) Mexico
C) Burundi
D) Argentina
Answer: C
Diff: 1
Type: MC
Page Ref: 179-180
Topic: The Rich Get Richer
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
Special Feature: None
38) Which of the following countries had the highest GDP per capita in 2010?
A) Luxembourg
B) Canada
C) Japan
D) Norway
Answer: A
Diff: 1
Type: MC
Page Ref: 179-180
Topic: The Rich Get Richer
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
7-13
Copyright © 2015 Pearson Canada Inc.
39) High-income countries are also referred to as
A) developing countries.
B) industrialized countries.
C) growing countries.
D) agrarian countries.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 179-180
Topic: The Rich Get Richer
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
40) The small group of East Asian countries that experienced high rates of growth in the 1980s
and 1990s are referred to as
A) newly industrializing countries.
B) countries with low standards of living.
C) education-deprived countries.
D) industrial countries.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 179-180
Topic: The Rich Get Richer
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: None
41) According to Nobel Laureate Douglass North, one reason why the Industrial Revolution
occurred in England before many other countries was because the King of England consistently
maintained control over the court system and the government.
Answer: FALSE
Diff: 1
Type: TF Page Ref: 176-177
Topic: Economic Growth from 1,000,000 B.C. to the Present
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: Making the Connection: Why Did the Industrial Revolution Begin in England?
7-14
Copyright © 2015 Pearson Canada Inc.
42) Most economic growth in the world occurred between 1,000,000 B.C. and 1300 A.D.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 176-177
Topic: Economic Growth from 1,000,000 B.C. to the Present
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
43) In 2010, South America had a lower average GDP per capita than any other continent.
Answer: FALSE
Diff: 1
Type: TF Page Ref: 179-180
Topic: The Rich Get Richer
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
44) Only income can produce increases in standard of living.
Answer: FALSE
Diff: 1
Type: TF Page Ref: 180-181
Topic: The Rich Get Richer
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
Special Feature: Making the Connection: Is Income All That Matters?
45) How do economic growth rates affect a nation's standard of living?
Answer: The speed at which an economy grows determines the standard of living of its people.
If an economy grows too slowly, then standards of living can decline. If a country is already
poor, then slow growth can fail to raise standards of living of its citizens. This can result in
people living in poverty, poor health, having poor nutrition, low life expectancy, high infant
mortality, and an overall poor quality of life. On the other hand, more rapid rates of growth can
improve standards of living. This can lift people out of poverty, raise life expectancy, improve
health, eliminate hunger, and improve the general quality of life.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 178-179
Topic: Why Do Growth Rates Matter?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
7-15
Copyright © 2015 Pearson Canada Inc.
Table 7.2
Country
Bangladesh
India
Singapore
Turkey
Population
(thousands)
131,200
1,052,000
4,200
69,600
GDP (measured in
thousands of U.S. dollars)
$ 53,800,000
517,300,000
113,500,000
204,870,000
46) Refer to Table 7.2. Calculate the GDP per capita for each country in the table. Which
country has the highest standard of living? Why?
Answer: GDP per capita = GDP / Population.
GDP per capita in Bangladesh: $53,800,000 / 131,200 = $410.06.
GDP per capita in India: $517,300,000 / 1,052,000 = $491.73.
GDP per capita in Singapore: $113,500,000 / 4,200 = $27,023.81.
GDP per capita in Turkey: $204,870,000 / 69,600 = $2,943.53.
Singapore has the highest standard of living because it has the highest GDP per capita.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 178-179
Topic: Why Do Growth Rates Matter?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
7.2 What Determines How Fast Economies Grow?
1) An economic growth model explains
A) changes in real GDP per capita in the long run.
B) how changes in the money supply affect real interest rates.
C) changes in government tax policies over time.
D) the growth rate of the price level over time.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 181
Topic: What Determines How Fast Economies Grow?
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
7-16
Copyright © 2015 Pearson Canada Inc.
2) Which of the following is not one of the three sources of technological change?
A) additional amounts of existing capital
B) better machinery and equipment
C) increases in human capital
D) better means of organizing and managing production
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 182
Topic: What Determines How Fast Economies Grow?
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
3) Which of the following would you expect to result in faster economic growth?
A) the invention of new computers that increase labour productivity
B) a decrease in the average level of education in the economy
C) a decrease in the stock of capital per worker
D) a decrease in research and development spending
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 181-182
Topic: What Determines How Fast Economies Grow?
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
4) An economy can improve its standard of living by
A) organizing production so that the quantity of goods produced per hour will decrease.
B) reducing the amount of human capital workers have.
C) increasing the amount of capital available per hour worked.
D) all of the above
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 182
Topic: What Determines How Fast Economies Grow?
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
7-17
Copyright © 2015 Pearson Canada Inc.
5) When an economy faces diminishing returns,
A) the slope of the per-worker production function becomes steeper as capital per hour worked
increases.
B) the slope of the per-worker production function becomes flatter as capital per hour worked
increases.
C) the per-worker production function shifts to the left.
D) the per-worker production function shifts to the right.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 182
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
6) When additions of input to a fixed quantity of another input lead to progressively smaller
increases in output, we say we are facing
A) diminishing returns.
B) negative returns.
C) accelerating returns.
D) decreasing production.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 183
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
7) Suppose that an increase in capital per hour worked from $15,000 to $20,000 increases real
GDP per hour worked by $500. If capital per hour worked increases further to $25,000, by how
much would you expect real GDP per hour worked to increase if there are diminishing returns?
A) by less than $500
B) by exactly $500
C) by more than $500 but less than $5,000
D) by more than $5,000 but less than $20,000
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 182-183
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
7-18
Copyright © 2015 Pearson Canada Inc.
Figure 7.1
8) Refer to Figure 7.1. Diminishing marginal returns is illustrated in the per-worker production
function in the figure above by a movement from
A) A to C.
B) B to C.
C) C to D.
D) D to C.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 182-184
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
9) Refer to Figure 7.1. Technological change is illustrated in the per-worker production function
in the figure above by a movement from
A) A to B.
B) B to C.
C) B to A.
D) D to C.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 182-184
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
7-19
Copyright © 2015 Pearson Canada Inc.
10) Refer to Figure 7.1. Using the per-worker production function in the figure above, the
largest changes in an economy's standard of living would be achieved by a movement from
A) A to B to C.
B) B to C to D.
C) C to B to A.
D) D to C to B.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 182-184
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
11) Refer to Figure 7.1. Suppose the per-worker production function in the figure above
represents the production function for the U.S. economy. If the United States decided to double
its support of university research, this would cause a movement from
A) A to B.
B) B to C.
C) B to A.
D) D to C.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 182-184
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
12) Refer to Figure 7.1. Within a country, the impact of wars and revolutions and their
subsequent destruction of capital is reflected in the per-worker production function in the figure
above by a movement from
A) A to B.
B) B to C.
C) B to A.
D) C to A.
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 182-184
Topic: Growth Policies
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
7-20
Copyright © 2015 Pearson Canada Inc.
13) Refer to Figure 7.1. Many countries in Africa strongly discouraged and prohibited foreign
direct investment in the 1950s and 1960s. By doing so, these countries were essentially
preventing a moment from
A) A to B.
B) B to C.
C) B to A.
D) D to C.
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 182-184
Topic: Growth Policies
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
14) In the eighteenth century, Honoré Blanc, a French gunsmith, revolutionized the arms
manufacturing industry by focusing on interchangeable parts and standardization and the
integration of the assembly line. What impact did his methods for producing muskets have on the
per-worker production function?
A) It became flatter.
B) It shifted up.
C) It shifted down.
D) It became linear.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 183-184
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
7-21
Copyright © 2015 Pearson Canada Inc.
15) If the per-worker production function shifts down,
A) it now takes more capital per hour worked to get the same amount of real GDP per hour
worked.
B) an economy can increase its real GDP per hour worked without changing the level of capital
per hour worked.
C) the per-worker production function becomes steeper.
D) positive technological change has occurred in the economy.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 183-184
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
16) Because of diminishing returns, an economy can continue to increase real GDP per hour
worked only if
A) there are decreases in human capital.
B) the per-worker production function shifts downward.
C) there continue to be decreases in capital per hour worked.
D) there is technological change.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 184
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
17) In a small European country, it is estimated that a $10,000 increase in capital per hour
worked will increase real GDP per hour worked by $300. Based on this information, what is the
slope of the per-worker production function in this range?
A) 0.03
B) 3.3
C) 33.3
D) 333
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 182-184
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
7-22
Copyright © 2015 Pearson Canada Inc.
18) In a small European country, it is estimated that changing the level of capital from $8 million
to $10 million will increase real GDP from $2 million to $3 million. If the number of hours
worked in the labour force does not change, what does this information tell you about the slope
of the per-worker production function in this range?
A) The slope is -2.
B) The slope is 1/2.
C) The slope is 2.
D) The slope is 4.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 182-184
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
19) In a small European country, it is estimated that changing the level of capital from $8 million
to $10 million will increase real GDP from $2 million to $3 million. What level of GDP would
you expect the economy to be able to reach if spending on capital continued to rise to $12
million, assuming no technological change and no change in the hours of work?
A) GDP would increase further, but by less than $1 million.
B) GDP would increase further by exactly $1 million.
C) GDP would increase further by more than $1 million
D) GDP would increase further by exactly $4 million.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 182-184
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
7-23
Copyright © 2015 Pearson Canada Inc.
20) If the slope of the per-worker production function is 1/2 in a given range, how will a $10,000
increase in capital per hour worked affect real GDP per hour worked in the same given range?
A) Real GDP per hour worked will increase by $5,000.
B) Real GDP per hour worked will increase by $20,000.
C) Real GDP per hour worked will increase by $10,000.
D) Real GDP per hour worked will decrease by $20,000.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 182-184
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
21) The Soviet Union's economy grew rapidly in terms of GDP per hour worked in the 1950s,
but eventually this growth slowed. Why did this occur?
A) Capital per hour worked grew rapidly from 1950 to 1980, but technological change occurred
very slowly.
B) Capital per hour worked grew slowly, but technological change grew very rapidly.
C) Increasing implementation of new technologies eventually suffered diminishing marginal
returns.
D) The centrally planned economy invested too heavily in technological change.
Answer: A
Diff: 2
Type: MC
Page Ref: 184-185
Topic: What Determines How Fast Economies Grow?
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: Making the Connection: What Explains the Economic Failure of the Soviet
Union?
7-24
Copyright © 2015 Pearson Canada Inc.
22) Under the Soviet system of communism,
A) managerial pay was determined by the extent to which managers could lower the per-unit
costs of production.
B) technological progress was slow because managers had little incentive to develop new
technologies.
C) competitive pressures in the Soviet Union allowed the country's technological progress to
keep pace with the rest of the world.
D) the per-worker production function in the Soviet Union shifted up more rapidly than
production functions in other countries.
Answer: B
Diff: 2
Type: MC
Page Ref: 184-185
Topic: What Determines How Fast Economies Grow?
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: Making the Connection: What Explains the Economic Failure of the Soviet
Union?
23) Technological improvements are more likely to occur if
A) the economy is centrally planned.
B) entrepreneurs are compensated with higher profits for taking risks.
C) economic decisions are made by politicians rather than entrepreneurs.
D) companies face little competition in their markets.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 184-185
Topic: What Determines How Fast Economies Grow?
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: Making the Connection: What Explains the Economic Failure of the Soviet
Union?
7-25
Copyright © 2015 Pearson Canada Inc.
Figure 7.2
24) Refer to Figure 7.2. Based on the per-worker production function above, if the economy
raises capital per hour worked from $35,000 to $40,000, by how much will real GDP per hour
worked increase?
A) $150
B) $1,850
C) $2,000
D) $5,000
Answer: A
Diff: 1
Type: MC
Page Ref: 185-186
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: Solved Problem: Using the Economic Growth Model to Analyze the Failure of
the Soviet Economy
25) Refer to Figure 7.2. Assuming no technological change, if Canada increases capital per hour
worked by $40,000 every year between 2010 and 2014, we would expect to see
A) real GDP per hour worked will increase by the same increment each year between 2010 and
2014.
B) real GDP per hour worked will be lower in 2014 than it was in 2010.
C) the per-worker production function will get flatter over time.
D) the per-worker production function will shift up every year there is increase in capital per
hour worked.
Answer: C
Diff: 2
Type: MC
Page Ref: 185-186
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: Solved Problem: Using the Economic Growth Model to Analyze the Failure of
the Soviet Economy
7-26
Copyright © 2015 Pearson Canada Inc.
26) According to new growth theory,
A) technological change is influenced by economic incentives.
B) centrally-planned economies are the most efficient.
C) growth in real GDP per capita occurs only if there are increasing returns.
D) economic growth is determined by forces outside the control of the market system.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 186-187
Topic: New Growth Theory
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
27) Paul Romer, an economist at Stanford University, is most closely associated with what
economic theory?
A) new growth theory
B) labour productivity theory
C) the process of creative destruction
D) the Communist Manifesto
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 186
Topic: New Growth Theory
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
28) According to new growth theory
A) physical capital is nonexcludable.
B) knowledge capital is excludable.
C) knowledge capital is subject to increasing returns.
D) knowledge capital is rival and excludable.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 187
Topic: New Growth Theory
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
7-27
Copyright © 2015 Pearson Canada Inc.
29) Knowledge capital is
A) rival.
B) nonrival.
C) nonexcludable.
D) both B and C
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 187
Topic: New Growth Theory
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
30) Knowledge capital is nonrival in the sense that
A) two people can use the same knowledge to develop and produce a product.
B) firms do not compete to be the first to develop new technologies.
C) no single company can be excluded from the benefits of new technologies.
D) firms can benefit from the research and development of rival firms without paying for that
benefit.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 187
Topic: New Growth Theory
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
31) Firms free ride on the research and development of other firms when they
A) buy a firm's newly developed product, and then give it away to consumers.
B) use knowledge other firms have developed without paying for that knowledge.
C) license a new technology from a firm that developed the new technology.
D) choose a level of research and development that is inefficiently high.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 187
Topic: New Growth Theory
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
7-28
Copyright © 2015 Pearson Canada Inc.
32) Which of the following government provisions would help increase the accumulation of
knowledge capital?
A) patents
B) copyrights
C) education subsidies
D) All of the above are correct.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 187
Topic: New Growth Theory
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
33) Because firms can free ride on the research and development of other firms,
A) firms choose a level of research and development where the marginal cost of research is equal
to the economy's marginal return of research.
B) firms choose a level of research and development where the marginal cost of research is
above the economy's marginal return of research.
C) firms choose a level of research and development where the marginal cost of research is
below the economy's marginal return of research.
D) firms choose a level of research and development where the marginal cost of research is
below the individual firm's marginal return of research.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 187
Topic: New Growth Theory
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
34) A patent grants an inventor exclusive rights to a product for how long?
A) 14 years
B) 17 years
C) 20 years
D) the lifetime of the product
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 187
Topic: New Growth Theory
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
7-29
Copyright © 2015 Pearson Canada Inc.
35) Why do some firms choose not to file for a patent and instead try to keep the results of their
research a trade secret?
A) because firms must disclose information about the product or process being patented in a
patent application
B) because trade secrets are never divulged
C) because a patent only gives the inventor exclusive rights to a product or process for 5 years
D) because trade secrets provide the same exclusive legal rights to a product as a patent does
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 187
Topic: New Growth Theory
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
36) Which of the following government policies would most likely result in an increase in
economic growth?
A) a decrease in the life of a patent from 20 years to 15 years
B) a decrease in the interest rate at which the government provides student loans
C) a decrease in government spending on grants issued through the National Institutes of Health
D) decreased copyright protection on music and movies
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 187-188
Topic: New Growth Theory
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
37) According to Joseph Schumpeter, economic growth is achieved through
A) focusing only on making old products better rather than inventing new ones.
B) centralizing economic production.
C) a process termed "creative destruction."
D) removing the entrepreneur from the production function.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 188
Topic: Creative Destruction
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
7-30
Copyright © 2015 Pearson Canada Inc.
38) Creative destruction means that
A) firms develop new products that replace old products in the economy, thereby encouraging
economic growth.
B) economic growth can only be sustained if capital depreciates rapidly.
C) knowledge capital can be created through a system of government subsidies for education and
research and development.
D) research and development should only be financed if research and development is
incremental (a result of making small changes to existing products).
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 188
Topic: Creative Destruction
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
39) Human capital refers to the percentage of the working-age population in the labour force.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 182
Topic: What Determines How Fast Economies Grow?
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
40) Technological change is the key to sustaining economic growth.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 184
Topic: What Determines How Fast Economies Grow?
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
41) One drawback of the patent system is that firms must disclose to the public information
about the product or process.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 187
Topic: New Growth Theory
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
7-31
Copyright © 2015 Pearson Canada Inc.
42) Explain how advances in technology are critical to sustaining economic growth, even if
capital per hour worked is consistently increasing. Provide a graph of a per-worker production
function to support your answer.
Answer: As the level of capital per hour worked increases, an economy moves along the perworker production function toward higher levels of real GDP per hour worked. However,
diminishing returns imply that successive increases in capital per hour work increase real GDP
per hour worked at a decreasing rate. As shown in the graph below, moving from point A to point
B implies an increase in capital per hour worked. As a result, real GDP per hour worked
increases from $780 to $800 (an increase of $20). Moving from point B to point C implies a
similar increase in capital per hour worked, but real GDP per hour worked increases from $800
to $810 (an increase of only $10). Without technological change that shifts the per-worker
production function upward, continual growth in real GDP per hour worked cannot be sustained
even if capital per hour worked continues to increase.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 183
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
7-32
Copyright © 2015 Pearson Canada Inc.
43) Starting at point B in the diagram below, identify which combinations of points illustrate
technological change. Give a brief explanation to support your answer.
Answer: The movement from B to D in the diagram illustrates technological change.
Technological change is constant along a given production function. Technological change will
shift the production function up as more output is produced ($17,000 GDP per hour vs. $16,000
GDP per hour) with the same amount of capital per hour worked ($60,000).
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 184
Topic: Per-Worker Production Function
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
44) Explain how market economies are generally better able to achieve technological progress
than are centrally planned economies.
Answer: In a centrally planned economy, decisions regarding the allocation of resources are
made by government employees paid a salary, not by independent entrepreneurs whose own
finances are at stake. Independent entrepreneurs make choices for the use of resources based on
the expected profitability of various projects. This drive for profit provides an incentive for
technological change that centrally planned economies are unable to duplicate. The result is that
technological progress is more likely in market economies than in centrally planned economies.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 184
Topic: What Determines How Fast Economies Grow?
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: Making the Connection: What Explains the Economic Failure of the Soviet
Union?
7-33
Copyright © 2015 Pearson Canada Inc.
45) Provide examples of three kinds of government policies that can help increase the
accumulation of knowledge capital and explain why government policies are often necessary to
encourage the accumulation of knowledge capital.
Answer: Knowledge capital is a result of research and development that culminates in new
technology. Because research and development is costly, and the resulting knowledge capital is
both nonrival and nonexcludable, firms have an incentive not to disclose new technologies. If
other firms can receive some of the benefits without incurring the costs of research and
development, firms have less incentive to invest in research and development (they act as "free
riders"), so government policies are sometimes necessary to encourage research and
development. For example, government policies that protect intellectual property rights with
patents and copyrights guarantee firms exclusive rights to profits from new technologies for a
period of time. This will encourage the accumulation of knowledge capital. In addition, subsidies
for research and development through grants to researchers or tax benefits to firms that invest in
research and development can also encourage the accumulation of knowledge capital. Finally,
government subsidies for education will increase the number of workers who receive education,
thereby reducing firms' costs of training and increasing the level of research and development
firms will be willing to undertake.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 187-188
Topic: New Growth Theory
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Analytic Skills
Special Feature: None
46) Is knowledge capital subject to the law of diminishing returns? Explain.
Answer: The law of diminishing returns states that successive increases in capital result in
successively smaller and smaller increases in output. Knowledge capital may not be subject to
the same law of diminishing returns that physical capital is. In fact, knowledge capital may
experience increasing returns because knowledge, once discovered, is available to everyone and
is therefore more likely to generate new technologies and economic growth.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 186-187
Topic: New Growth Theory
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
7-34
Copyright © 2015 Pearson Canada Inc.
47) Describe the process of "creative destruction" using a specific example.
Answer: Creative destruction, based on the ideas of Joseph Schumpeter, describes the process
whereby older products are driven out of the market by newer products. New products that meet
consumer wants in qualitatively better ways will increase the overall standard of living for an
economy. Here are some current and historical examples of creative destruction: DVD players
replaced video tapes and VHS recorders, calculators replaced slide rules, clocks replaced
sundials, cars replaced horses and buggies, disposable diapers replaced cloth diapers, Game Boys
and Xboxes replaced Ataris, Internet Explorer replaced NCSA Mosaic, CD players replaced tape
players, indoor plumbing replaced outhouses, iPods replaced Walkmans, phones replaced the
telegraph, planes replaced trains for travel, digital cameras replaced film cameras, and electricity
replaced candlelight and gas lights.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 188
Topic: Creative Destruction
Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ
across countries
AACSB: Reflective Thinking
Special Feature: None
48) An economic growth model
A) explains changes in nominal GDP per capita in the long run.
B) explains changes in real GDP per capita in the long run.
C) explains changes in nominal GDP per capita in the short run.
D) explains changes in real GDP per capita in the short run.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 181-182
Topic: What Makes Economies Grow?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
49) Which factors explain labour productivity?
A) technological change; the quantity of labour per hour worked
B) diminishing returns; the quantity of labour per hour worked
C) diminishing returns; the quantity of capital per hour worked
D) technological change; the quantity of capital per hour worked
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 181-182
Topic: What Makes Economies Grow?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
7-35
Copyright © 2015 Pearson Canada Inc.
50) The per-worker production function shows the relationship between ________ per hour
worked and ________ per hour worked, holding ________ constant.
A) labour; real GDP; technology
B) capital; real GDP; technology
C) labour; capital; real GDP
D) capital; labour; real GDP
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 182-183
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
Figure 7.3
51) Refer to Figure 7.3. Technological change is shown in the figure above by the movement
from
A) B to C.
B) B to D.
C) B to E.
D) B to A.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 182-183
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
7-36
Copyright © 2015 Pearson Canada Inc.
52) Refer to Figure 7.3. Which of the following would cause an economy to move from a point
like A in the figure above to a point like B?
A) an improvement in technology
B) a decrease in capital per hour worked
C) an increase in capital per hour worked
D) a technological regression
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 182-183
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
53) The per-worker production function has a ________ slope, indicating that increases in capital
per hour worked ________ real GDP.
A) negative; increase
B) positive; increase
C) negative; decrease
D) positive; decrease
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 182-183
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
54) A small economy increased its capital per hour worked (K/L) from $40,000 to $50,000. As a
result, real GDP per worker (Y/L) grew from $20,000 to $25,000. If the economy increases its
capital per hour worked by another $10,000 to $60,000, but there is no change in technology, by
how much more and in what direction will output per worker change?
A) Output per worker will increase by exactly $5,000.
B) Output per worker will increase by more than $5,000.
C) Output per worker will increase by less than $5,000.
D) Output per worker will fall by more than $5,000.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 182-183
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
7-37
Copyright © 2015 Pearson Canada Inc.
55) What is human capital?
A) labour productivity
B) buildings, equipment, and machinery owned by individuals rather than firms
C) buildings, equipment, and machinery owned by firms
D) the accumulated knowledge and skills that workers acquire from education, training, and life
experiences
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 181-182
Topic: What Makes Economies Grow?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
56) If there is a change in the ability of a firm to produce a given level of output with a given
level of inputs, we say there is
A) human capital investment.
B) technological change.
C) an increase in labour productivity.
D) a movement along a given per-worker production function.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 183-184
Topic: What Makes Economies Grow?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
57) Technological change will
A) shift the per-worker production function up.
B) shift the per-worker production function down.
C) move the economy to a point beneath the per-worker production function.
D) move the economy along a given per-worker production function.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 182-183
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills, Use of Information Technology
Special Feature: None
7-38
Copyright © 2015 Pearson Canada Inc.
58) In the long run, a country will experience an increasing standard of living only if it
experiences
A) a high rate of consumption.
B) continuous technological change.
C) a high rate of labour-force growth.
D) a slow rate of population growth.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 183-184
Topic: What Makes Economies Grow?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
59) If, after an outflow of workers in a country, it now takes more capital per hour worked to get
the same amount of GDP per hour worked, this indicates ________ the per-worker production
function in that country.
A) a movement up
B) a movement down
C) an upward shift of
D) a downward shift of
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 183-184
Topic: What Makes Economies Grow?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
60) If an outflow of workers leaves a country with a smaller but more productive workforce and
the capital per hour worked does not change, there will be ________ the per-worker production
function in that country.
A) a movement up
B) a movement down
C) an upward shift of
D) a downward shift of
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 183-184
Topic: What Makes Economies Grow?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
7-39
Copyright © 2015 Pearson Canada Inc.
61) Which of the following describes the former Soviet Union's economy through most of the
second half of the 20th century?
A) The Soviet economy grew rapidly in the later half of the 20th century.
B) The Soviet economy increased capital per worker very slowly from 1950 through 1980.
C) The Soviet economy grew slowly because of the slow rate of technological change.
D) The Soviet economy grew because it added labour through its immigration policy in the
1950s.
Answer: C
Diff: 2
Type: MC
Page Ref: 184-185
Topic: What Makes Economies Grow?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: Making the Connection: What Explains the Economic Failure of the Soviet
Union?
62) The former Soviet Union consistently increased the amount of capital available to its
workers, but found that increases in capital resulted in progressively smaller and smaller
increases in GDP per worker. This phenomenon is referred to as
A) a rising standard of living.
B) diminishing returns to capital.
C) new growth theory.
D) a shift of the per-worker production function.
Answer: B
Diff: 2
Type: MC
Page Ref: 184-185
Topic: What Makes Economies Grow?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: Solved Problem: Using the Economic Growth Model to Analyze the Failure of
the Soviet Economy
63) New growth theory
A) states that the rate of technological change is determined outside the working of the market
system.
B) does not adequately explain the factors that determine productivity.
C) states that the rate of technological change is caused by economic incentives.
D) states that the rate of technological change is unaffected by economic incentives.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 186-188
Topic: New Growth Theory
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
7-40
Copyright © 2015 Pearson Canada Inc.
64) If the per-worker production function shifts up,
A) it now takes more capital per hour worked to get the same amount of real GDP per hour
worked.
B) an economy can increase its real GDP per hour worked without changing the level of capital
per hour worked.
C) the per-worker production function becomes flatter.
D) negative technological change has occurred in the economy.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 183-184
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
65) Knowledge capital is ________ in production and ________. As a result, firms ________
free ride.
A) nonrival; nonexcludable; can
B) nonrival; excludable; can
C) rival; nonexcludable; cannot
D) nonrival; nonexcludable; cannot
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 186-188
Topic: New Growth Theory
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
66) An increase in ________ shifts the production function ________, and makes it possible to
produce a higher level of GDP with ________ capital per hour worked.
A) technology; down; the same amount of
B) technology; up; the same amount of
C) consumption; up; a lesser amount
D) labour productivity; down; the same amount of
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 183-184
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking, Use of Information Technology
Special Feature: None
7-41
Copyright © 2015 Pearson Canada Inc.
67) In a small Asian country, it is estimated that a $10,000 increase in capital per hour worked
will increase real GDP per hour worked by $600. Based on this information, what is the slope of
the per-worker production function in this range?
A) 0.06
B) 6.6
C) 66.6
D) 666
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 183-184
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
68) In a small Asian country, it is estimated that changing the level of capital from $8 million to
$12 million will increase real GDP from $5 million to $6 million. If the number of hours worked
in the labour force does not change, what does this information tell you about the slope of the
per-worker production function in this range?
A) The slope is -4.
B) The slope is 1/4.
C) The slope is 4.
D) The slope is 8.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 183-184
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
7-42
Copyright © 2015 Pearson Canada Inc.
69) In a small Asian country, it is estimated that changing the level of capital from $8 million to
$12 million will increase real GDP from $4 million to $6 million. What level of GDP would you
expect the economy to be able to reach if spending on capital continued to rise to $16 million,
assuming no technological change and no change in the hours of work?
A) GDP would increase further, but by less than $2 million.
B) GDP would increase further by exactly $2 million.
C) GDP would increase further by more than $2 million
D) GDP would increase further by exactly $8 million.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 183-184
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
70) If the slope of the per-worker production function is 1/4 in a given range, how will a $10,000
increase in capital per hour worked affect real GDP per hour worked in the same given range?
A) Real GDP per hour worked will increase by $2,500.
B) Real GDP per hour worked will increase by $40,000.
C) Real GDP per hour worked will increase by $10,000.
D) Real GDP per hour worked will decrease by $40.000.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 183-184
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
7-43
Copyright © 2015 Pearson Canada Inc.
Figure 7.4
71) Refer to Figure 7.4. The movement from A to B to C illustrates
A) an improvement in technology.
B) a decline in capital per worker.
C) diminishing returns to capital.
D) diminishing returns to labour.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 183-185
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
72) Refer to Figure 7.4. The movement from E to B to D in the figure above illustrates
A) an improvement in technology.
B) a decline in capital per worker.
C) diminishing returns to capital.
D) diminishing returns to labour.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 183-185
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
7-44
Copyright © 2015 Pearson Canada Inc.
73) Refer to Figure 7.4. Suppose the economy gains more capital per hour worked and
experiences technological change. This is shown in the figure above by the movement from
A) E to B to D.
B) A to B to C.
C) A to E.
D) A to D.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 183-185
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
74) Refer to Figure 7.4. Which of the following combinations of points illustrates changes in the
Soviet Union's economy from 1950 to 1980?
A) E to B
B) B to D
C) B to E
D) A to B to C
Answer: D
Diff: 2
Type: MC
Page Ref: 184-185
Topic: What Makes Economies Grow?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills, Multicultural and Diversity
Special Feature: Solved Problem: Using the Economic Growth Model to Analyze the Failure of
the Soviet Economy
75) Refer to Figure 7.4. Using the per-worker production function in the figure above, the
largest changes in an economy's standard of living would be achieved by a movement from
A) A to B to C.
B) E to B to D.
C) C to B to A.
D) D to B to E.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 183-185
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
7-45
Copyright © 2015 Pearson Canada Inc.
76) Refer to Figure 7.4. Suppose the per-worker production function in the figure above
represents the production function for the Canadian economy. If Canada decided to cut its
support of university research in half, this would cause a movement from
A) B to A.
B) B to E.
C) B to C.
D) B to D.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 183-185
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
77) Refer to Figure 7.4. Within a country, the impact of wars and revolutions and their
subsequent destruction of capital is reflected in the per-worker production function in the figure
above by a movement from
A) A to C.
B) B to C.
C) B to A.
D) E to B.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 183-185
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
78) Refer to Figure 7.4. Many countries in Africa strongly discouraged and prohibited foreign
direct investment in the 1950s and 1960s. By doing so, these countries were essentially
preventing a movement from
A) B to A.
B) E to B.
C) A to E.
D) D to B.
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 183-185
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
7-46
Copyright © 2015 Pearson Canada Inc.
79) New growth theory states that increases in ________ capital will result in ________ at the
________ level.
A) knowledge; increasing returns to scale; firm
B) physical; decreasing returns to scale; firm
C) knowledge; decreasing returns to scale; economy
D) knowledge; increasing returns to scale; economy
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 186-188
Topic: New Growth Theory
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
80) According to new growth theory, the accumulation of ________ capital is subject to
diminishing returns at the ________ level, but not at the level of the economy as a whole.
A) physical; firm
B) technological; personal
C) knowledge; firm
D) physical; production
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 186-188
Topic: New Growth Theory
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
81) Because knowledge capital is nonexcludable and nonrival, firms have an incentive to
________ the research and development of other firms.
A) make bids on
B) not use
C) ignore
D) free ride on
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 186-188
Topic: New Growth Theory
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
7-47
Copyright © 2015 Pearson Canada Inc.
82) When firms benefit from the results of research and development they didn't pay for, we say
firms are
A) litigious.
B) free riding.
C) investing in knowledge capital.
D) maintaining a level playing field.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 186-188
Topic: New Growth Theory
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
83) For how long does a patent give a firm the exclusive legal right to a product?
A) 10 years
B) 17 years
C) 20 years
D) 50 years
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 186-188
Topic: New Growth Theory
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
Special Feature: None
84) A copyright grants the creator of a book, film, or piece of software exclusive legal rights to
use the creation for how long?
A) the creator's lifetime plus 10 years for the creator's heirs
B) the creator's lifetime plus 20 years for the creator's heirs
C) the creator's lifetime plus 50 years for the creator's heirs
D) the creator's lifetime plus 70 years for the creator's heirs
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 186-188
Topic: New Growth Theory
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
Special Feature: None
7-48
Copyright © 2015 Pearson Canada Inc.
85) According to the text, there are three ways the government can help increase the
accumulation of knowledge capital. What are they?
A) protecting intellectual property rights, subsidizing research and development, and subsidizing
education
B) increasing taxes on firms, eliminating patents, and increasing the minimum wage
C) encouraging the use of trade secrets, expanding student loan programs, and increasing the
minimum wage
D) reducing taxes on capital, increasing Social Security payments, and lowering the exchange
rate
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 186-188
Topic: New Growth Theory
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
86) According to Joseph Schumpeter, which of the factors of production is central to economic
growth?
A) land
B) labour
C) natural resources
D) the entrepreneur
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 188
Topic: Creative Destruction
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
7-49
Copyright © 2015 Pearson Canada Inc.
87) According to Joseph Schumpeter, the theory of creative destruction describes a process by
which
A) some new products unleash a gale of destruction that drive other new products out of the
market.
B) new products unleash a gale of destruction that drives old products out of the market.
C) new products are created by the destruction of capital.
D) the creation of new products never involves the destruction of old products.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 188
Topic: Creative Destruction
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
88) The easiest way for a country to obtain access to technology is through
A) subsidizing education and training.
B) promoting foreign direct investment.
C) promoting policies to enhance saving.
D) enacting policies to promote property rights.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 186-188
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking, Use of Information Technology
Special Feature: None
89) The Soviet Union's economic growth rate slowed despite rapid increases in capital per hour
worked.
Answer: TRUE
Diff: 2
Type: TF Page Ref: 184-185
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: Making the Connection: What Explains the Economic Failure of the Soviet
Union?
7-50
Copyright © 2015 Pearson Canada Inc.
90) Technological change allows the economy to produce more output with the same amount of
capital and labour.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 183-185
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking, Use of Information Technology
Special Feature: None
91) According to new growth theory, firms accumulate the efficient level of both physical and
knowledge capital.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 186-188
Topic: New Growth Theory
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
7-51
Copyright © 2015 Pearson Canada Inc.
Table 7.3
Year
2008
2009
2010
2011
Real GDP per Capita
(2007 prices)
$28,000
29,000
30,000
31,000
Growth Rate in Real
GDP per Capita
92) Refer to Table 7.3. Use the table above to calculate the annual growth rate in GDP. Also
calculate the total percentage change in the growth from 2008 through 2011. Explain the
difference between the average annual growth rate in real per capita GDP from 2008 through
2011 and the total percentage change in growth from 2008 and 2011.
Answer: One calculates the average annual percent change in growth from 2008 through 2011
by finding the individual growth rates from year to year and then averaging them. The growth
rates are calculated as follows:
2009 growth = (29,000 - 28,000) / 28,000 = 3.6%
2010 growth = (30,000 - 29,000) / 29,000 = 3.4%
2011 growth = (31,000 - 30,000) / 30,000 = 3.3%
Because we are dealing with only a few years, we can approximate the average annual growth
rate by averaging the growth rates for each year. The average annual growth rate is (3.6% + 3.4%
+ 3.3%) / 3 = 3.4% (approximately—calculated to accuracy to the tenth)
The total percentage change in growth from 2008 through 2011 is calculated differently. In this
case, one would find the growth rate that occurred over the entire period from 2008 through
2011. This is (31,000 - 28,000) / 28,000 = 10.7%. Note that the calculations result in very
different answers.
Diff: 2
Type: SA Page Ref: 185-186
Topic: New Growth Theory
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
93) The owner of a firm wants some advice on how to increase productivity. Suggest three ways
the entrepreneur could increase labour productivity through improving technology.
Answer: There are three main ways to improve technology. First, the entrepreneur could install
the most up-to-date equipment and machinery. Second the owner could implement an on-the-job
training program to improve the skills of his workers. He could even send a few of his workers to
college. Finally, the owner could develop better means of organizing and managing the
production process.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 181-182
Topic: What Makes Economies Grow?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
7-52
Copyright © 2015 Pearson Canada Inc.
94) Your friend owns a snow cone stand that he works by himself. He produces about 25 snow
cones per hour. He wants to be able to produce twice as many snow cones per hour, so he buys a
second machine. He notices that he can only produce 10 more snow cones an hour. He jokes that
he could have doubled his output with the second machine if he only had four hands. Using your
knowledge of the production process, explain to your friend what you think has happened when
he added more capital to his production process.
Answer: The second machine does not add as much as the friend thinks it should because of the
phenomenon of diminishing returns. He is able to produce more snow cones, but less with the
second machine than with the first. This is because as the only worker, he is not physically able
to work a second machine as rapidly as he could the first machine. He probably could double
output if he added another worker.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 182-183
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
7-53
Copyright © 2015 Pearson Canada Inc.
95) Use production functions from the economic growth model to explain why Canada grew at a
much faster rate than the former Soviet Union in the latter half of the 20th century.
Answer:
The Soviet Union's strategy to increase growth from the 1950s through the 1980s was to increase
capital per hour worked. While this can increase growth, according to the economic growth
model, eventually diminishing returns to capital set in. This means that as the Soviet Union
added more and more factories, the extra factories added less and less to output.
From the diagram above, the Soviet Union took a path along Production function 1. They
chose to increase capital per worker, and this moved them from A to B to C to D, where each
time the increase in capital is the same, $10,000. It does increase output per worker. The most
dramatic change is the movement from A to B, when real GDP per worker rises by $1,000.
However, each subsequent addition to capital brings about smaller increases in real GDP per
worker. The movement from B to C increases real GDP per worker by $400; the movement from
C to D increases real GDP per worker by $100
Technological change is key to sustaining economic growth. The Soviet Union experienced
very slow technological change. An extreme illustration of this is graphing the Soviet Union as
moving along the same production function, Production function 1. In comparison, Canada
experienced more rapid technological change. This would be illustrated by the shift up to
Production function 2. Canada moved on a path from B to E. The Soviet Union moved on a path
from B to C to D. The improvement in technology increases real GDP per worker by $1000. The
movement from B to D increases real GDP per worker by only $500.
Diff: 3
Type: SA Page Ref: 184-186
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills, Multicultural and Diversity
Special Feature: Making the Connection: What Explains the Economic Failure of the Soviet
Union?
7-54
Copyright © 2015 Pearson Canada Inc.
96) Using the points on the diagram below, identify which combinations of these points illustrate
diminishing returns to capital. Give a brief explanation to support your answer.
Answer: The movement from A to B to C illustrates diminishing returns to capital in the
diagram. When technology is held constant, equal increases in capital per hour lead to
diminishing increases in output per hour. Technology is held constant by moving along a given
production function diagram. Capital per hour increases by $10,000 per worker in the movement
from A to B and from B to C. The movement from A to B increases output per worker by $1,000.
The movement from B to C increases output per worker by $400. Clearly, the additions to output
are diminishing.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 184-186
Topic: Per-Worker Production Function
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Analytic Skills
Special Feature: None
7-55
Copyright © 2015 Pearson Canada Inc.
97) One of the results of Paul Romer's new growth theory is that investment in research and
development will be too low in an economy. Explain how he comes to this conclusion.
Answer: According to Romer, knowledge capital is a key determinant of economic growth.
Firms contribute to an economy's knowledge capital by conducting research and development.
But there is a problem. Knowledge capital is nonrival in that if one firm uses it, it does not
prevent another firm from using it. Also knowledge capital is nonexcludable because if one firm
gets it, all other firms get it too. That is, once the formula for a drug is known, it becomes widely
available for other firms to use. If this is the case, when one firm invents a drug, once the
formula for the drug is known, other firms cannot be prevented from benefiting from the research
and development they did not pay for. These firms have the incentive to free ride. If this is the
case, the original firm inventing the formula cannot capture all the benefits of the formula. Some
of the marginal benefits will go to other firms. If this is the case, the firm will choose the amount
of research and development equal to the amount that will equate the marginal costs and the
marginal benefits for the firm. Since the marginal benefits to the firm will be low, then the firm
will not invest enough in research and development.
Comment: Recurring
Diff: 3
Type: SA Page Ref: 186-188
Topic: New Growth Theory
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
98) Suggest two policies the federal government could pursue to help increase the accumulation
of knowledge.
Answer: Any two of the following three explanations are correct.
First, the government could increase the incentive to engage in research and development by
giving firms the exclusive rights to their discoveries for a long period of time. The Canadian
government does this by granting patents, or the exclusive right to produce a product, for 20
years to firms that invent new products or processes. This allows the company to capture the
profits from selling this product exclusively.
Second, the government can encourage research and development by directly subsidizing
research and development. This can be done by granting tax benefits to firms that invest in
research and development, providing support for research at universities, or directly carrying out
the research itself.
Third, the government can subsidize education. This should increase the number of workers
with technical training.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 186-188
Topic: New Growth Theory
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
7-56
Copyright © 2015 Pearson Canada Inc.
7.3 Economic Growth in Canada
1) Growth in Canada from 1870 to 1970 can be characterized as
A) positive and increasing.
B) positive and flat.
C) positive and decreasing.
D) negative.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 189
Topic: Economic Growth in Canada
Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada
AACSB: Analytic Skills
Special Feature: None
2) Which of the following explains the ability of the Canadian economy to avoid diminishing
marginal returns and experience accelerating growth in the early to mid-20th century?
A) continuing technological change
B) immigration
C) additions of a greater amount of capital of the same quality
D) a decrease in the quality of labour
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 189
Topic: Economic Growth in Canada
Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada
AACSB: Reflective Thinking
Special Feature: None
3) In Canada, the annual growth rate of real GDP per person between 1995 and 2011 averaged
A) -1.0%.
B) -0.3%.
C) 1.6%.
D) 2.8%.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 187
Topic: Economic Growth in Canada
Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada
AACSB: Reflective Thinking
Special Feature: None
7-57
Copyright © 2015 Pearson Canada Inc.
4) Growth in real GDP per person in Canada began to slow down during what period of time?
A) 1900-1949
B) 1950-1972
C) 1973-1994
D) 1995-2008
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 187
Topic: The Productivity Slowdown of 1973-1994
Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada
AACSB: Reflective Thinking
Special Feature: None
5) The productivity slowdown of the mid-1970s in Canada can be explained by which of the
following?
A) excessive use of fiscal policy
B) large increases in research and development
C) a decline in labour skills
D) diminishing marginal returns
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 190
Topic: The Productivity Slowdown of 1973-1994
Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada
AACSB: Reflective Thinking
Special Feature: None
6) Which of the following is true regarding the productivity slowdown in Canada during the
mid-1970s?
A) The productivity slowdown occurred despite a rising quality of labour.
B) The productivity slowdown was unique to Canada as other countries experienced
unprecedented rates of growth during that time.
C) High oil prices raised the costs of doing business for markets worldwide, and reduced output
worldwide as well.
D) The move toward a "New Economy" ended in the early 1970s, resulting in less technological
progress in Canada during the mid-1970s.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 190
Topic: The Productivity Slowdown of 1973-1994
Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada
AACSB: Reflective Thinking
Special Feature: None
7-58
Copyright © 2015 Pearson Canada Inc.
7) Some economists argue that the apparent slowdown in economic growth in Canada during the
mid-1970s may not really have reduced the standard of living because
A) spending on new government regulations such as the anti-pollution and worker safety laws
increased output dramatically without increasing the standard of living of Canadians.
B) significant improvements in the quality of services occurred, and convenience and improved
quality are not always readily captured by GDP measurements.
C) changes in well-being are accurately reflected in statistics measuring economic growth.
D) higher production costs from higher oil prices raised production and transportation costs and
reduced output.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 190
Topic: The Productivity Slowdown of 1973-1994
Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada
AACSB: Reflective Thinking
Special Feature: None
8) Why do some economists doubt the once commonly held belief that rapid oil price increases
from 1974-1979 explain the productivity slowdown of 1973-1994?
A) The average level of standard of living in Canada rose dramatically during this period of time.
B) The productivity slowdown continued even when oil prices declined.
C) Canadian firms never fully adapted to high oil prices.
D) All high income countries experienced a growth slowdown between the mid-1970s and the
mid-1990s.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 190
Topic: The Productivity Slowdown of 1973-1994
Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada
AACSB: Reflective Thinking
Special Feature: None
9) The "new economy" which some economists believe can lead to higher productivity growth in
the future is based on
A) manufacturing.
B) financial services.
C) information technology.
D) retail sales.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 190
Topic: The New Economy
Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada
AACSB: Reflective Thinking
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
10) Which of the following developments have the potential to significantly increase labour
productivity and the standard of living?
A) the increased use of the Internet in selling products and services
B) expanded cell phone use
C) the lower cost and increased availability of mobile computers
D) all of the above
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 190
Topic: The New Economy
Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada
AACSB: Reflective Thinking
Special Feature: None
11) The rate of growth of productivity in Canada was positive during the 20th century.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 189
Topic: Economic Growth in Canada
Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada
AACSB: Reflective Thinking
Special Feature: None
12) The labour productivity slowdown in Canada in the 1970s was due to declining quality of
education in, because no other industrialized country experienced the same labour productivity
slowdown at the same time.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 190
Topic: The Productivity Slowdown of 1973-1994
Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada
AACSB: Reflective Thinking
Special Feature: None
13) Compared to the previous 20 years, productivity growth in Canada increased between 1995
and 2011.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 189
Topic: Economic Growth in Canada
Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada
AACSB: Reflective Thinking
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
14) Describe the pattern of growth rates in real GDP per person in Canada since the early
nineteenth century. Has output per hour worked consistently increased at the same rate? Explain.
Answer: Growth in real GDP per hour worked averaged 1.7% throughout the nineteenth century
and then increased to over 2% until the mid-1970s (when it fell to 1.7% again). Productivity
slowed dramatically during the mid-1970s. This slowdown has persisted throughout the turn of
the century, with average annual growth rates in GDP per person sitting at 1.6% through 2011.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 189
Topic: Economic Growth in Canada
Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada
AACSB: Reflective Thinking
Special Feature: None
15) Explain three reasons why the productivity slowdown of 1973-1994 occurred.
Answer: Three explanations have been suggested for the productivity slowdown of 1973-1994:
measurement problems, high oil prices, and transition from a goods-based economy to a service
economy. Measurement problems in accounting for improvements to environmental and health
safety laws as well as in measuring growth in the output of services may have resulted in
additional output that was not reflected in estimates of real GDP. In the 1980s many economists
believed high oil prices increased costs for many industries, reducing output as a result, but this
theory does not hold through the declining oil prices of the late 1980s and early 1990s, which
still saw slow growth rates. It is more difficult to measure increases in the output of services than
to measure increases in the output of goods
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 190
Topic: The Productivity Slowdown of 1973-1994
Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada
AACSB: Reflective Thinking
Special Feature: None
16) Which of the following accurately describes growth rates in Canada from 1900 to the
present?
A) Growth rates rose until the 1970s; then fell until the present.
B) Growth rates have risen continuously from 1900 to the present.
C) Growth rates rose until the 1970s, slowed until the 1990s; then rose up to the present.
D) Growth rates have fallen continuously from 1900 to the present.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 189-190
Topic: Economic Growth in Canada
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
17) During which of the following periods was the Canadian growth rate the fastest?
A) 1900-1949
B) 1950-1972
C) 1973-1994
D) 1995-2011
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 189
Topic: Economic Growth in Canada
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
Special Feature: None
18) Because of the productivity slowdown in Canada from the mid-1970s through the mid1990s,
A) real GDP per capita grew more rapidly.
B) real GDP per capita grew more slowly.
C) the standard of living did not change.
D) the standard of living increased in Canada.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 189-190
Topic: The Productivity Slowdown of 1973-1994
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: None
19) An explanation for the productivity slowdown from 1973 through 1995 is
A) measurement problems.
B) creative destruction.
C) a decline in oil prices.
D) an increase in labour quality.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 189-190
Topic: The Productivity Slowdown of 1973-1994
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
20) Some economists argue that the productivity slowdown from mid-1970s to mid-1990s
actually didn't happen, but just "appeared" to happen because
A) services were becoming a more important part of the economy and it was hard to measure
increases of output from services.
B) new environmental laws had passed that forced firms to spend to reduce pollution, and this
spending did not raise output.
C) increased spending on health and safety raised worker productivity.
D) A and B
E) B and C
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 189-190
Topic: The Productivity Slowdown of 1973-1994
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
21) Some economists argue that the productivity slowdown of the mid-1970s to the mid-1990s
was due to changes in oil prices that
A) increased production costs, causing firms to reorganize production to conserve energy, which
reduced output per worker.
B) decreased production costs, causing firms to reorganize production to conserve energy, which
reduced output per worker.
C) increased production costs, causing firms to reorganize production to conserve energy, which
increased output per worker.
D) decreased production costs, causing firms to increase production, which reduced output per
worker.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 189-190
Topic: The Productivity Slowdown of 1973-1994
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
22) Given the fact that the productivity slowdown of the mid-1970s to the mid-1990s affected all
industrial countries, which of the following explanations for the productivity slowdown in
Canada is not likely to be correct?
A) A deterioration of the Canadian education system caused a decline in the quality of labour.
B) High oil prices increased costs.
C) Services became a larger fraction of GDP.
D) Firms had to meet stricter environmental regulations.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 189-190
Topic: The Productivity Slowdown of 1973-1994
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
23) Which of the following is not an explanation for the revival in the growth of productivity
starting in the mid-1990s?
A) Information and communication innovations have been increasingly geared toward improving
business processes and not consumer products.
B) Faster computers have sped up data processing.
C) Internet use has increased the efficiency of how firms buy and sell to each other and to
consumers.
D) Cell phones and wireless Internet access have increased worker flexibility.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 190
Topic: The New Economy
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
24) The productivity slowdown experienced in Canada from the mid-1970s to the mid-1990s
was actually a global phenomenon.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 190
Topic: The Productivity Slowdown of 1973-1994
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
25) Over the last three decades in Canada, services have become a smaller fraction of GDP
relative to goods.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 190
Topic: Economic Growth in Canada
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
26) How might Canada's educational system have contributed to the productivity slowdown of
the mid-1970s to the mid-1990s?
Answer: If the educational system was not preparing workers with the skills that they needed to
perform their jobs, these workers would have had low rates of productivity. There was some
evidence at the time that the educational system was deteriorating. Standardized tests scores had
begun to decline in the 1970s. In addition, the skills necessary to perform many jobs were
changing. The school system might not have responded to the change by incorporating teaching
programs and methods designed to teach these skills. However, because it is difficult to quantify
the skills necessary for a particular job, it is hard to measure this effect.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 190
Topic: The Productivity Slowdown of 1973-1994
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
7.4 Why Isn't the Whole World Rich?
1) The economic growth model predicts that
A) the level of real GDP per capita in poor countries will grow faster than in rich countries.
B) the per-worker production function of poor countries will be flatter than the per-worker
production function of rich countries.
C) lower-income industrial countries will forever be unable to catch up to higher-income
industrial countries.
D) economic growth in rich countries can only be accomplished at the expense of slow or even
negative growth in poor countries.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 191-192
Topic: Catch-up
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
2) Which of the following is a true statement regarding the economic growth model's predictions
and how it actually affects the real world?
A) The growth model predicts that poor countries should catch up with rich countries, but
developing countries are not catching up to lower-income industrialized countries as a group.
B) The growth model predicts that poor countries will never catch up with rich countries, but
lower-income industrialized countries are catching up to higher-income industrialized countries
as a group.
C) The growth model predicts that poor countries will catch up with rich countries, but lowerincome industrialized countries are not catching up to higher-income industrialized countries as a
group.
D) The growth model predicts that poor countries will catch up with rich countries, and this is
what we observe across all developmental categories of countries.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 191-192
Topic: Catch-up
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
Figure 7.5
3) Refer to Figure 7.5. Based on the "catch-up line" drawn above, poorer countries are more
likely to be at a point like ________, where growth in GDP is relatively ________, while richer
countries are more likely to be at a point like ________, where growth in GDP is relatively
________.
A) A; low; B; high
B) A; high; B; low
C) B; low; A; high
D) B; high; A; low
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 191-192
Topic: Catch-up
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
7-67
Copyright © 2015 Pearson Canada Inc.
4) Consider two countries, Alpha and Beta. In Alpha, real GDP per capita is $6,000. In Beta, real
GDP per capita is $9,000. Based on the economic growth model, what would you predict about
the growth rates in real GDP per capita across these two countries?
A) The growth rate of real GDP per capita will be lower in Alpha than it is in Beta.
B) The growth rate of real GDP per capita will be higher in Alpha than it is in Beta.
C) The growth rate of real GDP per capita in Alpha and Beta will be the same.
D) The economic growth model makes no predictions regarding differences in growth rates of
real GDP per capita across the two countries.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 191-192
Topic: Catch-up
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
5) The industrialized group of countries has growth rates that are consistent with the findings of
the economic growth model. That is, Taiwan, Korea, and Singapore had ________ incomes in
1960 than Canada, the United States and Switzerland; and Taiwan, Korea, and Singapore grew
________ than Canada, the United States and Switzerland between 1960 and 2009.
A) lower; more rapidly
B) greater; less rapidly
C) lower; less rapidly
D) greater; more rapidly
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 191-192
Topic: Catch-up
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
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Copyright © 2015 Pearson Canada Inc.
Table 7.4
Country
Botswana
Thailand
Japan
Guatemala
Real GDP per Capita
(in 1996 dollars)
$958
1,091
4,544
2,344
Growth in Real GDP
per Capita, 1960-2000
5.29%
4.70%
4.32%
1.29%
6) Refer to Table 7.4. In the table above, which countries are consistent with the predictions of
the economic growth model?
A) Botswana and Thailand
B) Japan and Guatemala
C) only Japan
D) all four countries
Answer: A
Diff: 3
Type: MC
Page Ref: 191-192
Topic: Catch-up
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Analytic Skills
Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up
7) Which of the following does not contribute to the explanation why some countries have not
experienced relatively high growth rates in real GDP per capita despite relatively low initial
levels of real GDP per capita?
A) Many of these developing countries do not have a functioning court system that can enforce
laws.
B) Countries that are relatively poor are more likely to experience wars and revolutions.
C) Countries that are relatively poor are likely to have a lower quality of health care and
education.
D) Countries that are relatively poor are more likely to have higher savings.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 191
Topic: Catch-up
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
7-69
Copyright © 2015 Pearson Canada Inc.
8) According to the World Bank, Albania does one of the worst jobs as a country enforcing the
rule of law. The consequence of a weak rule of law is
A) difficulty in attracting investment and low economic growth.
B) a decrease in cash transactions and increased efficiency.
C) more risk taking on the part of entrepreneurs and greater economic investment.
D) strong property rights enforcement leading to greater investment.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 196
Topic: Why Isn't the Whole World Rich?
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
9) The purchase or building by a corporation of a facility in a foreign country is called
A) foreign direct investment.
B) foreign portfolio investment.
C) foreign capital depreciation.
D) globally-directed investment.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 199
Topic: The Benefits of Globalization
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
10) The purchase by an individual or firm of stock or bonds issued in another country is called
A) foreign exchange arbitrage.
B) foreign direct investment.
C) foreign portfolio investment.
D) global stock exchange.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 199
Topic: The Benefits of Globalization
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
7-70
Copyright © 2015 Pearson Canada Inc.
11) Developing countries with low saving rates and poor levels of health and education are likely
to experience
A) high levels of foreign direct investment.
B) easy access to financial backing from banks.
C) rapid growth in household incomes.
D) low rates of growth in real GDP per capita.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 199
Topic: Why Isn't the Whole World Rich?
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
12) High-income countries have ________ and ________ as compared to developing countries.
A) low rates of savings; high rates of growth
B) low rates of savings; low rates of growth
C) high rates of savings; high rates of growth
D) high rates of savings; low rates of growth
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 192
Topic: Why Isn't the Whole World Rich?
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
13) Globalization refers to
A) the process of establishing a common world currency.
B) the willingness of individuals within a given country to share knowledge with one another.
C) the process of countries becoming more open to foreign trade and investment.
D) the reduction in growth rates of real GDP per capita as a result of trade with foreign countries.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 199
Topic: The Benefits of Globalization
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
7-71
Copyright © 2015 Pearson Canada Inc.
14) Countries that are more globalized tend to have
A) lower levels of real GDP per capita.
B) a higher likelihood of war or revolution.
C) higher growth rates in real GDP per capita.
D) lower levels of foreign direct investment.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 199
Topic: The Benefits of Globalization
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
15) According to the World Bank, GDP per capita ________ in the least corrupt countries than
in the most corrupt countries.
A) is more than 50 percent less
B) is roughly the same
C) is twice as high
D) is more than 10 times higher
Answer: D
Diff: 1
Type: MC
Page Ref: 197-198
Topic: Why Isn't the Whole World Rich?
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: Making the Connection: What Do Parking Tickets in New York City Tell Us
About Poverty in the Developing World?
16) According to a study by economists Raymond Fisman and Edward Miguel, as the level of
corruption in a country increases,
A) so does the number of parking violations by the country's United Nations delegates.
B) so does the size of the country's population.
C) the levels of foreign direct investment and foreign portfolio investment decrease.
D) the levels of real GDP per capita and real income per capita increase.
Answer: A
Diff: 2
Type: MC
Page Ref: 197-198
Topic: The Benefits of Globalization
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: Making the Connection: What Do Parking Tickets in New York City Tell Us
About Poverty in the Developing World?
7-72
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17) Employees who are employed for longer periods tend to have greater skills, greater
productivity and higher wages. American workers tend to retire later and have fewer spells of
long unemployment. This is due to
A) less generous payments for unemployment.
B) fewer regulations around firms' abilities to fire workers.
C) fewer restrictions around implementation of new technology.
D) all of the above
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 195
Topic: Why Isn't the Whole World Rich?
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
18) Foreign direct investment in Canada increased 3.8 percent in 2011. This means that
A) people or firms in other countries increased their purchases of stocks and bonds in Canada by
3.8 percent in 2011.
B) people or firms in Canada increased their purchases of stocks and bonds in foreign countries
by 3.8 percent in 2011
C) people or firms in other countries increased their building or facilities of purchases of
facilities in Canada by 3.8 percent in 2011.
D) people or firms in Canada increased their building of facilities or purchases of facilities in
foreign countries by 3.8 percent in 2011.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 199
Topic: The Benefits of Globalization
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
7-73
Copyright © 2015 Pearson Canada Inc.
19) Relative to productivity growth in the United States, which of the following countries
experienced the largest decline in productivity growth from 1990 to 2010?
A) Canada
B) Japan
C) Germany
D) the United Kingdom
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 195
Topic: Economic Growth in Canada
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
20) From 1990-2010, the productivity growth in Canada was ________ the growth rates of the
United States.
A) greater than
B) less than
C) equal to
D) greater than for the first 15 years, then less than
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 195
Topic: Economic Growth in Canada
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
21) The opportunity cost of being unemployed tends to be the highest in which of the following
countries?
A) Canada
B) the United States
C) France
D) the United Kingdom
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 195
Topic: Economic Growth in Canada
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
7-74
Copyright © 2015 Pearson Canada Inc.
22) Which of the following best explains why productivity growth in the United States has been
faster than in other leading industrialized nations?
A) There are fewer government regulations in the United States regarding the way firms can hire
and fire workers.
B) The financial systems of foreign countries are generally more efficient than those in the
United States.
C) European countries have more flexible policies regarding the number of hours employees are
permitted to work.
D) Job mobility in the United States is more restricted than it is in many foreign countries.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 195
Topic: Economic Growth in Canada
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
23) Productivity gains in Canada since 1990 have been ________ productivity gains in the
United States.
A) the same as
B) lower than
C) higher than
D) more variable than
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 195
Topic: Economic Growth in Canada
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
24) Between 1990 and 2010, which of these leading industrial countries of the world had the
highest average annual growth rate in GDP per capita?
A) the United States
B) Germany
C) Japan
D) Canada
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 195
Topic: Economic Growth in Canada
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
7-75
Copyright © 2015 Pearson Canada Inc.
25) By offering more generous unemployment insurance programs, Canadians can expect
A) to pay less in taxes than in the United States.
B) workers to gain new skills quickly in response to fluctuations in the labour market.
C) shorter periods of unemployment for their workers.
D) longer periods of unemployment for their workers.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 195
Topic: Economic Growth in Canada
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
26) Which of the following is an example of the way the financial markets in the United States
can encourage technological progress more efficiently than other countries?
A) Even when entrepreneurs cannot secure sufficient funding for projects from banks, venture
capital firms may be willing to lend money.
B) The level of legal protection for investors in the United States is relatively low.
C) Because the financial market in the United States is so large, the quantity of trading in
corporate stocks and bonds makes those investments less liquid.
D) Banks in the United States are more willing to take on risk because the government
guarantees each bank cannot lose more than $100,000 on any given loan that defaults.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 195
Topic: Economic Growth in Canada
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
27) The lower-income industrial countries are catching up to the higher-income industrial
countries in terms of economic growth.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 191-192
Topic: Catch-up
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
7-76
Copyright © 2015 Pearson Canada Inc.
28) The developing countries have been catching up to the lower-income industrial countries in
terms of economic growth.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 191-192
Topic: Catch-up
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
29) One reason why many low-income countries experience low rates of growth is because of
low rates of saving and investment in those countries.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 196
Topic: Why Isn't the Whole World Rich?
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Reflective Thinking
Special Feature: None
7-77
Copyright © 2015 Pearson Canada Inc.
30) Would you expect to see higher or lower growth rates for countries that start out with a
relatively low level of real GDP per capita? Explain using the concept of "catch-up" and support
your answer with a graph.
Answer: The economic growth model predicts that countries that start out with a relatively low
level of real GDP per capita would experience higher growth rates in real GDP per capita.
Countries with a low initial level of real GDP per capita will eventually "catch up" to the level of
real GDP per capita in richer countries. This is shown in the graph below. Point A corresponds to
a country where the initial level of real GDP per capita is relatively low, but the growth rate of
real GDP per capita in that country is relatively high. As that economy continues to grow, the
country will move down the line toward point B. Point B corresponds to a country where the
initial level of real GDP per capita is relatively high, but the growth rate of real GDP per capita is
relatively low. If countries with a low initial level of real GDP per capita also have low saving
rates, low levels of education and health, weak court systems or governments that do not enforce
the laws or property rights, then growth rates might remain low.
Diff: 3
Type: ES
Page Ref: 191-192
Topic: Catch-up
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Analytic Skills
Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up
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Copyright © 2015 Pearson Canada Inc.
31) Draw a graph of "catch-up" that shows where you would expect to see a country with low
saving rates and low levels of health and education. How would you expect real GDP per capita
to grow in a country like this? Explain.
Answer: Countries with low saving rates and low levels of health and education are likely to
have low levels of real GDP. Normally, countries with a low initial level of GDP will experience
relatively high levels of growth in real GDP per capita (as shown at point A in the graph below).
However, with low saving rates, firms do not have access to funds to invest in new factories,
machinery, and equipment needed for economic growth. Also, with low levels of health and
education, the labour force is less productive (when they are able to work), so real GDP per
capita does not rise and the country remains at a point like B in the graph below.
Diff: 2
Type: ES
Page Ref: 191-192
Topic: Catch-up
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Analytic Skills
Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up
7-79
Copyright © 2015 Pearson Canada Inc.
Table 7.5
Country
Belgium
France
Canada
Denmark
Real GDP per Capita
in 1960
(1996 dollars)
$7,778
7,824
10,383
10,988
Growth in Real GDP
per Capita
(1996 dollars)
5.02%
4.53%
3.88%
3.47%
32) Refer to Table 7.5. Consider the statistics in the table above in describing the industrialized
countries. Are these consistent with the economic growth model? Briefly explain.
Answer: These statistics for selected industrial economies are consistent with the economic
growth model. The countries with the lowest levels of real GDP per capita in 1960 had the fastest
growth rates between 1960 and 2000. The countries with the highest levels of real GDP per
capita had the slowest growth rates.
Diff: 3
Type: ES
Page Ref: 191-192
Topic: Catch-up
Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have
not experienced rapid economic growth
AACSB: Analytic Skills
Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up
33) The economic growth model predicts that
A) GDP per capita of rich countries will grow more rapidly than in poor countries.
B) GDP per capita of poor countries will grow more rapidly than in rich countries.
C) Governments must centrally direct the economy for growth to occur.
D) GDP per capita of poor countries will never change.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 191
Topic: Why Isn't the Whole World Rich?
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
7-80
Copyright © 2015 Pearson Canada Inc.
34) Empirical evidence from 1960 to 2010 shows that convergence in economic growth is
occurring in which of the following cases?
A) Low-income industrial countries are catching up to high-income industrial countries.
B) Low-income developing countries are catching up to high-income industrial countries.
C) Low-income industrial countries are catching up to high-income developing countries.
D) All low-income countries are catching up to all high-income countries.
Answer: A
Diff: 1
Type: MC
Page Ref: 192
Topic: Catch-up
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: None
35) Which of the following countries actually experienced negative economic growth from 1960
to 2010?
A) Israel
B) Singapore
C) Madagascar
D) Malaysia
Answer: C
Diff: 1
Type: MC
Page Ref: 192
Topic: Catch-up
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
36) Which of the following accurately describes the impact of the rule of law on a country's
economic growth rate?
A) Countries with a strong rule of law have faster economic growth.
B) Countries with a weak rule of law have faster economic growth.
C) Countries that enforce property rights through lawsuits have slower economic growth.
D) Countries where favouritism and bribery are common have stronger rates of growth.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 196-197
Topic: Why Isn't the Whole World Rich?
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
7-81
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37) Which of the following is not a reason why low-income countries might experience low
economic growth?
A) The country has endured extended periods of war.
B) The country fails to enforce a rule of law.
C) The country has a good education system.
D) The country has a low rate of saving and investment.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 196-197
Topic: Why Isn't the Whole World Rich?
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
38) There has been catch-up among the ________ countries, but there has not been catch-up
among ________.
A) developing countries such as Niger; industrialized countries such as Japan
B) industrialized countries such as Japan; all countries of the world
C) developing countries such as Niger; all countries of the world
D) all countries of the world together; industrialized countries such as Japan
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 194-196
Topic: Catch-up
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: None
39) ________ save a ________ of their income. This ________ capital in their economy and
raises economic growth.
A) Developing countries; large proportion; decreases
B) Developing countries; small proportion; increases
C) High-income countries; large proportion; increases
D) High-income countries; small proportion; increases
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 199
Topic: Why Isn't the Whole World Rich?
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
7-82
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40) Lack of investment in strong education and health care systems
A) causes a deterioration in human capital and a decline in labour productivity.
B) causes a decline in physical capital and a decline in labour productivity.
C) increases human capital and causes a decline in labour productivity.
D) causes a deterioration in human capital and an increase in physical capital.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 198-199
Topic: Why Isn't the Whole World Rich?
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
41) Which of the following is an example of foreign portfolio investment?
A) the purchase of a Canadian stock by a Canadian citizen
B) the purchase of a Canadian government bond by a German citizen
C) the purchase of a Canadian mutual fund by a Canadian citizen
D) the purchase of a Japanese factory by a Korean citizen
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 199
Topic: The Benefits of Globalization
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
42) Georg, a German citizen, just purchased 10 shares of stock in Suncor, a Canadian company.
This purchase is an example of
A) foreign direct investment.
B) foreign public investment.
C) foreign portfolio investment.
D) contractual globalization.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 199
Topic: The Benefits of Globalization
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
7-83
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43) Which of the following is an example of foreign direct investment?
A) You purchase a plane ticket to China on WestJet.
B) WestJet builds a hub in China.
C) You buy a plane that was made in China.
D) A stock broker from China sells you a Chinese government savings bond.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 199
Topic: The Benefits of Globalization
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
44) What is the difference between foreign direct investment and foreign portfolio investment?
A) Foreign direct investment involves purchases of foreign stock or bonds by individuals or
firms, while foreign portfolio investment involves a firm purchasing or building a facility in a
foreign country.
B) Individuals engage in foreign portfolio investment, but only firms can engage in foreign direct
investment.
C) Foreign direct investment only takes place when governments make official purchases or
foreign investments, while foreign portfolio investment takes place when firms, individuals, or
the government purchase foreign investments.
D) Foreign direct investment cannot give a low-income country access to funds and technology it
would not otherwise have, but foreign portfolio investment does expand that access.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 199
Topic: The Benefits of Globalization
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
7-84
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45) Foreign direct investment occurs when a Chinese corporation
A) purchases stock issued in China.
B) opens a new Chinese factory.
C) purchases 1,000 shares of stock issued by an Canadian company.
D) opens a new factory in France.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 199
Topic: The Benefits of Globalization
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: None
46) Until recently, many developing countries
A) were quite open to foreign investment.
B) encouraged foreign direct investment but discouraged foreign portfolio investment.
C) sealed themselves off from foreign investment.
D) encouraged foreign portfolio investment but discouraged foreign direct investment.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 199
Topic: The Benefits of Globalization
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
47) Foreign investment can give a low-income country
A) access to funds for investment and access to technology.
B) the means to slow down growth.
C) a path to dependency and low growth.
D) no hope to break the vicious cycle of poverty.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 199
Topic: The Benefits of Globalization
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
7-85
Copyright © 2015 Pearson Canada Inc.
48) Globalization is positively associated with
A) poverty.
B) declining rates of investment.
C) declining standards of living.
D) economic growth.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 199
Topic: The Benefits of Globalization
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
49) Globalization is defined as the process of countries becoming ________ open to foreign
trade and ________ open to foreign investment.
A) more; less
B) more; more
C) less; more
D) less; less
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 199
Topic: The Benefits of Globalization
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
50) The economic growth model predicts that ________ across countries will converge over
time.
A) income levels
B) GDP per capita
C) foreign direct investment rates
D) growth rates
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 194-196
Topic: Why Isn't the Whole World Rich?
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
7-86
Copyright © 2015 Pearson Canada Inc.
51) According to a study by economists Raymond Fisman and Edward Miguel, as the ________
increases , so does the number of parking violations by the country's United Nations delegates.
A) level of corruption in a country
B) population of a country
C) per capita income of a country
D) rate of investment in a country
Answer: A
Diff: 2
Type: MC
Page Ref: 197-198
Topic: The Benefits of Globalization
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
Special Feature: Making the Connection: What Do Parking Tickets in New York City Tell Us
About Poverty in the Developing World?
52) Which of the following countries had the highest level of GDP per capita in 2010?
A) Japan
B) France
C) Canada
D) the United States
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 194-196
Topic: Economic Growth in Canada
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: None
53) Unemployment insurance is usually available to workers in ________ for a shorter period of
time than it is in ________.
A) the United States; Canada
B) Canada and some Western European countries; the United States
C) Canada; some Western European countries
D) some Western European countries; the United States
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 194-196
Topic: Economic Growth in Canada
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
7-87
Copyright © 2015 Pearson Canada Inc.
54) By offering more generous unemployment insurance programs than the United States,
Canada can expect
A) citizens to pay less in taxes than citizens pay in the United States.
B) workers to be very fast in gaining new skills in response to fluctuations in the labour market.
C) shorter periods of unemployment for their workers.
D) longer periods of unemployment for their workers.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 194-196
Topic: Economic Growth in Canada
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
55) The U.S. economy has seen a faster increase in productivity since the mid-1990s as
compared to the economies of Canada and many Western European countries. Which of the
following explains this?
A) U.S. unions impose stricter work rules as compared to unions in Canada and many Western
European countries.
B) U.S. government regulations impose stricter work rules as compared to government
regulations in Canada and Western Europe.
C) The United States has a higher rate of job mobility than do Canada and many Western
European countries.
D) U.S. workers can obtain unemployment insurance for a longer period of time as compared to
workers in Canada and most Western European countries.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 194-196
Topic: Economic Growth in Canada
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: None
7-88
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56) To what do economists attribute the rapid growth of labour productivity in the United States
relative to other countries?
A) the flexibility of U.S. labour markets and the efficiency of the U.S. financial system
B) the strict government rules in the United States that regulate a firm's ability to hire and fire
workers
C) the low rate of job mobility in the United States
D) the high level of unemployment benefits the United States pays relative to other countries like
Canada
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 194-196
Topic: Economic Growth in Canada
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: None
57) As predicted by the economic growth model, countries that start with lower levels of GDP
per capita always grow faster than countries that start with higher levels of GDP per capita.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 192
Topic: Why Isn't the Whole World Rich?
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
58) One reason why many low-income countries experience low rates of growth is because of
poor public education and health.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 198-199
Topic: Why Isn't the Whole World Rich?
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
7-89
Copyright © 2015 Pearson Canada Inc.
59) The purchase of stocks and bonds issued in another country is known as foreign direct
investment.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 199
Topic: The Benefits of Globalization
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
60) Of all industrialized nations, real GDP per capita was the highest in Canada in 2010.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 194-196
Topic: Why Has Productivity Growth Been Faster in the United States?
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: None
61) Explain the meaning of the word "convergence" in the context of economic growth and
standards of living.
Answer: Convergence is a term that describes a prediction of the economic growth model. The
prediction states that the profitability of using additional capital or better technology is generally
greater in developing countries than in a high-income country. This means that poorer countries
ought to grow more rapidly than rich countries and as a result, they should eventually catch up to
the richer countries. This phenomenon is also called catch-up.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 192
Topic: Why Isn't the Whole World Rich?
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
7-90
Copyright © 2015 Pearson Canada Inc.
Table 7.6
Country
India
Bangladesh
Honduras
Bolivia
Real GDP per Capita
in 1960
(1996 dollars)
$847
1,057
1,700
2,354
Average Annual Growth in
Real GDP per Capita
between 1960 and 2000
(1996 dollars)
4.70%
1.45%
0.50%
0.38%
62) Refer to Table 7.6. Consider the statistics in the table above in describing the developing
countries. Are these consistent with the economic growth model? Briefly explain.
Answer: These statistics for developing countries are consistent with the economic growth
model. The countries with the lowest levels of real GDP per capita in 1960 had the highest
growth rates between 1960 and 2000. The countries with the highest levels of real GDP per
capita had the lowest growth rates.
Diff: 3
Type: SA Page Ref: 192-194
Topic: Catch-up
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Analytic Skills
Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up
7-91
Copyright © 2015 Pearson Canada Inc.
Table 7.7
Country
India
Bangladesh
Honduras
Bolivia
Belgium
France
Canada
Denmark
Real GDP per Capita
in 1960
(1996 dollars)
$847
1,057
1,700
2,353
7,778
7,824
10,383
10,988
Growth in Real GDP
per Capita
(1996 dollars)
4.70%
1.45%
0.50%
0.38%
5.02%
4.53%
3.88%
3.47%
63) Refer to Table 7.7. Consider the statistics in the table above in describing the following
industrialized and developing countries. Are these consistent with the economic growth model?
Briefly explain.
Answer: These statistics combine industrialized countries with developing countries. The
statistics in this table are not consistent with the predictions of the economic growth model. For
example, Belgium, France, Canada, and Denmark had much higher levels of real GDP per capita
in 1960 than did Bangladesh, Honduras, and Bolivia. The economic growth model predicts that
Belgium, France, Canada, and Denmark should have grown more slowly than Bangladesh,
Honduras, and Bolivia, but the table shows that they grew much faster.
Comment: Recurring
Diff: 3
Type: SA Page Ref: 192
Topic: Catch-up
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Analytic Skills
Special Feature: None
7-92
Copyright © 2015 Pearson Canada Inc.
64) List two ways the labour force experience is different for workers in Canada and in the
United States. How do these differences influence productivity?
Answer: It is harder to fire workers in Canada as compared to the United States. Firms are less
likely to want to hire workers in Canada and younger workers will have a harder time finding a
job. Workers stay on the job longer in Canada, even if the job is not a good match. Put
differently, the lower rate of mobility makes it more likely that the Canadian workers' skills and
preferences will not match well with job characteristics. This will lower their productivity
relative to the U.S. worker, who tends to have a higher rate of job mobility.
Workers in the United States tend to experience fewer long spells of unemployment than do
Canadian workers. This is in part due to unemployment insurance. Workers in the United States
receive unemployment insurance for a shorter time and the payments are less compared to their
Canadian counterparts. They are employed for longer periods of time and tend to have higher
skills and greater productivity as compared to Canadian workers.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 194-196
Topic: Economic Growth in Canada
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: None
7.5 Growth Policies
1) The term "brain drain" refers to
A) highly educated individuals who leave developing countries for high-income countries.
B) the diminishing returns to studying for an exam.
C) the negative impact on brain function of an individual's overinvestment in human capital.
D) the decreased quality of the college-educated workforce.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 202
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: None
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2) Disease, poor nutrition, and substandard health care in developing nations can reduce growth
in an economy by
A) reducing physical capital.
B) reducing human capital.
C) increasing labour productivity.
D) increasing technological change.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 201-202
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: None
3) Enforcing property rights in an economy will
A) cause the market system to work less efficiently.
B) decrease the level of foreign portfolio investment.
C) encourage corruption and expand the underground economy.
D) raise the level of investment.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 200
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: None
4) All of the following policies are ways for a country to promote long-run economic growth
except
A) increasing vaccinations against infectious diseases.
B) undergoing political reform to decrease corruption.
C) enacting stronger laws to protect property rights.
D) imposing stricter regulations to limit foreign direct investment.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 200-202
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: None
7-94
Copyright © 2015 Pearson Canada Inc.
5) Robert Lucas, a Nobel laureate in economics, argues that there are ________ returns to human
capital.
A) increasing
B) decreasing
C) constant
D) negative
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 201
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: None
6) You are an economic advisor to the Prime Minister. You are asked to recommend a policy to
promote long-term economic growth in the economy. Which of the following policies would you
choose?
A) a reduction in sales taxes
B) an investment tax credit
C) a reduction in taxes on luxury yachts
D) all of the above
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 202
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: None
7) Which of the following policies would not help promote economic growth?
A) a law requiring that the funds in an individual retirement account be taxed
B) a law restricting elected officials from accepting expensive gifts and trips from private
individuals
C) a law that funds prenatal care for all expectant mothers
D) a law that subsidizes research in nanotechnology
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 202
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: None
7-95
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8) A policy that offers parents a tax reduction based on how much they are saving for their
children's college education should ________ the equilibrium level of loanable funds and
________ the rate of long-term growth.
A) decrease; increase
B) increase; decrease
C) decrease; decrease
D) increase; increase
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 201-202
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: None
9) In 1973, the Club of Rome published a book titled The Limits to Growth, which predicted that
economic growth would likely end in high-income countries because of
A) declining populations.
B) rapid increases in government debt.
C) increases in outsourcing of the production of goods and services to low-income countries.
D) increasing pollution and the depletion of natural resources.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 202-203
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: None
10) China's economy is fueled primarily by
A) fixed asset investment, such as investing in buildings and roads.
B) foreign portfolio investment, such as the purchase of European stocks and bonds.
C) technological innovation, such as advances in medical care.
D) consumer spending on domestic goods and services.
Answer: A
Diff: 2
Type: MC
Page Ref: 204
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: An Inside LOOK at Policy: Despite a Plan for Change, Investment Still Spurs
China's Growth
7-96
Copyright © 2015 Pearson Canada Inc.
11) One potential problem with the Chinese government's increases in spending on capital goods
is that these increases have been achieved through
A) high levels of borrowing in global financial markets.
B) decreases in private consumption.
C) debt refinancing and tariff revenues.
D) a rapid expansion of the money supply.
Answer: B
Diff: 2
Type: MC
Page Ref: 204
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: An Inside LOOK at Policy: Despite a Plan for Change, Investment Still Spurs
China's Growth
12) All of the following are reasons why China is unlikely to maintain high enough rates of
productivity growth to catch-up with the standard of living in the Canada except
A) Canada invests more in research and development. than does China.
B) much of China's growth is likely due to the transition from a centrally-planned economy to a
market economy.
C) because of the low birth rate in China, the labour force will soon decline.
D) the Chinese migration of rural workers to more productive urban jobs.
Answer: D
Diff: 2
Type: MC
Page Ref: 204
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: Making the Connection: Will China's Standard of Living Ever Exceed That of
Canada?
13) Foreign portfolio investment occurs when an individual or firm buys stock or bonds issued in
another country.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 199
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: None
7-97
Copyright © 2015 Pearson Canada Inc.
14) Recent rapid economic growth in India and China has reduced the amount of "brain drain" in
those countries.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 202
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: None
15) The question of whether economic growth is desirable is a positive question, easily settled by
economic analysis.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 202-203
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: None
16) Does globalization promote economic growth, and how does globalization affect the welfare
of a given country's citizens?
Answer: More globalized countries generally experience much higher annual growth rates in
real GDP per capita than countries that are less open to foreign trade and investment. As
countries become more globalized, advances in technology in those countries become more
likely, and advances in technology are a key to economic growth. However, foreign influences in
some countries are not always viewed as positive, as they can have a greater impact on culture
than some would like. In addition, multinational firms that operate in foreign countries may also
pay very low wages or fail to uphold the same safety and environmental regulations they are
required to follow in their own countries.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 199-200
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: None
7-98
Copyright © 2015 Pearson Canada Inc.
17) How do government policies that enforce property rights affect economic growth?
Answer: Without enforceable property rights, entrepreneurs lose the incentive to take on risk
because they are not assured ownership of their resources. Economic growth suffers as a result.
Failure to protect intellectual property rights has a similar impact. If the benefits of technological
advances are shared with all firms, each individual firm has little incentive to invest in the costly
research and development necessary for technological progress to continue.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 200
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: None
18) How does government support of health and education programs foster economic growth?
Answer: As the health of the people in a nation improves, they become more productive. They
become stronger and less susceptible to disease. For example, if the government provides
vaccinations or access to clean water, people will be healthier and the economy is more likely to
grow. By helping to finance education, the government can also improve economic growth.
Since the benefits of an education do not accrue exclusively to the person receiving an education,
the market may produce an inefficiently low level of education and training. If the government
offers subsidies for education, more people will receive an education, and the increase in human
capital will increase economic growth (particularly if there are increasing returns to human
capital).
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 201-202
Topic: Growth Policies
Learning Outcome: 7.5 Discuss government policies that foster economic growth
AACSB: Reflective Thinking
Special Feature: None
19) Corruption
A) curtails economic growth.
B) raises the rate of growth as bribes enhance income.
C) is eliminated by foreign direct investment.
D) acts as a magnet for foreign direct investment.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 200
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
7-99
Copyright © 2015 Pearson Canada Inc.
20) Canada
A) currently is one of the most corrupt countries.
B) has never had a significant problem with corruption.
C) had a significant problem with corruption in the 1930s.
D) currently ranks among the least corrupt countries.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 200
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
21) If property rights are not enforced in a country,
A) the market system will still work smoothly.
B) entrepreneurs are unlikely to risk their own funds investing in such an economy.
C) that country's growth rate will not be affected.
D) that country will grow more rapidly because of the reduction of law suits.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 200
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
22) Robert Lucas, a Nobel Laureate in economics, argues that there are increasing returns to
A) knowledge capital.
B) physical capital.
C) financial capital.
D) human capital.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 201-202
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
7-100
Copyright © 2015 Pearson Canada Inc.
23) Robert Lucas argues that there are ________ returns to human capital, and these productivity
increases are not completely captured by individuals as they decide how much education to
purchase. As a result, the market produces ________ education and training.
A) increasing; too much
B) decreasing; too much
C) increasing; too little
D) decreasing; too little
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 201-202
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
24) Which of the following policies are designed specifically to directly promote technological
change in an economy?
A) government subsidization of research and development
B) tax incentives to promote investment in RRSP plans
C) laws to strengthen property rights
D) a vaccination program to combat infectious diseases
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 202
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
7-101
Copyright © 2015 Pearson Canada Inc.
25) Policies to promote growth by increasing saving and investment work through
A) decreasing the supply of loanable funds, lowering the interest rate, and raising the level of
investment in physical capital.
B) increasing the supply of loanable funds, increasing the interest rate, and raising the level of
investment in physical capital.
C) increasing the supply of loanable funds, lowering the interest rate, and lowering the level of
investment in physical capital.
D) increasing the supply of loanable funds, lowering the interest rate, and raising the level of
investment in physical capital.
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 202
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
26) Not enforcing property rights in an economy will
A) cause the market system to work efficiently.
B) not change the level of investment.
C) lower the level of investment.
D) raise the level of investment.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 200
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
7-102
Copyright © 2015 Pearson Canada Inc.
27) What is "brain drain"?
A) the tendency for highly educated workers in high-income countries to move to low-income
countries to volunteer their services
B) increased recruiting efforts that attempt to raise the average level of education in developed
nations
C) foreign direct investment that flows from a developed country to a developing country
D) the loss of highly educated people from a low-income country as they move to higher-income
opportunities in foreign countries
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 201-202
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
28) How can economic growth help a country combat "brain drain"?
A) Economic growth increases the incomes of low-skilled workers relative to high-skilled
workers.
B) Economic growth opens up opportunities for better jobs and higher incomes for skilled
workers.
C) Economic growth allows highly skilled persons to earn more in a foreign country than in their
native country.
D) Economic growth combined with decreasing returns to human capital require workers to
achieve steadily higher and higher levels of education over time.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 201-202
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
7-103
Copyright © 2015 Pearson Canada Inc.
29) Which of the following is a normative statement about economic growth?
A) Economic growth is associated with higher labour productivity growth.
B) Economic growth increases GDP per capita.
C) Economic growth hurts developing countries.
D) Foreign direct investment stimulates economic growth.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 202-203
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
30) How can freedom of the press promote economic growth?
A) A free press can act as a watchdog for corruption, increasing chances for economic growth.
B) A free press can be more easily swayed to report only one side of any issue.
C) A free press reduces the likelihood that judges will protect private property rights.
D) A free press does not promote economic growth.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 200-201
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
31) The rapid growth of China's economy relative to Canada's has benefitted Canadian
consumers because
A) competition from China has made jobs harder to find in Canada.
B) Canadian consumers can purchase more lower-priced goods made in China.
C) Canada has comparative advantage in more goods than China does.
D) goods made in China are always of higher quality than goods made in Canada.
Answer: B
Diff: 1
Type: MC
Page Ref: 202-203
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: Economics in Your Life: Would You Be Better Off without China?
7-104
Copyright © 2015 Pearson Canada Inc.
32) In 2010, GDP per capita was ________ in Canada than in China, and since 1980 the growth
rate of real GDP per capita has been ________ in Canada than in China.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
Answer: B
Diff: 2
Type: MC
Page Ref: 200-201
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: Making the Connection: Will China's Standard of Living Ever Exceed That of
Canada?
33) Which of the following is not a reason why China is unlikely to maintain high enough rates
of productivity growth to catch-up with the standard of living in Canada?
A) Canada invests more in research and development than China does.
B) Much of China's growth has likely been due to the transition from a centrally-planned
economy to a market economy.
C) Because of the low birth rate in China, the labour force will soon decline.
D) There has been a migration of rural Chinese workers to more productive urban jobs.
Answer: D
Diff: 2
Type: MC
Page Ref: 200-201
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: Making the Connection: Will China's Standard of Living Ever Exceed That of
Canada?
34) Because of diminishing returns to capital, further increases in the quantity of capital in China
would result in ________ in real GDP per worker.
A) even smaller increases
B) even larger increases
C) equal increases
D) rapid decreases
Answer: A
Diff: 2
Type: MC
Page Ref: 204-205
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: An Inside LOOK at Policy: Despite a Plan for Change, Investment Still Spurs
China's Growth
7-105
Copyright © 2015 Pearson Canada Inc.
35) Because of diminishing returns to capital, further increases in the quantity of capital in China
would be represented as ________ the Chinese production function.
A) a downward shift of
B) an upward shift of
C) a movement up along
D) a movement down along
Answer: C
Diff: 2
Type: MC
Page Ref: 204-205
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 4: Explain the sources of productivity growth
AACSB: Reflective Thinking
Special Feature: An Inside LOOK at Policy: Despite a Plan for Change, Investment Still Spurs
China's Growth
36) Political stability is not a prerequisite to economic growth.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 200
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
37) Increased foreign direct investment in India has contributed to its recent economic growth.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 202
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
38) Some researchers have been unable to find evidence of increasing returns to human capital.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 201-202
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
7-106
Copyright © 2015 Pearson Canada Inc.
39) List four types of government policies that can aid economic growth.
Answer: Governments can aid economic growth through policies that enhance property rights
and the rule of law, improve health and education, subsidize research and development, and
provide incentives for saving and investment.
Comment: Recurring
Diff: 1
Type: SA Page Ref: 201-202
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
40) Your friend does not understand the benefits of globalization. Outline for your friend the
positive economic aspects of globalization.
Answer: Globalization is the process of countries becoming more open to foreign trade and
investment. The increased investment either by foreign direct investment or foreign portfolio
investment can give a low-income country access to funds and technology that it might not
otherwise have. These funds can help the country invest in factories, machinery, and the
equipment needed for economic growth. The extra capital can raise labour productivity, growth,
and GDP per capita. Trade and investment can also provide the country with much-needed
upgrades in technology. One of the lessons of the economic growth model is that technological
change is more important for raising productivity than are increases in capital. It is an important
ingredient for rapid economic growth. Technological change is an important contributor to longterm economic growth.
The bottom line is that trade and investment can cause standards of living to rise. Indeed, it
has been empirically shown that growth and globalization are positively related. With growth in
standards of living, the country can break the vicious cycle of poverty. Incomes will grow, the
people of the country will be able to save and invest, and this saving and investment will fuel
growth from within.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 202-203
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
7-107
Copyright © 2015 Pearson Canada Inc.
41) You have been hired as an economic advisor for a developing country. You have been asked
to focus on education as a means for the country's development. Explain to the prime minister
how improving education and training can contribute to his country's economic growth, and why
it is important for the government to take a proactive role in promoting education.
Answer: Education raises the level of human capital in an economy. Human capital is the
accumulated knowledge and skills that workers acquire from education and training or from their
life experiences. Human capital raises a worker's productivity. The increase in productivity
increases growth, per capita GDP, and standards of living. Human capital is one of the main
sources of technological change. One of the lessons of the economic growth model is that
technological change is more important for raising productivity than are increases in capital. It is
an important ingredient for rapid economic growth.
The government's role in promoting investment in human capital is important, as the market
might not provide the optimal amount of investment in human capital. Nobel Laureate Robert
Lucas argues that there are increasing returns to investments in human capital. These returns are
not entirely captured by the individual, so if left to their own devices, the individual may not
invest enough in education. Having the government invest in education will provide the country
with a higher and more efficient level of education and training.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 201-202
Topic: Growth Policies
Updated: Yes
Learning Outcome: Macro 16: Discuss the obstacles to development in developing countries and
ways to address those obstacles
AACSB: Reflective Thinking
Special Feature: None
7-108
Copyright © 2015 Pearson Canada Inc.
Macroeconomics, Canadian Edition (Hubbard et al.)
Chapter 8 Aggregate Expenditure and Output in the Short Run
8.1 The Aggregate Expenditure Model
1) The aggregate expenditure model focuses on the relationship between ________ and
________ in the short run, assuming ________ is constant.
A) total production; total income; real GDP
B) total spending; real GDP; total income
C) total spending; real GDP; the price level
D) total income; real GDP; the price level
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 214
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
2) As a result of slow economic growth in 2012, many companies including Tim Hortons,
Bombardier, and Blackberry cut production and employment as a result of the sluggish growth in
the total amount of spending in the economy. The total amount of spending in the economy is
known as
A) deficit spending.
B) planned investment spending.
C) aggregate expenditure.
D) equilibrium spending.
Answer: C
Diff: 1
Type: MC
Page Ref: 213
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Fluctuating Demand at Tim Hortons
8-1
Copyright © 2015 Pearson Canada Inc.
3) The key idea of the aggregate expenditure model is that in any particular year, the level of
GDP is determined mainly by
A) investment spending.
B) export spending.
C) government spending.
D) the level of aggregate expenditure.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 214
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
4) All of the following are one of the four main categories of spending identified by John
Maynard Keynes except
A) consumption.
B) net exports.
C) government purchases.
D) taxes.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 214
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
5) A decrease in consumer confidence can put your job at risk if
A) aggregate expenditures fall.
B) consumers expect their incomes to rise in the future.
C) aggregate expenditures rise.
D) consumers expect firms to increase investment in the future.
Answer: A
Diff: 1
Type: MC
Page Ref: 214
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: Economics in Your Life: When Consumer Confidence Fails, is Your Job at
Risk?
8-2
Copyright © 2015 Pearson Canada Inc.
6) Economists first began studying the relationship between changes in aggregate expenditures
and changes in GDP
A) in the 1950s.
B) during the Great Depression.
C) at the end of the Civil War.
D) during the Industrial Revolution.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 214
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
7) Household spending on goods and services is known as
A) consumption spending.
B) planned investment spending.
C) government purchases.
D) net exports.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 214
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
8) All of the following are components of aggregate expenditure except
A) consumption spending.
B) net export spending.
C) actual investment spending.
D) government spending.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 214
Topic: Planned Investment and Actual Investment
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
8-3
Copyright © 2015 Pearson Canada Inc.
9) The aggregate expenditure model focuses on the ________ relationship between real spending
and ________.
A) short-run; real GDP
B) short-run; inflation
C) long-run; real GDP
D) long-run; inflation
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 214
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
10) The formula for aggregate expenditure is
A) AE = C + I + G.
B) AE = C + I + G - NX.
C) AE = C + I + G + NX.
D) AE = C + I + depreciation - NX.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
11) Actual investment spending does not include
A) spending on consumer durable goods.
B) spending on new capital equipment.
C) spending on new houses.
D) changes in inventories.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 215
Topic: Planned Investment and Actual Investment
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
8-4
Copyright © 2015 Pearson Canada Inc.
12) Inventories refer to
A) goods which have been presold before they are produced.
B) goods that have been produced but not yet sold.
C) goods that have been planned but not yet produced.
D) goods that have been produced and sold in the same year.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 215
Topic: Planned Investment and Actual Investment
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
13) An unplanned increase in inventories results from
A) an increase in planned investment.
B) a decrease in planned investment.
C) actual investment that is greater than planned investment.
D) actual investment that is less than planned investment.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: Planned Investment and Actual Investment
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
14) If inventories decline by more than analysts predict they will decline, this implies that
A) actual investment spending was greater than planned investment spending.
B) actual investment spending was less than planned investment spending.
C) actual investment spending was equal to than planned investment spending.
D) there is no relationship between actual investment spending and planned investment
spending.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: Planned Investment and Actual Investment
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
8-5
Copyright © 2015 Pearson Canada Inc.
15) When aggregate expenditure = GDP,
A) macroeconomic equilibrium occurs.
B) the federal budget is balanced.
C) net exports equal zero.
D) saving equals zero.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
16) Consumption is $5 billion, planned investment spending is $8 billion, government purchases
are $10 billion, and net exports are equal to $2 billion. If GDP during that same time period is
equal to $27 billion, what unplanned changes in inventories occurred?
A) There was an unplanned increase in inventories equal to $2 billion.
B) There was no unplanned change in inventories.
C) There was an unplanned decrease in inventories equal to $2 billion.
D) There was an unplanned decrease in inventories equal to $19 billion.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Analytic Skills
Special Feature: None
17) Consumption spending is $16 billion, planned investment spending is $4 billion, unplanned
investment spending is $2 billion, government purchases are $6 billion, and net export spending
is $1 billion. What is aggregate expenditure?
A) $22 billion
B) $26 billion
C) $27 billion
D) $29 billion
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Analytic Skills
Special Feature: None
8-6
Copyright © 2015 Pearson Canada Inc.
18) Consumption spending is $5 million, planned investment spending is $8 million, unplanned
investment spending is $2 million, government purchases are $10 million, and net export
spending is $2 million. What is GDP?
A) $15 million
B) $23 million
C) $25 million
D) $27 million
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Analytic Skills
Special Feature: None
19) Consumption spending is $22 million, planned investment spending is $7 million, actual
investment spending is $7 million, government purchases are $9 million, and net export spending
is $3 million. Based on this information, which of the following is true?
A) There was an unplanned change in inventories.
B) Aggregate expenditure is equal to GDP.
C) Aggregate expenditure is greater than GDP.
D) Aggregate expenditure is less than GDP.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Analytic Skills
Special Feature: None
20) At macroeconomic equilibrium,
A) total investment equals total inventories.
B) total spending equals total production.
C) total consumption equals total production.
D) total taxes equal total transfers.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
8-7
Copyright © 2015 Pearson Canada Inc.
21) When aggregate expenditure is more than GDP, which of the following is true?
A) There was an unplanned decrease in inventories.
B) Firms spent less on capital goods than they planned.
C) Households bought fewer new homes than they planned.
D) All of the above must be true when aggregate expenditure is more than GDP.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
22) In a small economy in 2011, aggregate expenditure was $800 million while GDP that year
was $850 million. Which of the following can explain the difference between aggregate
expenditure and GDP that year?
A) Aggregate expenditure is always less than GDP in developed countries.
B) Firm investment in inventories was less than anticipated in 2011.
C) Firm investment in inventories was greater than anticipated in 2011.
D) Aggregate expenditure is always less than GDP in developing countries.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Analytic Skills
Special Feature: None
23) Firms in a small economy planned that inventories would grow over the past year by
$300,000. Over that year, inventories actually grew by $400,000. This implies that
A) aggregate expenditure that year was less than GDP that year.
B) there was an unplanned decrease in inventories that year.
C) there was a planned decrease in inventories that year.
D) aggregate expenditure that year was equal to GDP that year.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Analytic Skills
Special Feature: None
8-8
Copyright © 2015 Pearson Canada Inc.
24) Firms in a small economy planned that inventories would grow over the past year by
$500,000. Over that year, inventories did grow by exactly $500,000. This implies that
A) aggregate expenditure that year was equal to GDP that year.
B) there was an unplanned increase in inventories that year.
C) there was an unplanned decrease in inventories that year.
D) aggregate expenditure that year was greater than GDP that year.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Analytic Skills
Special Feature: None
25) If aggregate expenditure is less than GDP, how will the economy reach macroeconomic
equilibrium?
A) Inventories will decline, and GDP and employment will decline.
B) Inventories will rise, and GDP and employment will decline.
C) Inventories will decline, and GDP and employment will rise.
D) Inventories will rise, and GDP and employment will rise.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
26) If firms find that consumers are purchasing more than expected, which of the following
would you expect?
A) Aggregate expenditure will likely be greater than GDP.
B) Aggregate expenditure will likely be less than GDP.
C) The economy will adjust to macroeconomic equilibrium as inventories rise, and production
and employment fall.
D) The economy will adjust to macroeconomic equilibrium as inventories fall, and production
and employment fall.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
8-9
Copyright © 2015 Pearson Canada Inc.
27) If firms sell exactly what they expected to sell, all of the following will be true except
A) aggregate expenditure will be greater than GDP.
B) there is no unplanned change in inventories.
C) inventories will not change, and GDP and employment will remain stable.
D) aggregate expenditure will be equal to GDP.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
28) If economists forecast a decrease in aggregate expenditure, which of the following is likely
to occur?
A) GDP will rise.
B) GDP will fall.
C) Wages will rise.
D) Inventories will fall.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
29) If planned investment is greater than actual investment, then aggregate expenditure is less
than GDP.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 215
Topic: Planned Investment and Actual Investment
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
8-10
Copyright © 2015 Pearson Canada Inc.
30) Aggregate expenditure includes consumption spending, unplanned investment spending,
government purchases, and net exports.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 215
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
31) If aggregate expenditure is more than GDP, then inventories fall and GDP rises.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 215
Topic: The Aggregate Expenditure Model
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
32) Explain, in detail, how the adjustment to macroeconomic equilibrium occurs when spending
is less than production. Be sure to discuss how inventories play a crucial role in the adjustment
process. State what happens to GDP and employment during the adjustment process.
Answer: If spending is less than production, then firms will not be selling as many goods and
services as they had expected. Inventories of goods will start to build up. This sends a signal to
those managing the retail firms to cut back on orders of goods from their distributors.
Distributors cut back purchases from manufacturers. Manufacturers of the goods will cut back on
production of the goods, and reduce purchases from their suppliers and lay off workers. The
reduction in production will continue until inventories equal their desired levels, or until
spending equals production. If this happens across many different industries, GDP and total
employment will decline.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 216
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
8-11
Copyright © 2015 Pearson Canada Inc.
Table 8.1
Planned
Government
Real GDP Consumption Investment Purchases Net Exports
$4,000
$2,800
$550
$600
$250
4,500
3,200
550
600
250
5,000
3,600
550
600
250
5,500
4,000
550
600
250
33) Refer to Table 8.1. Using the table above, compute aggregate expenditure and identify the
macroeconomic equilibrium.
Answer: The macroeconomic equilibrium is determined where aggregate expenditure = real
GDP. The value for aggregate expenditure (C + I + G + NX) for each level of real GDP is given
in the table below. The value where real GDP equals aggregate expenditure is $5,000, and this is
equilibrium.
Aggregate
Real GDP Expenditures
$4,000
$4,200
4,500
4,600
5,000
5,000
5,500
5,200
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 215
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Analytic Skills
Special Feature: None
34) Why do economists care about aggregate expenditures?
Answer: Increases and decreases in aggregate expenditures cause the year-to-year fluctuations in
GDP. Economists devote considerable time and energy to forecasting what will happen to each
component of aggregate expenditure. If they forecast aggregate expenditures will decline in the
future, this is equivalent to saying that GDP will decline and the economy will enter into a
recession. This means fewer job opportunities, lower wages, and lower profits.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 216-217
Topic: Determining the Level of Aggregate Expenditure
Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the
aggregate expenditure model
AACSB: Reflective Thinking
Special Feature: None
8-12
Copyright © 2015 Pearson Canada Inc.
35) The ________ model focuses on the relationship between total spending and real GDP in the
short run, assuming the price level is constant.
A) supply and demand
B) national income
C) aggregate expenditure
D) business cycle
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 214
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
36) As a result of the recession of 2008-2009, revenues at many Tim Hortons locations
________, and it ________ the size of its workforce.
A) fell; increased
B) fell; decreased
C) rose; increased
D) rose; decreased
Answer: B
Diff: 1
Type: MC
Page Ref: 213
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Fluctuating Demand at Tim Hortons
37) The key idea of the aggregate expenditure model is that in any particular year, the level of
________ is determined mainly by the level of aggregate expenditure.
A) frictional unemployment
B) export spending
C) government spending
D) GDP
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 214-215
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-13
Copyright © 2015 Pearson Canada Inc.
38) Which of the following is not one of the four main categories of spending identified by John
Maynard Keynes?
A) consumption
B) planned investment
C) government purchases
D) transfer payments
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 214-215
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
39) A decrease in ________ can put your job at risk if aggregate expenditures fall.
A) consumer confidence
B) the natural rate of unemployment
C) the inflation rate
D) the length of a business cycle
Answer: A
Diff: 1
Type: MC
Page Ref: 213
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: Economics in Your Life: When Consumer Confidence Fails, is Your Job at
Risk?
40) During the Great Depression, economists first began studying the relationship between
A) changes in GDP and changes in interest rates.
B) changes in aggregate expenditures and changes in GDP.
C) changes in nominal GDP and changes in real GDP.
D) changes in stock prices and changes in price controls.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 214
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: None
8-14
Copyright © 2015 Pearson Canada Inc.
41) Consumption spending refers to ________ spending on goods and services.
A) household
B) business
C) government
D) foreign
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 214
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
42) Which of the following is not a component of aggregate expenditure?
A) consumption spending
B) planned investment spending
C) actual investment spending
D) government spending
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 214-215
Topic: Planned Investment and Actual Investment
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
43) The aggregate expenditure model focuses on the short-run relationship between ________
and ________.
A) real spending; real GDP
B) unemployment; inflation
C) nominal spending; nominal GDP
D) planned inventories; unplanned inventories
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 214
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-15
Copyright © 2015 Pearson Canada Inc.
44) Aggregate expenditure includes spending on
A) C + I + G.
B) C + I + G - NX.
C) C + I + G + NX.
D) C + I + depreciation - NX.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
45) Actual investment spending includes spending by consumers on
A) durable goods.
B) nondurable goods.
C) new houses.
D) services.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 215
Topic: Planned Investment and Actual Investment
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
46) Goods that have been produced but not yet sold are referred to as
A) understocks.
B) inventories.
C) pre-sold goods.
D) capital goods.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 215
Topic: Planned Investment and Actual Investment
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
8-16
Copyright © 2015 Pearson Canada Inc.
47) An unplanned decrease in inventories results in
A) a decrease in planned investment.
B) an increase in planned investment.
C) actual investment that is greater than planned investment.
D) actual investment that is less than planned investment.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215
Topic: Planned Investment and Actual Investment
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
48) Macroeconomic equilibrium occurs when
A) aggregate expenditure = GDP.
B) aggregate expenditure = C+ I + G + net transfers.
C) aggregate income = planned inventories.
D) aggregate expenditure = planned inventories.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215-216
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
49) Consumption is $5 million, planned investment spending is $8 million, government
purchases are $10 million, and net exports are equal to $2 million. If GDP during the same time
period is equal to $23 million, what unplanned changes in inventories occurred?
A) There was an unplanned increase in inventories equal to $2 million.
B) There was no unplanned change in inventories.
C) There was an unplanned decrease in inventories equal to $2 million.
D) There was an unplanned decrease in inventories equal to $19 million.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215-216
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Analytic Skills
Special Feature: None
8-17
Copyright © 2015 Pearson Canada Inc.
50) Consumption spending is $5 million, planned investment spending is $8 million, unplanned
investment spending is $2 million, government purchases are $10 million, and net export
spending is $2 million. What is aggregate expenditure?
A) $15 million
B) $23 million
C) $25 million
D) $27 million
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215-216
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Analytic Skills
Special Feature: None
51) Consumption spending is $5 million, planned investment spending is $8 million, unplanned
investment
spending is -$2 million, government purchases are $10 million, and net export spending is $2
million. What is GDP?
A) $15 million
B) $23 million
C) $25 million
D) $27 million
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215-216
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Analytic Skills
Special Feature: None
8-18
Copyright © 2015 Pearson Canada Inc.
52) Consumption spending is $5 million, planned investment spending is $8 million, actual
investment spending is $8 million, government purchases are $10 million, and net export
spending is $2 million. Based on this information, which of the following is true?
A) There was an unplanned change in inventories.
B) Aggregate expenditure is equal to GDP.
C) Aggregate expenditure is greater than GDP.
D) Aggregate expenditure is less than GDP.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215-216
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Analytic Skills
Special Feature: None
53) At macroeconomic equilibrium, total ________ equals total ________.
A) spending; production
B) investment; inventories
C) consumption; production
D) taxes; transfers
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215-216
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
54) When aggregate expenditure is less than GDP, which of the following is true?
A) There was an unplanned increase in inventories.
B) Firms spent more on capital goods than they anticipated.
C) Households bought more new homes than they anticipated.
D) All of the above must be true when aggregate expenditure is less than GDP.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215-216
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-19
Copyright © 2015 Pearson Canada Inc.
55) In a small economy in 2016, aggregate expenditure was $850 million while GDP that year
was $800 million. Which of the following can explain the difference between aggregate
expenditure and GDP that year?
A) Aggregate expenditure is always less than GDP in developed countries.
B) Firm investment in inventories was less than anticipated in 2016.
C) Firm investment in inventories was greater than anticipated in 2016.
D) Aggregate expenditure is always less than GDP in developing countries.
Answer: B
Diff: 2
Type: MC
Page Ref: 215-216
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
56) Firms in a small economy anticipated that inventories would grow over the past year by
$500,000. Over that year, inventories actually grew by only $400,000. This implies that
A) aggregate expenditure that year was greater than GDP that year.
B) there was an unplanned increase in inventories that year.
C) there was a planned increase in inventories that year.
D) aggregate expenditure that year was equal to GDP that year.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215-217
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
57) Firms in a small economy anticipated that inventories would grow over the past year by
$750,000, and over that year, inventories grew by exactly $750,000. This implies that
A) aggregate expenditure and GDP were equal that year.
B) there was an unplanned increase in inventories that year.
C) there was an unplanned decrease in inventories that year.
D) aggregate expenditure was greater than GDP that year.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215-217
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-20
Copyright © 2015 Pearson Canada Inc.
58) If aggregate expenditure is greater than GDP, how will the economy reach macroeconomic
equilibrium?
A) Inventories will decline and GDP and employment will decline.
B) Inventories will rise and GDP and employment will decline.
C) Inventories will decline and GDP and employment will rise.
D) Inventories will rise and GDP and employment will rise.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215-217
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
59) If firms find that consumers are purchasing less than expected, which of the following would
you expect?
A) Aggregate expenditure will likely be greater than GDP.
B) Aggregate expenditure will likely be less than GDP.
C) The economy will adjust to macroeconomic equilibrium as inventories rise and production
and employment rise.
D) The economy will adjust to macroeconomic equilibrium as inventories fall and production
and employment rise.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215-217
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
60) If firms sell what they expected to sell, which of the following will be true?
A) Aggregate expenditure will be greater than GDP.
B) There will be no unplanned change in inventories.
C) Inventories will rise and GDP and employment will fall.
D) Aggregate expenditure will be less than GDP.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215-217
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-21
Copyright © 2015 Pearson Canada Inc.
61) If economists forecast an increase in aggregate expenditure, which of the following is likely
to occur?
A) GDP will rise.
B) GDP will fall.
C) Wages will fall.
D) Inventories will rise.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 215-217
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
62) If planned investment is equal to actual investment, then aggregate expenditure is equal to
GDP.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 215
Topic: Planned Investment and Actual Investment
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
63) Aggregate expenditure includes consumption spending, planned investment spending,
government purchases, and net exports.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 214-215
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
64) If aggregate expenditure is less than GDP, then inventories rise and GDP falls.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 215-217
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
8-22
Copyright © 2015 Pearson Canada Inc.
65) What is the main reason for changes in GDP in the short run?
Answer: The main reason for changes in GDP in the short run is changes in the level of
aggregate expenditure.
Comment: Recurring
Diff: 1
Type: SA Page Ref: 214-215
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
Table 8.2
Planned
Government
Real GDP Consumption Investment Purchases Net Exports
$2,000
$1,600
$250
$250
$100
2,500
2,000
250
250
100
3,000
2,400
250
250
100
3,500
2,800
250
250
100
66) Refer to Table 8.2. Using the table above, compute aggregate expenditure and identify the
macroeconomic equilibrium.
Answer: The macroeconomic equilibrium is determined where aggregate expenditure = real
GDP. The value for aggregate expenditure (C + I + G + NX) for each level of real GDP is given
in the table below. The value where real GDP equals aggregate expenditure is $3000, and this is
equilibrium.
Real GDP
$2,000
2,500
3,000
3,500
Aggregate
Expenditure
$2,200
2,600
3,000
3,400
Comment: Recurring
Diff: 2
Type: SA Page Ref: 215-217
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Analytic Skills
Special Feature: None
8-23
Copyright © 2015 Pearson Canada Inc.
67) What are inventories? What usually happens to inventories at the beginning of a recession,
and what usually happens to inventories at the beginning of an expansion?
Answer: Inventories are goods that have been produced but not yet sold. Inventories rise at the
beginning of a recession and fall at the beginning of an expansion.
Comment: Recurring
Diff: 1
Type: SA Page Ref: 215
Topic: Planned Investment and Actual Investment
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
68) Into which category of aggregate expenditure would each of the following transactions fall?
a. Sandra MacMillian purchases a new Toyota Corolla made in Cambridge, Ontario.
b. The city of Vancouver buys 5 new garbage trucks.
c. Adrian Garcia buys a newly constructed townhome in Winnipeg.
d. An airline in Latvia orders a new airplane from Bombardier.
e. Magna International buys 300 new BlackBerry phones.
Answer:
a. consumption
b. government purchases
c. planned investment
d. net exports
e. planned investment
Comment: Recurring
Diff: 2
Type: SA Page Ref: 214-215
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
8.2 Determining the Level of Aggregate Expenditure in the Economy
1) Which is the largest component of aggregate expenditure?
A) planned investment expenditures
B) consumption expenditures
C) government expenditures
D) net export expenditures
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 217
Topic: Determining the Level of Aggregate Expenditure
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
8-24
Copyright © 2015 Pearson Canada Inc.
2) Which of the following will cause a direct increase in consumption spending?
A) an increase in planned investment
B) an increase in government spending
C) an increase in disposable income
D) a decrease in net export spending
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 218
Topic: Consumption
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
3) The five most important variables that determine the level of consumption are
A) disposable income, wealth, expected future income, price level, and interest rate.
B) wealth, savings account balances, chequing account balances, stock portfolio balances, and
bond portfolio balances.
C) government purchases, interest rates, income, taxes, and transfers.
D) government purchases, saving account balances, wealth, interest rates, portfolio balances.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 218
Topic: Consumption
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
4) ________ in taxes will decrease consumption spending, and ________ in transfer payments
will increase consumption spending.
A) An increase; an increase
B) A decrease; an increase
C) An increase; a decrease
D) A decrease; a decrease
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 218
Topic: Consumption
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
8-25
Copyright © 2015 Pearson Canada Inc.
5) A decrease in Employment Insurance payments will
A) decrease consumption spending.
B) decrease investment spending.
C) decrease government spending.
D) decrease export spending.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 218
Topic: Consumption
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
6) ________ is defined as the value of a household's assets minus the value of its liabilities.
A) Household income
B) Household wealth
C) Personal household consumption
D) Planned household investment
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 218
Topic: Household Wealth
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
7) Examples of assets that are included in household wealth would be
A) stocks, bonds, and savings accounts.
B) stocks, loans owed, and savings accounts.
C) stocks, bonds, and mortgages.
D) stocks, credit cards, and savings accounts.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 218
Topic: Household Wealth
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
8-26
Copyright © 2015 Pearson Canada Inc.
8) A stock market boom which causes stock prices to rise should cause
A) a decrease in consumption spending.
B) an increase in consumption spending.
C) a decrease in wealth.
D) a decrease in net export spending.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 218
Topic: Household Wealth
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
9) The Conference Board of Canada's Consumer Confidence Index measures
A) consumers' expectations about the future.
B) the confidence the public has in the federal government.
C) the confidence consumers have in banks.
D) the confidence Canadians have in their relationships.
Answer: A
Diff: 2
Type: MC
Page Ref: 219-220
Topic: Consumer Confidence
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: Making the Connection: Do Changes in Consumer Confidence Affect
Consumption Spending?
10) Increases in consumer confidence
A) decrease consumption in direct proportion to the increase in consumer confidence.
B) directly increase consumption.
C) tend to increase consumption spending.
D) increase consumption only when the overall price level decreases in the economy.
Answer: C
Diff: 2
Type: MC
Page Ref: 219-220
Topic: Household Wealth
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: Making the Connection: Do Changes in Consumer Confidence Affect
Consumption Spending?
8-27
Copyright © 2015 Pearson Canada Inc.
11) An increase in the real interest rate will
A) cause consumers to spend more and save less.
B) most likely lower consumers' purchases of durable goods.
C) most likely lower the reward to savings.
D) most likely lower the cost of borrowing.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 220
Topic: The Interest Rate
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
12) Decreases in the price level will
A) lower consumption because goods and services are less affordable.
B) raise consumption because goods and services are more affordable.
C) raise consumption because real wealth increases.
D) lower consumption because real wealth decreases.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 220
Topic: The Price Level
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
13) Which of the following will raise consumer expenditures?
A) an increase in interest rates
B) a general decline in housing prices
C) an increase in expected future income
D) an increase in the price level
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 219
Topic: Expected Future Income
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
8-28
Copyright © 2015 Pearson Canada Inc.
14) ________ describes the relationship between consumption spending and disposable income.
A) Household wealth
B) The liquidity trap
C) The consumption function
D) The paradox of thrift
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 221
Topic: The Consumption Function
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
15) The slope of the consumption function is equal to
A) the change in consumption divided by the change in disposable income.
B) the change in consumption divided by the change in personal income.
C) the change in disposable income divided by the change in consumption.
D) the change in national income divided by the change in consumption.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 221
Topic: The Consumption Function
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
16) The marginal propensity to save is defined as
A) saving divided by disposable income.
B) disposable income divided by saving.
C) the change in saving divided by the change in disposable income.
D) the change in disposable income divided by the change in saving.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 224
Topic: The Marginal Propensity to Save
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
8-29
Copyright © 2015 Pearson Canada Inc.
17) If disposable income increases by $100 million, and consumption increases by $90 million,
then the marginal propensity to consume is
A) 0.9.
B) 0.8.
C) 0.75.
D) 0.6.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 222
Topic: The Marginal Propensity to Consume
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Analytic Skills
Special Feature: None
18) If disposable income falls by $50 billion and consumption falls by $40 billion, then the slope
of the consumption function is
A) 1.20.
B) 0.80.
C) 0.70.
D) 0.10.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 221
Topic: The Consumption Function
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Analytic Skills
Special Feature: None
19) Disposable income is defined as
A) national income - transfers + taxes.
B) national income + transfers + taxes.
C) national income - transfers - taxes.
D) national income + transfers - taxes.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 222
Topic: Consumption and National Income
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
8-30
Copyright © 2015 Pearson Canada Inc.
Table 8.3
Consumption
(dollars)
$1,200
2,100
3,000
Disposable Income
(dollars)
$3,000
4,000
5,000
20) Refer to Table 8.3. Given the consumption schedule in the table above, the marginal
propensity to consume is
A) 0.1.
B) 0.3.
C) 0.6.
D) 0.9.
Answer: D
Diff: 2
Type: MC
Page Ref: 224-225
Topic: The Consumption Function
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the
Marginal Propensity to Save
21) Refer to Table 8.3. Given the consumption schedule in the table above, the marginal
propensity to save is
A) 0.1.
B) 0.4.
C) 0.7.
D) 0.9.
Answer: A
Diff: 2
Type: MC
Page Ref: 224-225
Topic: The Marginal Propensity to Save
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the
Marginal Propensity to Save
8-31
Copyright © 2015 Pearson Canada Inc.
22) If the MPC is 0.5, then a $10 million increase in disposable income will increase
consumption by
A) $2 million.
B) $5 million.
C) $15 million
D) $50 million.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 222
Topic: Consumption and National Income
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Analytic Skills
Special Feature: None
23) If national income increases by $20 million and consumption increases by $5 million, the
marginal propensity to consume is
A) 4.
B) 0.75.
C) 0.5.
D) 0.25.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 222
Topic: Consumption and National Income
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Analytic Skills
Special Feature: None
24) When we graph consumption as a function of ________ rather than as a function of
disposable income, the slope of this consumption function is ________.
A) national income; the MPC
B) personal income; (MPC - MPS)
C) national income; the MPS
D) personal income; the MPS
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 222
Topic: Consumption and National Income
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
8-32
Copyright © 2015 Pearson Canada Inc.
25) If the marginal propensity to save is 0.25, then a $10,000 decrease in disposable income will
A) increase consumption by $7,500.
B) increase consumption by $2,500.
C) decrease consumption by $7,500.
D) decrease consumption by $2,500.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 224
Topic: The Marginal Propensity to Save
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Analytic Skills
Special Feature: None
26) MPC + MPS =
A) 0.
B) 0.5.
C) 1.
D) 100.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 224
Topic: Consumption
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
27) If the marginal propensity to consume is 0.75, the marginal propensity to save is
A) 0.25.
B) 0.5.
C) 1.
D) 3.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 224
Topic: The Marginal Propensity to Save
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Analytic Skills
Special Feature: None
8-33
Copyright © 2015 Pearson Canada Inc.
28) National income =
A) Consumption + Saving - Taxes
B) Consumption - Saving - Taxes
C) Consumption - Saving +Taxes
D) Consumption + Saving + Taxes
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 223
Topic: Income, Consumption, and Saving
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
29) Investment spending ________ during a recession, and ________ during an expansion.
A) declines; increases
B) increases; declines
C) increases; increases
D) declines; declines
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 226
Topic: Planned Investment
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
30) Consumer spending ________ and investment spending ________.
A) is very volatile and subject to fluctuations; follows a smooth trend
B) follows a smooth trend; is more volatile and subject to fluctuations
C) follows a smooth trend; is the most stable component of aggregate expenditure
D) is very erratic; is also erratic, but less erratic than consumer spending
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 226
Topic: Planned Investment
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
8-34
Copyright © 2015 Pearson Canada Inc.
31) If firms are more optimistic that future profits will rise and remain strong for the next few
years, then
A) investment spending will fall.
B) investment spending will rise.
C) investment spending will remain unaffected.
D) investment spending will rise and then fall.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 226
Topic: Planned Investment
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
32) Sales of snowmobiles tend to
A) increase during a recession and decrease during an expansion.
B) increase smoothly over time.
C) depend only on the snowfall in a given year.
D) increase during an expansion and decrease during a recession.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 227-228
Topic: Planned Investment
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: Making the Connection: The Hills and Valleys of Snowmobile Purchases
33) Investment spending will increase when
A) the interest rate rises.
B) the corporate income tax increases.
C) business cash flow increases.
D) firms become more pessimistic about earning future profits.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 227
Topic: Planned Investment
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
8-35
Copyright © 2015 Pearson Canada Inc.
34) During a(n) ________ many firms experience increased profits, which increases ________
and investment spending.
A) expansion; government spending
B) recession; cash flow
C) expansion; cash flow
D) recession; business confidence
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 227
Topic: Cash Flow
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
35) From 1981-2007, net exports for Canada
A) grew and then declined.
B) were negative.
C) were positive.
D) increased as exports rose above imports.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 229
Topic: Net Exports
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
36) The difference between GDP and net taxes is
A) personal income.
B) actual investment spending.
C) disposable income.
D) unplanned investment spending.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 222
Topic: Consumption and National Income
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
8-36
Copyright © 2015 Pearson Canada Inc.
37) Canadian net export spending rises when
A) the price level in Canada rises relative to the price level in other countries.
B) the growth rate of Canadian GDP is slower than the growth rate of GDP in other countries.
C) the value of the Canadian dollar increases relative to other currencies.
D) the inflation rate is higher in Canada relative to other countries.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 229
Topic: Net Exports
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
38) ________ usually increase(s) when the Canadian economy is in a recession and decrease(s)
when the Canadian economy is expanding.
A) Consumer spending
B) Planned investment
C) Net Exports
D) Taxes
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 229
Topic: Net Exports
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
39) If inflation in Canada is higher than inflation in other countries, what will be the effect on net
exports for Canada?
A) Net exports will rise as Canadian exports increase.
B) Net exports will rise as Canadian imports decrease.
C) Net exports will decrease as Canadian exports decrease.
D) Net exports will decrease as Canadian imports decrease.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 230
Topic: Net Exports
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
8-37
Copyright © 2015 Pearson Canada Inc.
40) Which of the following will decrease aggregate expenditure in Canada?
A) a decrease in the value of the dollar
B) a decrease in the price level
C) a decrease in interest rates
D) a decrease in government purchases
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 228
Topic: Government Purchases
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
41) Higher interest rates increase both consumption and investment spending.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 220 & 226
Topic: Consumption
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
42) The marginal propensity to consume is the slope of the consumption function.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 221
Topic: Consumption
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
43) When Jack's income increases by $1,000, he spends an additional $850 dollars. This implies
that his marginal propensity to consume is 0.85.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 222
Topic: Consumption
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Analytic Skills
Special Feature: None
8-38
Copyright © 2015 Pearson Canada Inc.
44) When Jack's income increases by $5,000, he spends an additional $4,000 dollars. This
implies that his marginal propensity to consume is 1.25.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 222
Topic: The Marginal Propensity to Consume
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Analytic Skills
Special Feature: None
45) An increase in the price level in Canada will reduce exports and increase imports.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 230
Topic: Net Exports
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
46) You review a salesman's income over a 5-year period. You note it fluctuates tremendously
from year to year, yet his consumption of goods and services remains consistently at the same
level, year after year. Does this mean that income is not a determinant of consumption, or could
something else explain his behaviour?
Answer: The salesman is not making purchase decisions based on his current income. He is
making his consumption decisions based on his expected future income. He is following a
pattern exhibited by many people. He prefers to keep his consumption fairly stable from year to
year. Yet his income fluctuates significantly. That is, current income explains consumption quite
well except in this case when current income is unusually high or unusually low compared to
expected future income.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 219
Topic: Expected Future Income
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
8-39
Copyright © 2015 Pearson Canada Inc.
47) Ceteris paribus, how does a recession in the United States affect Canadian net exports?
Answer: As GDP decreases in the United States due to the recession, the incomes of American
households fall. Households respond by lowering their purchases of goods and services. Some of
the decline in purchases includes Canadian goods and services. This essentially lowers imports.
As the U.S. is Canada's largest trading partner a recession in the U.S. which reduces American
demand for Canadian products reduces Canadian net exports.
Comment: Recurring
Diff: 1
Type: ES
Page Ref: 229
Topic: Net Exports
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
48) Explain how a stock market crash has the potential to lead to a recession in an economy.
Answer: A stock market crash is essentially a substantial decrease in the average price of stocks.
Stocks are a part of real wealth. A stock market crash decreases the value of stocks which
decreases real wealth. Real wealth is an important determinant of consumption spending. If real
wealth declines, so does consumption spending. Therefore, a stock market crash will result in a
decline in consumer expenditures. This will result in a decline in GDP. If the decrease in GDP is
substantial enough, this can lead to a recession.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 218-219
Topic: Household Wealth
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
8-40
Copyright © 2015 Pearson Canada Inc.
49) Given Table 8.4 below, fill in the values for saving. Assume there are no taxes.
Table 8.4
National Income
$7,500
8,000
8,500
9,000
Consumption
$5,400
5,800
6,200
6,600
Saving
Answer: When taxes are zero, saving is the difference between national income and
consumption:
Saving = national income - consumption.
S=Y-C
Using the table:
National Income
$7,500
8,000
8,500
9,000
Consumption
$5,400
5,800
6,200
6,600
Saving
$2,100
2,200
2,300
2,400
Comment: Recurring
Diff: 1
Type: ES
Page Ref: 224
Topic: Income, Consumption, and Saving
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Analytic Skills
Special Feature: None
8-41
Copyright © 2015 Pearson Canada Inc.
50) Given Table 8.5 below, fill in the values for saving. Assume taxes = $800.
Table 8.5
National Income
$11,400
11,800
12,200
12,600
Consumption
$7,500
7,800
8,100
8,400
Saving
Answer: Saving = national income - consumption - taxes.
S=Y-C-T
Using the table:
National Income
$11,400
11,800
12,200
12,600
Consumption
$7,500
7,800
8,100
8,400
Saving
$3,100
3,200
3,300
3,400
Comment: Recurring
Diff: 1
Type: ES
Page Ref: 224
Topic: Income, Consumption, and Saving
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Analytic Skills
Special Feature: None
8-42
Copyright © 2015 Pearson Canada Inc.
51) Given Table 8.6 below, fill in the values of the marginal propensity to save (MPS) and the
marginal propensity to consume (MPC). Show that MPC + MPS = 1.
Table 8.6
National
Income
$8,600
9,000
9,400
9,800
Consumption
$8,000
8,300
8,600
8,900
Saving
$600
700
800
900
MPC
MPS
Answer: The MPC is defined as:
MPC =
=
=
= 0.75
The MPS is defined as:
MPS =
=
=
= 0.25
At every level of income the MPC is 0.75 and at every level of income the MPS = 0.25.
Therefore, MPC + MPS is always equal to 1.
Using the table:
National
Income
Consumption
$8,600
$8,000
9,000
8,300
9,400
8,600
9,800
8,900
Saving
$600
700
800
900
MPC
--0.75
0.75
0.75
MPS
-0.25
0.25
0.25
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 224
Topic: Income, Consumption, and Saving
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Analytic Skills
Special Feature: None
8-43
Copyright © 2015 Pearson Canada Inc.
52) Suppose Canada experiences a long period of inflation relative to other countries. How will
this affect Canadian net exports?
Answer: If inflation in Canada is higher than inflation in other countries, then prices of products
and services produced in Canada increase more rapidly than the prices of products and services
of other countries. This difference in the price levels decreases the demand for Canadian goods
relative to foreign goods. Canadian exports decrease, imports increase, and Canadian net exports
decline.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 230
Topic: The Price Level and Net Exports
Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate
expenditure and define marginal propensity to consume and marginal propensity to save
AACSB: Reflective Thinking
Special Feature: None
53) Which is the smallest component of aggregate expenditure?
A) planned investment expenditures
B) consumption expenditures
C) government expenditures
D) net export expenditures
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 217
Topic: Determining the Level of Aggregate Expenditure
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
54) Consumption spending will ________ when disposable income ________.
A) increase; increases
B) increase; decreases
C) decrease; increases
D) change unpredictably; decreases
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 218
Topic: Consumption
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
8-44
Copyright © 2015 Pearson Canada Inc.
55) The five most important variables that determine the level of ________ are disposable
income, wealth, expected future income, price level, and interest rate.
A) consumption
B) government purchases
C) planned investment
D) net exports
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 218
Topic: Consumption
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
56) An increase in taxes will ________ consumption spending, and a decrease in transfer
payments will ________ consumption spending.
A) increase; increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 218
Topic: Consumption
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
57) An increase in transfer payments will
A) increase consumption spending.
B) increase investment spending.
C) increase government spending.
D) increase export spending.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 218
Topic: Consumption
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
8-45
Copyright © 2015 Pearson Canada Inc.
58) Household wealth is defined as the value of a household's
A) assets minus the value of its liabilities.
B) assets plus the value of its liabilities.
C) assets.
D) liabilities.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 218-219
Topic: Household Wealth
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
59) Examples of assets that are included in ________ would be stocks, bonds, and savings
accounts.
A) household wealth
B) household income
C) planned investment
D) consumer purchases
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 218-219
Topic: Household Wealth
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
60) A stock market crash that causes stock prices to fall should cause
A) a decrease in consumption spending.
B) an increase in consumption spending.
C) an increase in wealth.
D) no change in consumption spending.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 218-219
Topic: Household Wealth
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
8-46
Copyright © 2015 Pearson Canada Inc.
61) The decrease in consumer spending during the 2008-2009 recession was due in part to falling
prices in the stock market. The reason for the decline in consumer spending is most closely
related to which of the following variables that determine the level of consumption?
A) the interest rate
B) current disposable income
C) household wealth
D) the price level
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 218-219
Topic: Consumption
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
62) The decline in consumer spending during the 2008-2009 recession was due in part to a
decrease in disposable income. The decline in consumption resulting from the decline in
disposable income caused a(n) ________ the consumption function curve.
A) movement up along
B) movement down along
C) downward shift of
D) upward shift of
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 221
Topic: Consumption
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
63) Economists Andy Kwan and John Cotsomitis' work indicates the fall in consumption
spending during the 2008-2009 recession would have been caused, in large part, by
A) lower housing wealth.
B) higher interest rates.
C) lower planned investment.
D) a fall in consumer confidence.
Answer: D
Diff: 2
Type: MC
Page Ref: 219-220
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: Making the Connection: Do Changes in Consumer Confidence Affect
Consumption Spending?
8-47
Copyright © 2015 Pearson Canada Inc.
64) A decrease in the real interest rate will
A) cause consumers to spend less and save more.
B) most likely increase consumer purchases of durable goods.
C) most likely increase the reward to savings.
D) most likely increase the cost of borrowing.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 221-221
Topic: The Interest Rate
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
65) Increases in the price level will
A) lower consumption because goods and services are less affordable.
B) raise consumption because some goods and services are more affordable.
C) raise consumption because real wealth increases.
D) lower consumption because real wealth decreases.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 220
Topic: The Price Level
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
66) Which of the following will reduce consumer expenditures?
A) a decrease in interest rates
B) a general increase in housing prices
C) a decrease in expected future income
D) a decrease in the price level
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 2197
Topic: Expected Future Income
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-48
Copyright © 2015 Pearson Canada Inc.
67) The consumption function describes the relationship between
A) consumption spending and national income.
B) consumption spending and aggregate income.
C) consumption spending and disposable income.
D) consumption spending and personal income.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 221-222
Topic: The Consumption Function
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
68) The change in consumption divided by the change in disposable income is equal to
A) the slope of the consumption function.
B) aggregate expenditure.
C) household saving.
D) real GDP.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 221-222
Topic: The Consumption Function
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
69) The marginal propensity to consume is defined as
A) consumption divided by disposable income.
B) disposable income divided by consumption.
C) the change in consumption divided by the change in disposable income.
D) the change in disposable income divided by the change in consumption.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 221
Topic: The Marginal Propensity to Consume
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-49
Copyright © 2015 Pearson Canada Inc.
70) If disposable income increases by $500 million, and consumption increases by $400 million,
then the marginal propensity to consume is
A) 1.25.
B) 0.8.
C) 0.6.
D) 0.4.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 221-222
Topic: The Marginal Propensity to Consume
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
71) If disposable income falls by $40 billion and consumption falls by $30 billion, then the slope
of the consumption function is
A) 1.33.
B) 0.75.
C) 0.4.
D) 0.3.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 221-222
Topic: The Consumption Function
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
72) ________ is defined as national income + transfers - taxes.
A) Gross private domestic investment
B) GDP
C) Personal income
D) Disposable income
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 218
Topic: Consumption and National Income
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-50
Copyright © 2015 Pearson Canada Inc.
Table 8.7
Consumption
(dollars)
$600
900
1,200
Disposable Income
(dollars)
$1,000
1,500
2,000
73) Refer to Table 8.7. Given the consumption schedule in the table above, the marginal
propensity to consume is
A) 0.5.
B) 0.6.
C) 0.75.
D) 0.8.
Answer: B
Diff: 2
Type: MC
Page Ref: 224-225
Topic: The Consumption Function
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the
Marginal Propensity to Save
74) Refer to Table 8.7. Given the consumption schedule in the table above, the marginal
propensity to save is
A) 0.3.
B) 0.4.
C) 0.5.
D) 0.6.
Answer: B
Diff: 2
Type: MC
Page Ref: 224-225
Topic: The Marginal Propensity to Save
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the
Marginal Propensity to Save
8-51
Copyright © 2015 Pearson Canada Inc.
75) If the MPC is 0.95, then a $10 million increase in disposable income will
A) increase consumption by $200 million.
B) increase consumption by $9.5 million.
C) decrease consumption by $105 million
D) increase consumption by $950 million.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 221-222
Topic: Consumption and National Income
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
76) If national income increases by $75 million and consumption increases by $15 million, the
marginal propensity to consume is
A) 5.
B) 0.75.
C) 0.20.
D) 0.15.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 222
Topic: Consumption and National Income
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
77) When we graph consumption as a function of national income rather than as a function of
________, the slope of this consumption function is the ________.
A) disposable income; MPC
B) personal income; MPC
C) disposable income; MPS
D) personal income; MPS
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 222-223
Topic: Consumption and National Income
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-52
Copyright © 2015 Pearson Canada Inc.
78) If the marginal propensity to save is 0.1, then a $10 million decrease in disposable income
will
A) increase consumption by $9 million.
B) increase consumption by $1 million.
C) decrease consumption by $9 million.
D) decrease consumption by $1 million.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 222
Topic: The Marginal Propensity to Save
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
79) The sum of the marginal propensity to consume and the marginal propensity to save is
always equal to
A) zero.
B) 0.5.
C) 1.
D) 100.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 223-224
Topic: Consumption
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
80) If the marginal propensity to consume is 0.6, the marginal propensity to save is
A) 0.4.
B) 0.6.
C) 1.
D) 1.5.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 223-224
Topic: The Marginal Propensity to Save
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-53
Copyright © 2015 Pearson Canada Inc.
81) Which of the following is true?
A) National income = Consumption + Savings - Taxes
B) National income = Consumption - Savings - Taxes
C) National income = Consumption + Savings + Taxes
D) National income = Consumption - Savings + Taxes
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 222
Topic: Income, Consumption, and Saving
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
82) Investment spending increases during ________, and decreases during ________.
A) an expansion; a recession
B) a recession; an expansion
C) a recession; a depression
D) a deflation; an inflation
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 225-227
Topic: Planned Investment
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
83) ________ spending follows a smooth trend whereas, ________ spending is more volatile and
subject to fluctuations.
A) Consumer; government
B) Consumer; investment
C) Investment; consumer
D) Government; consumer
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 225-226
Topic: Planned Investment
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-54
Copyright © 2015 Pearson Canada Inc.
84) If firms are more pessimistic and believe that future profits will fall and remain weak for the
next few years, then
A) investment spending will fall.
B) investment spending will rise.
C) investment spending will remain unaffected.
D) investment spending will rise and then fall.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 226
Topic: Planned Investment
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
85) In the aftermath of the 2008-2009 recession, snowmobile purchases
A) rose by 3 percent.
B) remained stable.
C) fell by 3 percent.
D) fell by 17.4 percent.
Answer: D
Diff: 2
Type: MC
Page Ref: 227-228
Topic: Planned Investment
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: Making the Connection: The Hills and Valleys of Snowmobile Purchases
86) Which of the following is most likely to decrease due to a recession?
A) households' purchases of snowmobiles
B) households' purchases of winter clothing
C) firms' purchases of printer paper
D) government purchases of computer equipment
Answer: A
Diff: 2
Type: MC
Page Ref: 227-228
Topic: Aggregate Expenditures and Recession
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: Making the Connection: The Hills and Valleys of Snowmobile Purchases
8-55
Copyright © 2015 Pearson Canada Inc.
87) Investment spending will decrease when
A) the interest rate falls.
B) the corporate income tax decreases.
C) business cash flow decreases.
D) firms become more optimistic about earning future profits.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 227
Topic: Planned Investment
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
88) During a(n) ________, many firms experience reduced profits, which reduces ________ and
investment spending.
A) expansion; business confidence
B) recession; cash flow
C) expansion; cash flow
D) recession; government spending
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 225-227
Topic: Cash Flow
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
89) From 2009 to 2014, ________ for Canada were negative.
A) planned inventories
B) net exports
C) unplanned inventories
D) transfer payments
Answer: B
Diff: 2
Type: MC
Page Ref: 229
Topic: Net Exports
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
Special Feature: None
8-56
Copyright © 2015 Pearson Canada Inc.
90) The difference between GDP and disposable income is
A) national income.
B) actual investment spending.
C) net taxes.
D) unplanned investment spending.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 218
Topic: Consumption and National Income
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
91) Canadian net export spending falls when
A) the price level in Canada falls relative to the price level in other countries.
B) the growth rate of Canadian GDP is faster than the growth rate of GDP in other countries.
C) the value of the Canadian dollar decreases relative to other currencies.
D) the inflation rate is lower in Canada relative to other countries.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 228-230
Topic: Net Exports
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
92) Net exports usually ________ when the Canadian economy is in a recession and ________
when the Canadian economy is expanding, all else equal.
A) increase; increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 228-230
Topic: Net Exports
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-57
Copyright © 2015 Pearson Canada Inc.
93) If inflation in Canada is lower than inflation in other countries, what will be the effect on net
exports for Canada?
A) Net exports will rise as Canadian exports increase.
B) Net exports will rise as Canadian imports increase.
C) Net exports will decrease as Canadian exports decrease.
D) Net exports will decrease as Canadian imports decrease.
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 765/391
Topic: Net Exports
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
94) Which of the following will increase aggregate expenditure in Canada?
A) an increase in the value of the dollar
B) an increase in the price level
C) an increase in interest rates
D) an increase in government purchases
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 228-230
Topic: Government Purchases
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
95) Lower interest rates increase both consumption and investment spending.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 218&226
Topic: Consumption
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-58
Copyright © 2015 Pearson Canada Inc.
96) The marginal propensity to consume measures the average amount of wealth that a consumer
spends in a given period of time.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 221
Topic: Consumption
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
97) When Javier's income increases by $5,000, he spends an additional $3,750 dollars. This
implies that his marginal propensity to consume is 0.75.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 221-222
Topic: Consumption
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
98) When Jack's income increases by $1,000, he spends an additional $850 dollars. This implies
that his marginal propensity to save is 0.85.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 224
Topic: The Marginal Propensity to Save
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
99) An increase in the price level in Canada will reduce imports and increase exports.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 228-230
Topic: Net Exports
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-59
Copyright © 2015 Pearson Canada Inc.
100) What are the four categories of aggregate expenditure?
Answer: The four categories are consumption spending, planned investment spending,
government purchases, and net exports.
Comment: Recurring
Diff: 1
Type: SA Page Ref: 217
Topic: The Aggregate Expenditure Model
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
101) Ceteris paribus, how does an expansion in Canada affect Canadian net exports?
Answer: As GDP increases in Canada due to the expansion, the household incomes rise.
Households respond by increasing their purchases of goods and services. Some of the increase in
purchases includes domestic goods and services; some of the increase includes foreign-produced
goods and services. This essentially raises imports. Assuming that exports do not change, net
exports will fall.
Comment: Recurring
Diff: 1
Type: SA Page Ref: 228-230
Topic: Net Exports
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
102) What are the five main determinants of consumption spending? Which of these is the most
important?
Answer: The five main determinants of consumption spending are current disposable income,
household wealth, expected future income, the price level, and the interest rate. The most
important determinant is current disposable income.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 218
Topic: Consumption
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-60
Copyright © 2015 Pearson Canada Inc.
103) Given Table 8.8 below, fill in the values for saving. Assume there are no taxes.
Table 8.8
National Income
$2,000
3,000
4,000
5,000
Consumption
$1,700
2,500
3,300
4,100
Saving
Answer: When taxes are zero, saving is the difference between national income and
consumption:
saving = national income - consumption.
S=Y-C
Using the table:
National Income
$2,000
3,000
4,000
5,000
Consumption
$1,700
2,500
3,300
4,100
Saving
$300
500
700
900
Comment: Recurring
Diff: 1
Type: SA Page Ref: 222-223
Topic: Income, Consumption, and Saving
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-61
Copyright © 2015 Pearson Canada Inc.
104) Given Table 8.9 below, fill in the values of the marginal propensity to save (MPS) and the
marginal propensity to consume (MPC). Show that MPC + MPS = 1.
Table 8.9
National
Income
$2,000
3,000
4,000
5,000
Consumption
$1,900
2,700
3,500
4,300
Saving
$100
300
500
700
Answer: The MPC is defined as:
MPC =
=
=
= 0.8
The MPS is defined as:
MPS =
=
= 0.2
=
MPC
MPS
At every level of income the MPC is 0.8 and at every level of income the MPS = 0.2. Therefore,
MPC + MPS is always equal to 1.
Using the table:
National
Income
$2,000
3,000
4,000
5,000
Consumption
$1,900
2,700
3,500
4,300
Saving
$100
300
500
700
MPC
--0.8
0.8
0.8
MPS
-0.2
0.2
0.2
Comment: Recurring
Diff: 2
Type: SA Page Ref: 222-225
Topic: Income, Consumption, and Saving
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-62
Copyright © 2015 Pearson Canada Inc.
105) Suppose Canada experiences a long period of relatively stable prices while other countries
experience long periods of inflation. How will this affect Canadian net exports?
Answer: If inflation in Canada is lower than inflation in other countries, then prices of products
and services produced in Canada increase at a slower pace than the prices of products and
services of other countries. This difference in the price levels will increase the demand for
Canadian goods relative to foreign goods. Canadian exports will increase, imports will decrease,
and Canadian net exports will rise.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 228-230
Topic: The Price Level and Net Exports
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8.3 Graphing Macroeconomic Equilibrium
1) On the 45-degree line diagram, the 45-degree line shows points where
A) real income equals real GDP.
B) real aggregate expenditure equals C + I.
C) real aggregate expenditure equals real GDP.
D) real aggregate output equals the quantity produced.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 231
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
2) On the 45-degree line diagram, for points that lie below the 45-degree line,
A) planned aggregate expenditure is greater than GDP.
B) planned aggregate expenditure is less than GDP.
C) planned aggregate expenditure is equal to GDP.
D) planned aggregate expenditure is less than aggregate income.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 231
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
8-63
Copyright © 2015 Pearson Canada Inc.
3) If planned aggregate expenditure is less than total production,
A) actual inventories will equal planned inventories.
B) firms will experience an unplanned increase in inventories.
C) GDP will increase.
D) the economy is in equilibrium.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 233
Topic: Graphing Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
4) If planned aggregate expenditure is less than total production,
A) actual inventories will equal planned inventories.
B) firms will experience an unplanned decrease in inventories.
C) GDP will decrease.
D) the economy is in equilibrium.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 233
Topic: Graphing Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
5) If the economy is currently in equilibrium at a level of GDP that is below potential GDP,
which of the following would move the economy back to potential GDP?
A) an increase in wealth
B) an increase in interest rates
C) a decrease in business confidence
D) an increase in the value of the dollar relative to other currencies
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 234
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
8-64
Copyright © 2015 Pearson Canada Inc.
Figure 8.1
6) Refer to Figure 8.1. According to the figure above, at what point is aggregate expenditure
greater than GDP?
A) J
B) K
C) L
D) none of the above
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 231
Topic: Graphing Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
7) Refer to Figure 8.1. At point L in the figure above, which of the following is true?
A) Aggregate expenditure is greater than GDP.
B) The economy has achieved macroeconomic equilibrium.
C) Actual inventories are greater than planned inventories.
D) GDP will be increasing.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 233
Topic: Graphing Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
8-65
Copyright © 2015 Pearson Canada Inc.
8) Refer to Figure 8.1. If the economy is at point L, what will happen?
A) Inventories have fallen below their desired level, and firms decrease production.
B) Inventories have fallen below their desired level, and firms increase production.
C) Inventories have risen above their desired level, and firms decrease production.
D) Inventories have risen above their desired level, and firms increase production.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 233
Topic: Graphing Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
9) Refer to Figure 8.1. If the economy is at a level of aggregate expenditure given by point K,
A) the economy is in equilibrium.
B) production is greater than spending.
C) production is less than spending.
D) inventories will increase above their desired level.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 233
Topic: Graphing Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
10) Which of the following leads to an increase real GDP?
A) a decrease in government spending
B) a decrease in the inflation rate in other countries, relative to the inflation in the United States
C) a decrease in interest rates
D) households have increasingly pessimistic expectations about future income
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 233
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
8-66
Copyright © 2015 Pearson Canada Inc.
11) If planned aggregate expenditure is below potential GDP and planned aggregate expenditure
equals GDP, then
A) actual inventory investment will be less than planned inventory investment.
B) actual inventory investment will be greater than planned inventory investment.
C) the economy is in a recession.
D) the economy is at full employment.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 234
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
12) Assume that inventories declined by more than analysts predicted. This implies that
A) planned aggregate expenditure was greater than real GDP.
B) planned aggregate expenditure was equal to real GDP.
C) planned aggregate expenditure was less than real GDP.
D) planned aggregate expenditure is unrelated to real GDP.
Answer: A
Diff: 2
Type: MC
Page Ref: 233
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
13) Following recession, slow economic growth, and increasing gas prices, Tim Hortons sales
were lower than expected. If a decrease in restaurant sales decreases aggregate expenditure, then
A) unplanned investment will increase.
B) planned investment will increase.
C) planned aggregate expenditure will be greater than real GDP.
D) real GDP will be more than nominal GDP.
Answer: A
Diff: 2
Type: MC
Page Ref: 244
Topic: Planned Investment and Actual Investment
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: An Inside LOOK: Tim Hortons Earnings Fall Short of Forecasts
8-67
Copyright © 2015 Pearson Canada Inc.
14) How does a decrease in government spending affect the aggregate expenditure line?
A) It shifts the aggregate expenditure line upward.
B) It shifts the aggregate expenditure line downward.
C) It increases the slope of the aggregate expenditure line.
D) It decreases the slope of the aggregate expenditure line.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 232
Topic: Government Purchases
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
Figure 8.2
15) Refer to Figure 8.2. If the Canadian economy is currently at point N, which of the following
could cause it to move to point K?
A) Households expect future income to decline.
B) Household wealth rises.
C) The firm's cash flow rises as profits rise.
D) Government expenditures increase.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 232
Topic: Determining the Level of Aggregate Expenditure
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
8-68
Copyright © 2015 Pearson Canada Inc.
16) Refer to Figure 8.2. If the Canadian economy is currently at point K, which of the following
could cause it to move to point N?
A) The price level in Canada rises relative to the price level in other countries.
B) Parliament passes investment tax incentives.
C) The interest rate rises.
D) Household wealth declines.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 232
Topic: Determining the Level of Aggregate Expenditure
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
17) Refer to Figure 8.2. Suppose that the level of GDP associated with point N is potential GDP.
If the Canadian economy is currently at point K,
A) firms are operating above capacity.
B) the economy is at full employment.
C) the economy is in recession.
D) the level of unemployment is equal to the natural rate.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 234
Topic: Showing a Recession on the 45 Degree Line
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
18) Planned aggregate expenditure is equal to
A) consumption spending only.
B) consumption spending plus planned investment spending.
C) planned investment spending only.
D) consumption spending plus planned investment spending plus government purchases plus net
exports.
Answer: D
Diff: 1
Type: MC
Page Ref: 235
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
8-69
Copyright © 2015 Pearson Canada Inc.
19) When net exports equal zero, the economy is in macroeconomic equilibrium.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 231
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
20) Macroeconomic equilibrium can occur at any point on the 45-degree line.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 231
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
21) For all points below the 45-degree line, planned aggregate expenditure will be less than
GDP.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 231
Topic: Showing a Recession on the 45 Degree Line
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
22) What is the difference between aggregate expenditure and consumption spending?
Answer: Aggregate expenditure represents the total spending in the economy. Consumption
spending is just one component of aggregate expenditure. The other components of aggregate
expenditure are: planned investment, government purchases, and net exports.
Diff: 2
Type: ES
Page Ref: 232
Topic: Consumption
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
8-70
Copyright © 2015 Pearson Canada Inc.
23) Use a 45-degree diagram to illustrate macroeconomic equilibrium. Make sure your diagram
shows the aggregate expenditure function. Include in your diagram a point where aggregate
expenditure is greater than GDP and a point where aggregate expenditure is less than GDP.
Answer:
Macroeconomic equilibrium occurs at point K, where Y = AE.
At point J, aggregate expenditure is greater than GDP.
At point L, aggregate expenditure is less than GDP.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 233
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
8-71
Copyright © 2015 Pearson Canada Inc.
Table 8.10
Planned
Government
Real GDP Consumption Investment Purchases Net Exports
$2,000
$1,600
$250
$250
$100
2,500
2,000
250
250
100
3,000
2,400
250
250
100
3,500
2,800
250
250
100
24) Refer to Table 8.10. Using the table above, calculate the unplanned change in inventories for
each level of GDP, and explain what will happen to GDP?
Answer: The macroeconomic equilibrium is determined where aggregate expenditure = real
GDP. The values for aggregate expenditure for each level of real GDP are given in the table
below. The unplanned change in inventories is the difference between aggregate expenditure and
real GDP. If there is an unplanned decrease in inventories, firms are selling goods faster than
they planned, and this is a signal for firms to increase production. If there is an unplanned
increase in inventories, firms are selling goods more slowly than they expected, and this is a
signal for firms to decrease production.
Real GDP
$2,000
2,500
3,000
3,500
Aggregate Unplanned Change
Expenditure
in Inventories
$2,200
-$200
2,600
-100
3,000
3,400
0
100
Real GDP
Will...
increase
increase
be in
equilibrium
decrease
Diff: 3
Type: ES
Page Ref: 235
Topic: Macroeconomic Equilibrium
Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: Solved Problem: Determining Macroeconomic Equilibrium
25) On the 45-degree line diagram, the 45-degree line shows points where real aggregate
expenditure equals
A) unplanned investment.
B) planned investment.
C) real GDP.
D) nominal GDP.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 231
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
8-72
Copyright © 2015 Pearson Canada Inc.
26) On the 45-degree line diagram, for points that lie above the 45-degree line,
A) planned aggregate expenditure is greater than GDP.
B) planned aggregate expenditure is less than GDP.
C) planned aggregate expenditure is equal to GDP.
D) planned aggregate expenditure is less than aggregate income.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 231
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
27) If planned aggregate expenditure is greater than total production,
A) actual inventories will equal planned inventories.
B) firms will experience an unplanned decrease in inventories.
C) GDP will decrease.
D) the economy is in equilibrium.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 231
Topic: Graphing Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
28) If planned aggregate expenditure is greater than total production,
A) actual inventories will equal planned inventories.
B) firms will experience an unplanned increase in inventories.
C) GDP will increase.
D) the economy is in equilibrium.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 231-232
Topic: Graphing Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
8-73
Copyright © 2015 Pearson Canada Inc.
29) If the economy is currently in equilibrium at a level of GDP that is above potential GDP,
which of the following would move the economy back to potential GDP?
A) a decrease in wealth
B) a decrease in interest rates
C) an increase in business confidence
D) a decrease in the value of the dollar relative to other currencies
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 233-234
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
Figure 8.3
30) Refer to Figure 8.3. According to the figure above, at what point is aggregate expenditure
less than GDP?
A) J
B) K
C) L
D) none of the above
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 233
Topic: Graphing Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-74
Copyright © 2015 Pearson Canada Inc.
31) Refer to Figure 8.3. At point J in the figure above, which of the following is true?
A) Aggregate expenditure is less than GDP.
B) The economy has achieved macroeconomic equilibrium.
C) Actual inventories are less than planned inventories.
D) GDP will be decreasing.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 233
Topic: Graphing Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
32) Refer to Figure 8.3. If the economy is at point J, what will happen?
A) Inventories have fallen below their desired level, so firms will decrease production.
B) Inventories have fallen below their desired level, so firms will increase production.
C) Inventories have risen above their desired level, so firms will decrease production.
D) Inventories have risen above their desired level, so firms will increase production.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 232-233
Topic: Graphing Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
33) Refer to Figure 8.3. If the economy is in equilibrium, it is at a level of aggregate expenditure
given by point
A) J.
B) K.
C) L.
D) Points J, K, and L all represent equilibrium.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 232-233
Topic: Graphing Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-75
Copyright © 2015 Pearson Canada Inc.
34) Which of the following leads to a decrease in real GDP?
A) an increase in government spending
B) an increase in the inflation rate in other countries, relative to inflation in Canada
C) an increase in interest rates
D) households having increasingly optimistic expectations about future income
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 231-233
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
35) If planned aggregate expenditure is above potential GDP and planned aggregate expenditure
equals GDP, then
A) actual inventory investment will be less than planned inventory investment.
B) actual inventory investment will be greater than planned inventory investment.
C) the economy is in an expansion.
D) the economy is at full employment.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 233-234
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
36) How does an increase in government spending affect the aggregate expenditure line?
A) It shifts the aggregate expenditure line upward.
B) It shifts the aggregate expenditure line downward.
C) It increases the slope of the aggregate expenditure line.
D) It decreases the slope of the aggregate expenditure line.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 236
Topic: Government Purchases
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-76
Copyright © 2015 Pearson Canada Inc.
Figure 8.4
37) Refer to Figure 8.4. If the Canadian economy is currently at point N, which of the following
could cause it to move to point K?
A) Households expect future income to rise.
B) Household wealth falls.
C) The firm's cash flow rises as profits rise.
D) Government expenditures increase.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 236
Topic: Determining the Level of Aggregate Expenditure
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
38) Refer to Figure 8.4. If the Canadian economy is currently at point K, which of the following
could cause it to move to point N?
A) The price level in Canada falls relative to the price level in other countries.
B) The federal government abolishes investment tax incentives.
C) The interest rate rises.
D) Household wealth declines.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 236
Topic: Determining the Level of Aggregate Expenditure
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-77
Copyright © 2015 Pearson Canada Inc.
39) Refer to Figure 8.4. Suppose that the level of GDP associated with point K is potential GDP.
If the Canadian economy is currently at point N,
A) firms are operating below capacity.
B) the economy is at full employment.
C) the economy is in an expansion.
D) the level of unemployment is above the natural rate.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 236
Topic: Showing a Recession on the 45 Degree Line
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
40) ________ is equal to consumption spending plus planned investment spending plus
government purchases plus net exports.
A) Full employment GDP
B) Short-run aggregate supply
C) Planned inventory investment
D) Planned aggregate expenditure
Answer: D
Diff: 1
Type: MC
Page Ref: 232
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: Don't Let This Happen to You: Don't Confuse Aggregate Expenditure with
Consumption Spending
41) If planned aggregate expenditure equals GDP, the economy is in macroeconomic
equilibrium.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 233
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
8-78
Copyright © 2015 Pearson Canada Inc.
42) For all points above the 45-degree line, planned aggregate expenditure will be less than
GDP.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 231
Topic: Showing a Recession on the 45 Degree Line
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
43) If planned aggregate expenditure is less than real GDP, some firms will experience
unplanned increases in inventories.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 231-232
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
44) What is the macroeconomic consequence if firms accumulate large amounts of unplanned
inventory at the beginning of a recession?
Answer: Firms will decrease production until they sell unintended inventories.
Comment: Recurring
Diff: 1
Type: SA Page Ref: 234-235
Topic: Aggregate Expenditures and Recession
Updated: Yes
Learning Outcome: Macro 2: Explain the relationship between expenditure and income
AACSB: Reflective Thinking
Special Feature: None
8-79
Copyright © 2015 Pearson Canada Inc.
45) At each of the three points in the following graph, indicate whether planned aggregate
expenditure is greater than, equal to, or less than GDP.
Answer: At point J, planned aggregate expenditure is greater than GDP.
At point K, planned aggregate expenditure is equal to GDP.
At point L, planned aggregate expenditure is less than GDP.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 231
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-80
Copyright © 2015 Pearson Canada Inc.
Table 8.11
Planned
Government
Real GDP Consumption Investment Purchases Net Exports
$5,000
$4,500
$350
$300
$50
6,000
5,300
350
300
50
7,000
6,100
350
300
50
8,000
6,900
350
300
50
46) Refer to Table 8.11. Using the table above, calculate the unplanned change in inventories for
each level of GDP, and explain what will happen to GDP.
Answer: The macroeconomic equilibrium is determined where aggregate expenditure = real
GDP. The values for aggregate expenditure for each level of real GDP are given in the table
below. The unplanned change in inventories is the difference between aggregate expenditure and
real GDP. If there is an unplanned decrease in inventories, firms are selling goods faster than
they planned, and this is a signal for firms to increase production. If there is an unplanned
increase in inventories, firms are selling goods more slowly than they expected, and this is a
signal for firms to decrease production.
Real GDP
$5,000
6,000
7,000
8,000
Unplanned
Aggregate
Change in
Expenditure Inventories
$5,200
-$200
6,000
6,800
7,600
0
200
400
Real GDP
will...
increase
be in
equilibrium
decrease
decrease
Diff: 3
Type: SA Page Ref: 234-235
Topic: Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: Solved Problem: Determining Macroeconomic Equilibrium
8-81
Copyright © 2015 Pearson Canada Inc.
8.4 The Multiplier Effect
Figure 8.5
1) Refer to Figure 8.5. Suppose that investment spending increases by $10 million, shifting up
the aggregate expenditure line and GDP increases from GDP1 to GDP2. If the MPC is 0.9, then
what is the change in GDP?
A) $9 million
B) $10 million
C) $90 million
D) $100 million
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 235-236
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Analytic Skills
Special Feature: None
8-82
Copyright © 2015 Pearson Canada Inc.
2) Refer to Figure 8.5. Suppose that government spending increases, shifting up the aggregate
expenditure line. GDP increases from GDP1 to GDP2, and this amount is $400 billion. If the
MPC is 0.75, then what is the distance between N and L or by how much did government
spending change?
A) $10 billion
B) $100 billion
C) $200 billion
D) $300 billion
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 235-236
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Analytic Skills
Special Feature: None
Figure 8.6
3) Refer to Figure 8.6. Potential GDP equals $100 billion. The economy is currently producing
GDP1 which is equal to $90 billion. If the MPC is 0.8, then how much must autonomous
spending change for the economy to move to potential GDP?
A) -$18 billion
B) -$2 billion
C) $2 billion
D) $18 billion
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 236
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Analytic Skills
Special Feature: None
8-83
Copyright © 2015 Pearson Canada Inc.
4) In the aggregate expenditure model, ________ has both an autonomous component and an
induced component.
A) planned investment spending
B) consumption spending
C) government spending
D) net export spending
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 236
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Reflective Thinking
Special Feature: None
5) The ratio of the increase in ________ to the increase in ________ is called the multiplier.
A) equilibrium nominal GDP; autonomous expenditure
B) equilibrium real GDP; autonomous expenditure
C) autonomous expenditure; equilibrium real GDP
D) induced expenditure; equilibrium real GDP
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 236
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Reflective Thinking
Special Feature: None
6) If an increase in investment spending of $50 million results in a $400 million increase in
equilibrium real GDP, then
A) the multiplier is 0.125.
B) the multiplier is 3.5.
C) the multiplier is 8.
D) the multiplier is 50.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 236-237
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Analytic Skills
Special Feature: None
8-84
Copyright © 2015 Pearson Canada Inc.
7) If an increase in autonomous consumption spending of $10 million results in a $50 million
increase in equilibrium real GDP, then
A) the MPC is 0.5.
B) the MPC is 0.75.
C) the MPC is 0.8.
D) the MPC is 0.9.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 236-237
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Analytic Skills
Special Feature: None
8) ________ consumption is consumption that does not depend upon the level of GDP.
A) Autonomous
B) Induced
C) Voluntary
D) Disposable
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 236-237
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Reflective Thinking
Special Feature: None
9) The multiplier is calculated as the
A) change in real GDP / change in autonomous expenditure.
B) change in autonomous expenditure / change in real GDP.
C) change in nominal GDP / change in autonomous expenditure.
D) change in real GDP / change in induced spending.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 236-237
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Reflective Thinking
Special Feature: None
8-85
Copyright © 2015 Pearson Canada Inc.
10) A general formula for the multiplier is
A)
.
B)
.
C)
.
D)
.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 238
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Reflective Thinking
Special Feature: None
11) Which of the following is a true statement about the multiplier?
A) The multiplier rises as the MPC rises.
B) The smaller the MPC, the larger the multiplier.
C) The multiplier is a value between zero and one.
D) The multiplier effect does not occur when autonomous expenditure decreases.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 238
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Reflective Thinking
Special Feature: None
12) All of the following are true statements about the multiplier except
A) The formula for the multiplier overstates the real world multiplier when we take into account
the impact of changes in GDP on imports, inflation and the interest rate.
B) The larger the MPC, the larger the multiplier.
C) The multiplier is the ratio of the change in real GDP to the change in autonomous
expenditure.
D) The multiplier makes the economy less sensitive to changes in autonomous expenditure.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 239
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Reflective Thinking
Special Feature: None
8-86
Copyright © 2015 Pearson Canada Inc.
13) Tariffs and trade wars cause net exports to ________ and real GDP to ________.
A) increase; increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease
Answer: D
Diff: 2
Type: MC
Page Ref: 240-241
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Reflective Thinking
Special Feature: Don't Let This Happen to You: Understand Why Protectionism Doesn't Raise
the Multiplier
14) John Maynard Keynes argued that if many households decide at the same time to increase
saving and reduce spending,
A) this may benefit the economy in the short run, but not in the long run.
B) the economy will benefit in the short run and benefit by an even greater amount in the long
run.
C) this will have a major negative impact on the economy in both the short run and in the long
run.
D) this may benefit the economy in the long run, but could be counterproductive in the short run.
Answer: D
Diff: 2
Type: MC
Page Ref: 241
Topic: The Paradox of Thrift
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Reflective Thinking
Special Feature: None
15) The formula for the multiplier is (1 - MPC).
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 238
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Analytic Skills
Special Feature: None
8-87
Copyright © 2015 Pearson Canada Inc.
16) The larger the MPC, the smaller the value of the multiplier.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 238
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Analytic Skills
Special Feature: None
17) If the marginal propensity to save is 0.4, the multiplier is 2.5.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 238
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Analytic Skills
Special Feature: None
18) If the multiplier is 5, the marginal propensity to consume must be 0.8.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 238
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Analytic Skills
Special Feature: None
8-88
Copyright © 2015 Pearson Canada Inc.
19) Discuss the leading causes of the Great Depression. Use the 45-degree line diagram to show
how they caused a decline in GDP.
Answer: Several events lowered aggregate expenditure in the economy. Drought on the Prairies
played a major role. Combined with the dramatic decline in American demand for Canadian
exports, the Canadian (and global) economy contracted significantly. Graphically, this is shown
by a downward shift of the aggregate expenditure line. The U.S. Smoot-Hawley Tariff Act was
passed in June of 1930 and this sparked a trade war. As a result, net exports declined and this
was another factor lowering aggregate expenditure.
The aggregate expenditure line shifts down due to the decline in consumption spending and net
export spending. The decline in these forms of spending led firms to cut back on production and
lay off workers. Income subsequently declined and this induced further declines in income and
spending and led to a downward spiral. As a result, GDP declined from GDP2 to GDP1.
Diff: 2
Type: ES
Page Ref: 240
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Analytic Skills
Special Feature: Don't Let This Happen to You: Understand Why Protectionism Doesn't Raise
the Multiplier
8-89
Copyright © 2015 Pearson Canada Inc.
20) Economists think that the marginal propensity to consume for the Canadian economy is
somewhere around 0.9. Based on our simple multiplier formula, this would imply that the
multiplier for Canada should be around 10. However, economists agree that the government
spending multiplier is less than 2. What might explain this supposed anomaly?
Answer: The formula for the multiplier, M =
, is a simplification. It points out the
relationship between the marginal propensity to consume and the multiplier, but it does leave out
many other real world effects such as inflation, income taxes, and imports. When we consider
these effects, they reduce the size of the multiplier.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 239
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Analytic Skills
Special Feature: None
Table 8.12
Planned
Government
Real GDP Consumption Investment Purchases Net Exports
$4,000
$3,500
$350
$450
-$100
5,000
4,300
350
450
-100
6,000
5,100
350
450
-100
7,000
5,900
350
450
-100
21) Refer to Table 8.12. Using the table above, answer the following questions. The numbers in
the table are in billions of dollars.
a. What is the equilibrium level of real GDP?
b. What is the MPC?
c. If potential GDP is $7,000 billion, is the economy at full employment? If not, what is the
condition of the economy?
d. If the economy is not at full employment, by how much should government spending
increase so that the economy can move to the full employment level of GDP?
Answer:
a. Equilibrium real GDP is determined where aggregate expenditure = real GDP. The values for
aggregate expenditure for each level of real GDP are given in the table below. They are found by
adding together C + I + G + NX. The value where real GDP equals aggregate expenditure is
$5,000 billion, and this is equilibrium.
Real GDP Aggregate Expenditure
$4,000
$4,200
5,000
5,000
6,000
5,800
7,000
6,600
8-90
Copyright © 2015 Pearson Canada Inc.
b. The MPC is found by the formula
. In this case, △C = $800 billion and ΔY = $1,000
billion, so the MPC = $800 billion / $1,000 billion or 0.8.
c. The economy is not at full employment. Equilibrium GDP is $5,000 billion, which is less
than potential GDP. The economy is in recession.
d. GDP must rise to $7,000 billion to be at full employment. This means that GDP must
increase by $2,000 billion. To find the right change in government spending, use the multiplier
formula:
ΔGDP = M × ΔG. We know the △GDP we want to achieve is $2,000 billion. We can find the
multiplier since we know the MPC:
Multiplier = 1 / (1-0.8) = 1 / 0.2 = 5. Substituting this into the above equation:
$2,000 billion = 5 × ΔG =
$2,000 billion / 5 = ΔG = $400 billion.
Therefore, government spending must increase by $400 billion to move the economy to full
employment.
Diff: 3
Type: ES
Page Ref: 239-240
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Analytic Skills
Special Feature: Solved Problem: Using the Multiplier Formula
8-91
Copyright © 2015 Pearson Canada Inc.
Table 8.13
Planned
Government
Real GDP Consumption Investment Purchases Net Exports
$500
$400
$100
$150
-$50
600
450
100
150
-50
700
500
100
150
-50
800
550
100
150
-50
22) Refer to Table 8.13. Using the table above, answer the following questions. The numbers in
the table are in billions of dollars.
a. What is the equilibrium level of real GDP?
b. What is the MPC?
c. If investment spending declines by $50 billion, what will happen to equilibrium GDP?
Answer:
a. Equilibrium real GDP is determined where aggregate expenditure = real GDP. The values for
aggregate expenditure for each level of real GDP are given in the table below. They are found by
adding together C + I + G + NX. The value where real GDP equals aggregate expenditure is $700
billion, and this is equilibrium.
Real GDP Aggregate Expenditure
$500
$600
600
650
700
700
800
750
b. The MPC is found by the formula
. In this case, ΔC = $50 billion and ΔY = $100 billion,
so the MPC = $50 billion / $100 billion, or 0.5.
c. We must use the multiplier formula to calculate the new equilibrium level of GDP. First we
calculate the multiplier which is:
Multiplier =
=
=
= 2.
The change in equilibrium GDP = change in expenditure × multiplier = -$50 billion × 2 = $100 billion.
New equilibrium GDP = old equilibrium GDP + change in equilibrium GDP =
$700 billion - $100 billion = $600 billion.
Diff: 3
Type: ES
Page Ref: 239-240
Topic: The Multiplier Effect
Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate
changes in equilibrium GDP
AACSB: Analytic Skills
Special Feature: Solved Problem: Using the Multiplier Formula
8-92
Copyright © 2015 Pearson Canada Inc.
Figure 8.7
23) Refer to Figure 8.7. Suppose that investment spending decreases by $5 million, decreasing
aggregate expenditure and decreasing real GDP from GDP2 to GDP1. If the MPC is 0.8, then
what is the change in GDP?
A) -$4 million
B) -$5 million
C) -$25 million
D) -$40 million
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 236-237
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-93
Copyright © 2015 Pearson Canada Inc.
24) Refer to Figure 8.7. Suppose that government spending increases, shifting up the aggregate
expenditure line. GDP increases from GDP1 to GDP2, and this amount is $200 billion. If the
MPC is 0.8, then what is the distance between N and L, or by how much did government
spending change?
A) $16 billion
B) $40 billion
C) $200 billion
D) $1,000 billion
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 236-237
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-94
Copyright © 2015 Pearson Canada Inc.
Figure 8.8
25) Refer to Figure 8.8. Potential GDP equals $500 billion. The economy is currently producing
GDP1, which is equal to $450 billion. If the MPC is 0.8, then how much must autonomous
spending change for the economy to move to potential GDP?
A) -$40 billion
B) -$10 billion
C) $10 billion
D) $40 billion
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 236-237
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
26) Autonomous expenditure is a type of expenditure that does not depend on
A) wealth.
B) expectations.
C) rates.
D) GDP.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 236
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-95
Copyright © 2015 Pearson Canada Inc.
27) The ratio of the increase in equilibrium real GDP to the increase in autonomous expenditure
is called the
A) MPC.
B) multiplier.
C) MPS.
D) consumption function.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 236
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
28) If an increase in investment spending of $20 million results in a $200 million increase in
equilibrium real GDP, then
A) the multiplier is 0.1.
B) the multiplier is 1.
C) the multiplier is 10.
D) the multiplier is 100.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 237
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
29) If an increase in autonomous consumption spending of $25 million results in a $100 million
increase in equilibrium real GDP, then
A) the MPC is 0.25.
B) the MPC is 0.75.
C) the MPC is 0.8.
D) the MPC is 2.5.
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 238
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-96
Copyright © 2015 Pearson Canada Inc.
30) ________ consumption is consumption that depends upon the level of GDP, and ________
consumption is consumption that does not depend upon the level of GDP.
A) Autonomous; induced
B) Induced; autonomous
C) Voluntary; autonomous
D) Autonomous; voluntary
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 236-237
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
31) The multiplier is calculated as the change in ________ / change in ________.
A) real GDP; autonomous expenditure
B) autonomous expenditure; real GDP.
C) nominal GDP; autonomous expenditure.
D) real GDP; induced spending.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 239
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
32) A general formula for the multiplier is
.
A)
B)
.
C)
.
D)
.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 238
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-97
Copyright © 2015 Pearson Canada Inc.
33) All of the following are true statements about the multiplier, except
A) the multiplier rises as the MPC rises.
B) the smaller the MPS, the larger the multiplier.
C) the multiplier is a value between zero and one.
D) the multiplier effect occurs when autonomous expenditure changes.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 238
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
34) Which of the following is a true statement about the multiplier?
A) The formula for the multiplier overstates the real world multiplier when we take into account
the impact of changes in GDP on imports, inflation, and the interest rate.
B) The larger the MPC, the smaller the multiplier.
C) The multiplier is the ratio of the change in spending to the change in GDP.
D) The multiplier makes the economy less sensitive to changes in autonomous expenditure.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 237-239
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
35) Assume proponents of public funding for a new stadium argue that every dollar spent
building the sports and entertainment facility will generate a total of $2.05 in spending in the
economy. This indicates that the spending multiplier for the construction industry is equal to
A) 1.21.
B) 1.70.
C) 2.05.
D) 4.25.
Answer: C
Diff: 2
Type: MC
Page Ref: 236-237
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-98
Copyright © 2015 Pearson Canada Inc.
36) In 2007-2008, exports from Canada to the United States fell dramatically. Based on the
multiplier effect, we would expect
A) the economy to shrink by less than the drop in exports.
B) the economy to grow by less than the drop in exports.
C) the economy to grow by more than the drop in exports.
D) the economy to shrink by more than the drop in exports.
Answer: D
Diff: 2
Type: MC
Page Ref: 236-237
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
37) John Maynard Keynes argued that if many households decide at the same time to increase
saving and reduce spending,
A) this will increase investment spending in the short run and expand the economy in the long
run.
B) the economy will benefit in the short run but the effect will not last into the long run.
C) this will have a major negative impact on the economy in both the short run and in the long
run.
D) they may make themselves worse off by causing aggregate expenditure to fall, thereby
pushing the economy into a recession.
Answer: D
Diff: 2
Type: MC
Page Ref: 241
Topic: The Paradox of Thrift
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
38) If the marginal propensity to save is 0.35, the multiplier is 2.86.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 238
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-99
Copyright © 2015 Pearson Canada Inc.
39) If the multiplier is 10, the marginal propensity to consume must be 0.1.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 238
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
40) The larger the MPC, the larger the value of the multiplier.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 238
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
41) What is the formula for the multiplier? Explain why this formula is considered to be too
simple.
Answer: Multiplier =
The formula ignores the effect that GDP increasing (or decreasing) can have on imports, the
price level, and interest rates. Ignoring these factors causes the multiplier formula to overstate the
size of the real-world multiplier.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 237-239
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
42) Would a larger multiplier lead to longer and more severe recessions or shorter and less
severe recessions? Briefly explain.
Answer: A larger multiplier would be likely to lead to longer and more severe recessions
because it would magnify the impact on the economy of changes in autonomous expenditures.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 237-239
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-100
Copyright © 2015 Pearson Canada Inc.
Table 8.14
Planned
Government
Real GDP Consumption Investment Purchases Net Exports
$1,000
$1,000
$100
$150
-$50
2,000
1,900
100
150
-50
3,000
2,800
100
150
-50
4,000
3,700
100
150
-50
43) Refer to Table 8.14. Using the table above, answer the following questions. The numbers in
the table are in billions of dollars.
a. What is the equilibrium level of real GDP?
b. What is the MPC?
c. If potential GDP is $4,000 billion, is the economy at full employment? If not, what is the
condition of the economy?
d. If the economy is not at full employment, by how much should government spending
increase so that the economy can move to the full employment level of GDP?
Answer:
a. Equilibrium real GDP is determined where aggregate expenditure = real GDP. The values for
aggregate expenditure for each level of real GDP are given in the table below. They are found by
adding together C + I + G +NX. The value where real GDP equals aggregate expenditure is
$3,000 billion, and this is equilibrium.
Real GDP
$1,000
2,000
3,000
4,000
Aggregate
Expenditure
$1,200
2,100
3,000
3,900
b. The MPC is found using the formula
. In this case, △C = $900 billion and
ΔY = $1,000 billion, so the MPC = $900 billion / $1,000 billion or 0.9.
c. The economy is not at full employment. Equilibrium GDP is $3,000 billion, which is less
than potential GDP. The economy is in recession.
d. GDP must rise to $4,000 billion to be at full employment. This means that GDP must
increase by $1,000 billion. To find the right change in government spending, use the multiplier
formula:
ΔGDP = M × ΔG. We know the △GDP we want to achieve is $1,000 billion. We can find the
multiplier since we know the MPC:
Multiplier = 1 / (1-0.9) = 1 / 0.1 = 10. Substituting this into the above equation:
$1,000 billion = 10 × ΔG =
$1,000 billion / 10 = ΔG = $100 billion.
Therefore, government spending must increase by $100 billion to move the economy to full
employment.
8-101
Copyright © 2015 Pearson Canada Inc.
Diff: 3
Type: SA Page Ref: 237-239
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: Solved Problem: Using the Multiplier Formula
8-102
Copyright © 2015 Pearson Canada Inc.
Table 8.15
Planned
Government
Real GDP Consumption Investment Purchases Net Exports
$250
$200
$40
$60
-$20
300
240
40
60
-20
350
280
40
60
-20
400
320
40
60
-20
44) Refer to Table 8.15. Using the table above, answer the following questions. The numbers in
the table are in billions of dollars.
a. What is the equilibrium level of real GDP?
b. What is the MPC?
c. If investment spending declines by $10 billion, what will happen to equilibrium GDP?
Answer:
a. Equilibrium real GDP is determined where aggregate expenditure = real GDP. The values for
aggregate expenditure for each level of real GDP are given in the table below. They are found by
adding together C + I + G + NX. The value where real GDP equals aggregate expenditure is $400
billion, and this is equilibrium.
Real GDP
$250
300
350
400
Aggregate
Expenditure
$280
320
360
400
b. The MPC is found by the formula
. In this case, ΔC = $40 billion and ΔY = $50 billion,
so the MPC = $40 billion / $50 billion, or 0.8.
c. We must use the multiplier formula to calculate the new equilibrium level of GDP. First we
calculate the multiplier which is:
=
=
= 5.
Multiplier =
The change in equilibrium GDP = change in expenditure × multiplier = -$10 billion × 5 = $50 billion.
New equilibrium GDP = old equilibrium GDP + change in equilibrium GDP =
$400 billion - $50 billion = $350 billion.
Diff: 3
Type: SA Page Ref: 237-239
Topic: The Multiplier Effect
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: Solved Problem: Using the Multiplier Formula
8-103
Copyright © 2015 Pearson Canada Inc.
8.5 The Aggregate Demand Curve
1) The aggregate demand curve illustrates the relationship between ________ and the ________,
holding constant all other factors that affect aggregate expenditure.
A) the price level; quantity of planned aggregate expenditure
B) the inflation rate; quantity of planned aggregate expenditure
C) the price level; quantity of planned investment expenditure
D) the price level; quantity of consumption expenditure
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 241-242
Topic: The Aggregate Demand Curve
Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and
aggregate expenditure
AACSB: Reflective Thinking
Special Feature: None
2) Which of the following is a reason why decreases in the price level result in a rise in aggregate
expenditure?
A) Price level decreases cause firms and consumers to hold less money, which lowers the interest
rate. Lower interest rates raise consumption and planned investment expenditures, which raises
aggregate expenditure.
B) Price level decreases reduce real wealth, which causes consumption spending and aggregate
expenditure to rise.
C) As the price level falls, government spending rises, which raises aggregate expenditure.
D) Price level decreases in the United States relative to other countries lower net exports, which
raises aggregate expenditure.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 241-242
Topic: The Aggregate Demand Curve
Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and
aggregate expenditure
AACSB: Reflective Thinking
Special Feature: None
8-104
Copyright © 2015 Pearson Canada Inc.
3) Which of the following correctly describes how an increase in the price level affects
consumption spending?
A) An increase in the price level raises real wealth, which causes consumption to increase.
B) An increase in the price level decreases the amount of money a household needs to buy goods
and raises the interest rate, which causes consumption to increase.
C) An increase in the price level increases the amount of money a household needs to buy goods
and raises the interest rate, which causes consumption to increase.
D) An increase in the price level lowers real wealth, which causes consumption to decrease.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 241-242
Topic: The Aggregate Demand Curve
Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and
aggregate expenditure
AACSB: Reflective Thinking
Special Feature: None
4) An increase in the price level results in a(n) ________ in household consumption spending
and a(n) ________ in investment spending.
A) increase; decrease
B) increase; increase
C) decrease; decrease
D) decrease; increase
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 241-242
Topic: The Aggregate Demand Curve
Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and
aggregate expenditure
AACSB: Reflective Thinking
Special Feature: None
8-105
Copyright © 2015 Pearson Canada Inc.
5) What impact does a decrease in the price level in Canada have on net exports and why?
A) A decrease in the price level increases net exports because lower prices increase the value of
the dollar.
B) A decrease in the price level increases net exports by reducing the relative cost of Canadian
goods.
C) A decrease in the price level reduces net exports because lower prices raise the value of the
dollar.
D) A decrease in the price level reduces net exports because lower prices increase American
spending on imports.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 241-242
Topic: The Aggregate Demand Curve
Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and
aggregate expenditure
AACSB: Reflective Thinking
Special Feature: None
6) A decrease in the price level in Canada will have what effect on the aggregate expenditure
line?
A) Aggregate expenditure will shift downward.
B) Aggregate expenditure will become steeper.
C) Aggregate expenditure will shift upward.
D) Aggregate expenditure will not be affected by an increase in the price level in the United
States.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 241-242
Topic: The Aggregate Demand Curve
Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and
aggregate expenditure
AACSB: Reflective Thinking
Special Feature: None
8-106
Copyright © 2015 Pearson Canada Inc.
7) An increase in aggregate expenditure has what result on equilibrium GDP?
A) Equilibrium GDP rises.
B) Equilibrium GDP is not affected by a decrease in aggregate expenditure.
C) Equilibrium GDP falls.
D) Equilibrium GDP may rise or fall depending on the size of the decrease in aggregate
expenditure relative to the initial level of GDP.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 241-242
Topic: The Aggregate Demand Curve
Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and
aggregate expenditure
AACSB: Reflective Thinking
Special Feature: None
8) An increase in the price level in Canada will shift the aggregate expenditure line upward.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 241-242
Topic: The Aggregate Demand Curve
Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and
aggregate expenditure
AACSB: Reflective Thinking
Special Feature: None
9) The aggregate demand curve shows the relationship between the price level and the level of
planned aggregate expenditure in the economy.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 242
Topic: The Aggregate Demand Curve
Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and
aggregate expenditure
AACSB: Reflective Thinking
Special Feature: None
10) What impact does a lower price level have on interest rates, wealth, and investment
spending?
Answer: A lower price level increases the purchasing power of wealth, decreases interest rates,
and increases investment spending.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 241-242
Topic: The Aggregate Demand Curve
Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and
aggregate expenditure
AACSB: Reflective Thinking
Special Feature: None
8-107
Copyright © 2015 Pearson Canada Inc.
11) Why is the aggregate demand curve downward sloping while the aggregate expenditure line
is upward sloping?
Answer: A downward sloping aggregate demand curve reflects the inverse relationship between
the price level and the level of planned aggregate expenditure, while an upward-sloping
aggregate expenditure line reflects the positive relationship between real GDP and aggregate
expenditure.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 241-242
Topic: The Aggregate Demand Curve
Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and
aggregate expenditure
AACSB: Reflective Thinking
Special Feature: None
12) The ________ illustrates the relationship between the price level and the quantity of planned
aggregate expenditure, holding constant all other factors that affect aggregate expenditure.
A) aggregate demand curve
B) savings line
C) 45-degree line
D) consumption function
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 242
Topic: The Aggregate Demand Curve
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-108
Copyright © 2015 Pearson Canada Inc.
13) Which of the following is a reason why increases in the price level result in a decline in
aggregate expenditure?
A) Price level increases raise real wealth, which causes consumption spending and aggregate
expenditure to decline.
B) Price level increases cause firms and consumers to hold more money, which raises the interest
rate. Higher interest rates lower consumption and planned investment expenditures, which
lowers aggregate expenditure.
C) Price level increases in Canada relative to other countries raise net exports, which lowers
aggregate expenditure.
D) As the price level rises, government spending falls, which lowers aggregate expenditure.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 242-243
Topic: The Aggregate Demand Curve
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
14) An increase in the price level ________ real wealth, which causes consumption to ________.
A) lowers; increase
B) lowers; decrease
C) raises; increase
D) raises; decrease
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 242-243
Topic: The Aggregate Demand Curve
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
15) A decrease in the price level results in a(n) ________ in household consumption spending
and a(n) ________ in investment spending.
A) increase; decrease
B) increase; increase
C) decrease; decrease
D) decrease; increase
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 242-243
Topic: The Aggregate Demand Curve
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-109
Copyright © 2015 Pearson Canada Inc.
16) What impact does an increase in the price level in Canada have on net exports and why?
A) An increase in the price level decreases net exports because higher prices decrease the value
of the dollar.
B) An increase in the price level decreases net exports by increasing the relative cost of Canadian
goods.
C) An increase in the price level increases net exports because higher prices lower the value of
the dollar.
D) An increase in the price level increases net exports because higher prices decrease Canadian
spending on imports.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 242-243
Topic: The Aggregate Demand Curve
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
17) An increase in the price level in Canada will have what effect on the aggregate expenditure
line?
A) Aggregate expenditure will shift downward.
B) Aggregate expenditure will become steeper.
C) Aggregate expenditure will shift upward.
D) Aggregate expenditure will not be affected by an increase in the price level in the Canada.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 242-243
Topic: The Aggregate Demand Curve
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
18) A decrease in aggregate expenditure has what result on equilibrium GDP?
A) Equilibrium GDP rises.
B) Equilibrium GDP is not affected by a decrease in aggregate expenditure.
C) Equilibrium GDP falls.
D) Equilibrium GDP may rise or fall depending on the size of the decrease in aggregate
expenditure relative to the initial level of GDP.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 242-243
Topic: The Aggregate Demand Curve
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-110
Copyright © 2015 Pearson Canada Inc.
19) A rising price level decreases consumption by decreasing the real value of household wealth.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 241
Topic: The Aggregate Demand Curve
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
20) A decrease in the price level in Canada will shift the aggregate expenditure line downward.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 241
Topic: The Aggregate Demand Curve
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
21) What is the difference between aggregate expenditure and aggregate demand?
Answer: Aggregate expenditure is the total amount of spending in the economy and aggregate
demand is the relationship between the price level and the level of planned aggregate
expenditure.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 241-243
Topic: The Aggregate Demand Curve
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
22) What impact does a higher price level have on interest rates, wealth, and investment
spending?
Answer: A higher price level reduces the purchasing power of wealth, increases interest rates,
and reduces investment spending.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 242-243
Topic: The Aggregate Demand Curve
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-111
Copyright © 2015 Pearson Canada Inc.
8.6 Appendix: The Algebra of Macroeconomic Equilibrium
1) Equilibrium GDP is equal to
A) autonomous expenditure times the marginal propensity to consume.
B) autonomous expenditure times the marginal propensity to save.
C) autonomous expenditure times the multiplier.
D) autonomous expenditure.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 251
Topic: The Algebra of Macroeconomic Equilibrium
Learning Outcome: 8.6 Appendix C: Apply the algebra of macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
2) Given the equations for C, I, G, and NX below, what is the equilibrium level of GDP?
C = 2,000 + 0.9Y
I = 2,500
G = 3,000
NX = 400
A) $4,333
B) $7,100
C) $8,778
D) $79,000
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Learning Outcome: 8.6 Appendix C: Apply the algebra of macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
8-112
Copyright © 2015 Pearson Canada Inc.
3) Given the equations for C, I, G, and NX below, what is the marginal propensity to consume?
C = 2,000 + 0.9Y
I = 2,500
G = 3,000
NX = 400
A) -0.1
B) 0.1
C) 0.9
D) 2000
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Learning Outcome: 8.6 Appendix C: Apply the algebra of macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
4) If the consumption function is defined as C = 5,500 + 0.9Y, what is the autonomous level of
consumption expenditure?
A) $4,950
B) $5,500
C) $6,050
D) $6,111
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 250
Topic: The Algebra of Macroeconomic Equilibrium
Learning Outcome: 8.6 Appendix C: Apply the algebra of macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
5) If the consumption function is defined as C = 5,500 + 0.9Y, what is the value of the
multiplier?
A) 0.1
B) 0.9
C) 9
D) 10
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Learning Outcome: 8.6 Appendix C: Apply the algebra of macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
8-113
Copyright © 2015 Pearson Canada Inc.
6) If the consumption function is defined as C = 7,250 + 0.8Y, what is the marginal propensity to
save?
A) 0.2
B) 0.8
C) 5.8
D) 9.1
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Learning Outcome: 8.6 Appendix C: Apply the algebra of macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
7) If the consumption function is defined as C = 7,250 + 0.8Y, what is the value of the
multiplier?
A) 0.2
B) 0.8
C) 1.25
D) 5
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Learning Outcome: 8.6 Appendix C: Apply the algebra of macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
8) If the consumption function is defined as C = 5,500 + 0.9Y, what is the multiplier?
A) 0.l
B) 0.9
C) 6.1
D) 10
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Learning Outcome: 8.6 Appendix C: Apply the algebra of macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
8-114
Copyright © 2015 Pearson Canada Inc.
9) Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is $32,000,
what is the marginal propensity to consume?
C = 5,000 + (MPC)Y
I = 1,500
G = 2,000
NX = -500
A) 0.67
B) 0.75
C) 0.8
D) 0.9
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Learning Outcome: 8.6 Appendix C: Apply the algebra of macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
10) Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is $32,000,
what will the new equilibrium level of GDP be if government spending increases to 2,500?
C = 5,000 + (MPC)Y
I = 1,500
G = 2,000
NX = -500
A) $32,500
B) $34,000
C) $38,000
D) $42,000
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Learning Outcome: 8.6 Appendix C: Apply the algebra of macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
8-115
Copyright © 2015 Pearson Canada Inc.
11) If consumption is defined as C = 2,000 + 0.8Y, then the marginal propensity to save is 0.8.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 250
Topic: The Algebra of Macroeconomic Equilibrium
Learning Outcome: 8.6 Appendix C: Apply the algebra of macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
12) If consumption is defined as C = 1,350 + 0.6Y, then the marginal propensity to consume is
0.6.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 250
Topic: The Algebra of Macroeconomic Equilibrium
Learning Outcome: 8.6 Appendix C: Apply the algebra of macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
13) C = 4,000 + 0.5Y
I = 1,500
G = 2,250
NX = -150
Given the equations for C, I, G, and NX above, what is the equilibrium level of GDP (Y)?
Answer:
Y = C + I + G + NX
Y = 4,000 + 0.5Y + 1,500 + 2,250 + (-150)
Y = 7,600 + 0.5Y
0.5Y = 7,600
Y = 15,200
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Learning Outcome: 8.6 Appendix C: Apply the algebra of macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
8-116
Copyright © 2015 Pearson Canada Inc.
14) C = 2,550 + (MPC)Y
I = 800
G = 1,100
NX = 50
If the equilibrium level of GDP is $11,250, using the equations for C, I, G, and NX shown above,
find the value of the marginal propensity to consume.
Answer:
Y = C + I + G + NX
11,250 = 2,550 + (MPC)11,250 + 800 + 1,100 + 50
11,250 = 4,500 + (MPC)11,250
6,750 = (MPC)11,250
0.6 = MPC
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Learning Outcome: 8.6 Appendix C: Apply the algebra of macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
15) Autonomous expenditure times the multiplier equals
A) autonomous saving.
B) autonomous consumption.
C) equilibrium GDP.
D) planned autonomous investment.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Reflective Thinking
Special Feature: None
8-117
Copyright © 2015 Pearson Canada Inc.
16) Given the equations for C, I, G, and NX below, what is the equilibrium level of GDP?
C = 1,000 + 0.8Y
I = 1,500
G = 1,250
NX = 100
A) $3,080
B) $3,850
C) $6,930
D) $19,250
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
17) Given the equations for C, I, G, and NX below, what is the marginal propensity to consume?
C = 1,000 + 0.8Y
I = 1,500
G = 1,250
NX = 100
A) 0.2
B) 0.8
C) 1.8
D) 10
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-118
Copyright © 2015 Pearson Canada Inc.
18) Given the equations for C, I, G, and NX below, what is the marginal propensity to save?
C = 1,000 + 0.8Y
I = 1,500
G = 1,250
NX = 100
A) 0.2
B) 0.8
C) 1.8
D) 10
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
19) If the consumption function is defined as C = 7,250 + 0.8Y, what is the autonomous level of
consumption expenditure?
A) $5,800
B) $7,250
C) $9,062.50
D) $9,700
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-119
Copyright © 2015 Pearson Canada Inc.
20) If the consumption function is defined as C = 7,250 + 0.8Y, what is the marginal propensity
to save?
A) 0.2
B) 0.8
C) 5.8
D) 7.25
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
21) If the consumption function is defined as C = 7,250 + 0.8Y, what is the multiplier?
A) 0.2
B) 0.8
C) 1.25
D) 5
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
22) If the consumption function is defined as C = 5,500 + 0.9Y, what is the marginal propensity
to consume?
A) 0.1
B) 0.9
C) 5.5
D) 6.1
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-120
Copyright © 2015 Pearson Canada Inc.
23) Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is $21,500,
what is the marginal propensity to consume?
C = 1,500 + (MPC)Y
I = 1,000
G = 2,000
NX = -200
A) 0.67
B) 0.75
C) 0.8
D) 0.9
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
24) If consumption is defined as C = 2,400 + 0.9Y, then the marginal propensity to consume is
0.9.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
25) If consumption is defined as C = 4,500 + 0.75Y, then the marginal propensity to save is 0.25.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-121
Copyright © 2015 Pearson Canada Inc.
26) C = 2,800 + 0.9Y
I = 750
G = 1,200
NX = 150
Given the equations for C, I, G, and NX above, what is the equilibrium level of GDP (Y)?
Answer:
Y = C + I + G + NX
Y = 2,800 + 0.9Y + 750 + 1,200 +150
Y = 4,900 + 0.9Y
0.1Y = 4,900
Y = 49,000
Comment: Recurring
Diff: 3
Type: SA Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
27) C = 3,600 + (MPC)Y
I = 1,200
G = 1,400
NX = -200
If the equilibrium level of GDP is $30,000, using the equations for C, I, G, and NX shown above,
find the value of the marginal propensity to consume.
Answer: Y = C + I + G + NX
30,000 = 3,600 + (MPC)30,000 + 1,200 + 1,400 - 200
30,000 = 6,000 + (MPC)30,000
24,000 = (MPC)30,000
0.8 = MPC
Comment: Recurring
Diff: 3
Type: SA Page Ref: 250-251
Topic: The Algebra of Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 8: Investigate the relationship between income and expenditures
AACSB: Analytic Skills
Special Feature: None
8-122
Copyright © 2015 Pearson Canada Inc.
Macroeconomics, Canadian Edition (Hubbard et al.)
Chapter 9 Aggregate Demand and Aggregate Supply Analysis
9.1 Aggregate Demand
1) The basic aggregate demand and aggregate supply curve model helps explain
A) short-term fluctuations in real GDP and the price level.
B) long-term growth.
C) price fluctuations in an individual market.
D) output fluctuations in an individual market.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 254
Topic: Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
2) Canadian National Railways (CN) plays such a large role in moving goods around the country
that there is usually a close relationship between fluctuations in CN's business and fluctuations in
GDP. When CN sees an increase in demand for its services, we can likely expect
A) a decrease in GDP.
B) an increase in GDP.
C) a drop in the exchange rate.
D) an increase in unemployment.
Answer: B
Diff: 1
Type: MC
Page Ref: 253
Topic: The Business Cycle
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Canadian National Railway and the Business Cycle
9-1
Copyright © 2015 Pearson Canada Inc.
3) When the economy enters into a recession, your employer is ________ to reduce your wages
because ________.
A) unlikely; output and input prices generally fall during recession
B) unlikely; lower wages reduce productivity and morale
C) likely; output prices always fall during recession
D) likely; aggregate demand is vertical in the long run
Answer: A
Diff: 1
Type: MC
Page Ref: 253
Topic: The Business Cycle
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: Economics in Your Life: Is an Employer Likely to Cut Your Pay During a
Recession?
4) The ________ shows the relationship between the price level and quantity of real GDP
demanded.
A) consumer price index
B) aggregate expenditure line
C) 45-degree line
D) aggregate demand curve
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 254
Topic: Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
5) Because of the slope of the aggregate demand curve, we can say that
A) a decrease in the price level leads to a lower level of real GDP demanded.
B) an increase in the price level leads to no change in the level of real GDP demanded.
C) a decrease in the price level leads to a higher level of real GDP demanded.
D) an increase in the price level leads to a higher level of real GDP demanded.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 254-255
Topic: Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-2
Copyright © 2015 Pearson Canada Inc.
6) All of the following would be considered a positive addition to household wealth except
A) the equity in one's home.
B) 500 shares of Google stock.
C) the balance in your savings account.
D) a credit card balance.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 255
Topic: Household Wealth
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
7) Which of the following best describes the "wealth effect"?
A) When the price level falls, the real value of household wealth falls.
B) When the price level falls, the nominal value of household wealth falls.
C) When the price level falls, the nominal value of household wealth rises.
D) When the price level falls, the real value of household wealth rises.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 255
Topic: Wealth Effect
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
8) The "interest rate effect" can be described as an increase in the price level that raises the
interest rate and chokes off
A) government spending.
B) government spending and unplanned investment.
C) investment and consumption spending.
D) net exports.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 255
Topic: Interest Rate Effect
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-3
Copyright © 2015 Pearson Canada Inc.
9) An increase in the price level results in a(n) ________ in the quantity of real GDP demanded
because ________.
A) decrease; a higher price level reduces consumption, investment, and net exports
B) increase; a higher price level reduces consumption, investment, and net exports
C) decrease; a higher price level increases consumption, investment, and net exports
D) increase; a higher price level increases consumption, investment, and net exports
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 254-256
Topic: Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
10) When the price level in Canada falls relative to the price level of other countries, ________
will fall, ________ will rise, and ________ will rise.
A) imports; exports; net exports
B) exports; imports; net exports
C) net exports; exports; imports
D) net exports; imports; exports
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256
Topic: International Trade Effect
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
11) The international trade effect states that
A) an increase in the price level will raise net exports.
B) an increase in the price level will lower net exports.
C) an increase in the price level will raise exports.
D) an increase in the price level will lower imports.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 256
Topic: International Trade Effect
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-4
Copyright © 2015 Pearson Canada Inc.
12) Which of the following is one explanation as to why the aggregate demand curve slopes
downward?
A) Decreases in the price level raise the interest rate and increase consumption spending.
B) Decreases in the price level raise the interest rate and increase investment spending.
C) Decreases in the Canada price level relative to the price level in other countries lower net
exports.
D) Decreases in the price level raise real wealth and increase consumption spending.
Answer: D
Diff: 2
Type: MC
Page Ref: 254-256
Topic: Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: Don't Let This Happen to You: Understand Why the Aggregate Demand Curve
is Downward Sloping
13) An increase in the price level will
A) shift the aggregate demand curve to the left.
B) shift the aggregate demand curve to the right.
C) move the economy up along a stationary aggregate demand curve.
D) move the economy down along a stationary aggregate demand curve.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256
Topic: Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
14) Deflation will
A) increase aggregate demand.
B) increase the quantity of real GDP demanded.
C) decrease aggregate demand.
D) decrease the quantity of real GDP demanded.
Answer: B
Diff: 2
Type: MC
Page Ref: 256-260
Topic: Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts
of the Aggregate Demand Curve
9-5
Copyright © 2015 Pearson Canada Inc.
15) Spending on the war in Afghanistan is essentially categorized as government purchases. How
do increases in spending on the war in Afghanistan affect the aggregate demand curve?
A) They will move the economy up along a stationary aggregate demand curve.
B) They will move the economy down along a stationary aggregate demand curve.
C) They will shift the aggregate demand curve to the left.
D) They will shift the aggregate demand curve to the right.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 257
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
16) The recession of 2008-2009 made many firms pessimistic about the future profitability of
investments. How does this increased pessimism affect the aggregate demand curve?
A) This will move the economy up along a stationary aggregate demand curve.
B) This will move the economy down along a stationary aggregate demand curve.
C) This will shift the aggregate demand curve to the left.
D) This will shift the aggregate demand curve to the right.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 257
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
17) Higher personal income taxes
A) increase aggregate demand.
B) increase disposable income.
C) decrease aggregate demand.
D) both B and C
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 257
Topic: Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-6
Copyright © 2015 Pearson Canada Inc.
18) Which of the following will shift the aggregate demand curve to the right, ceteris paribus?
A) an increase in interest rates
B) a decrease in disposable income
C) a decrease in expected profits for firms
D) an increase in net exports
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
19) German luxury car exports were hurt in 2009 as a result of the recession. How would this
decrease in exports have affected Germany's aggregate demand curve?
A) The aggregate demand curve would have shifted to the right.
B) The aggregate demand curve would not have shifted, but there would have been a movement
up the aggregate demand curve.
C) The aggregate demand curve would not have shifted, but there would have been a movement
down the aggregate demand curve.
D) The aggregate demand curve would have shifted to the left.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 257
Topic: Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
20) If the Canadian dollar decreases in value relative to other currencies, how does this affect the
aggregate demand curve?
A) This will move the economy up along a stationary aggregate demand curve.
B) This will move the economy down along a stationary aggregate demand curve.
C) This will shift the aggregate demand curve to the left.
D) This will shift the aggregate demand curve to the right.
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 257
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Analytic Skills
Special Feature: None
9-7
Copyright © 2015 Pearson Canada Inc.
21) Last week, six Swedish kronor could purchase one Canadian dollar. This week, it takes eight
Swedish kronor to purchase one Canadian dollar. This change in the value of the dollar will
________ exports from Canada to Sweden and ________ Canadian aggregate demand.
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 257
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
22) Suppose Canadian GDP growth rate is faster relative to other countries' GDP growth rates.
This will
A) move the economy up along a stationary aggregate demand curve.
B) move the economy down along a stationary aggregate demand curve.
C) shift the aggregate demand curve to the left.
D) shift the aggregate demand curve to the right.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 257
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
23) If aggregate demand just increased, which of the following may have caused the increase?
A) an increase in government purchases
B) an increase in the interest rate
C) an increase in the price level
D) an increase in imports
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-8
Copyright © 2015 Pearson Canada Inc.
24) How do lower taxes affect aggregate demand?
A) They increase disposable income, consumption, and aggregate demand.
B) They reduce disposable income, consumption, and aggregate demand.
C) They increase corporate investment and aggregate demand.
D) They increase aggregate supply and thus increase aggregate demand as well.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 257
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
25) Countries which export a large portion of their GDP saw ________ countries during the
2007-2009 global recession.
A) a larger shift in AD than other
B) a smaller shift in AD than other
C) the same shift in AD as other
D) no shift in AD at all compared with other
Answer: A
Diff: 1
Type: MC
Page Ref: 258-259
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: Making the Connection: The Role of Exports in Aggregate Demand
26) If you noticed that fashion models were wearing longer skirts, the local store was sold out of
lipstick, and skinny ties were all you saw for sale, it might be reasonable to assume
A) the aggregate demand curve was shifting left.
B) the aggregate demand curve was shifting right.
C) the federal government was in control of fashion.
D) the aggregate demand had a positive slope.
Answer: A
Diff: 1
Type: MC
Page Ref: 261-262
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: Making the Connection: Predicting Shifts of the Aggregate Demand Curve
9-9
Copyright © 2015 Pearson Canada Inc.
Figure 9.1
27) Refer to Figure 9.1. Ceteris paribus, an increase in the price level would be represented by a
movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 259-260
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Analytic Skills
Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts
of the Aggregate Demand Curve
28) Refer to Figure 9.1. Ceteris paribus, an increase in interest rates would be represented by a
movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Analytic Skills
Special Feature: None
9-10
Copyright © 2015 Pearson Canada Inc.
29) Refer to Figure 9.1. Ceteris paribus, an increase in personal income taxes would be
represented by a movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Analytic Skills
Special Feature: None
30) Refer to Figure 9.1. Ceteris paribus, a decrease in government spending would be
represented by a movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Analytic Skills
Special Feature: None
31) Refer to Figure 9.1. Ceteris paribus, an increase in households' expectations of their future
income would be represented by a movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Analytic Skills
Special Feature: None
9-11
Copyright © 2015 Pearson Canada Inc.
32) Refer to Figure 9.1. Ceteris paribus, a decrease in firms' expectations of the future
profitability of investment spending would be represented by a movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Analytic Skills
Special Feature: None
33) Refer to Figure 9.1. Ceteris paribus, a decrease in the growth rate of domestic GDP relative
to the growth rate of foreign GDP would be represented by a movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Analytic Skills
Special Feature: None
34) Refer to Figure 9.1. Ceteris paribus, an increase in the value of the domestic currency
relative to foreign currencies would be represented by a movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Analytic Skills
Special Feature: None
9-12
Copyright © 2015 Pearson Canada Inc.
35) An increase in imports increases aggregate demand.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 256-257
Topic: Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
36) A decrease in disposable income will shift the aggregate demand curve to the left.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 256-257
Topic: Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
37) An increase in the price level shifts the aggregate demand curve to the left.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 256-257
Topic: Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
38) The New Democratic Party has discussed raising income taxes for individuals earning very
high incomes. Explain how these higher income taxes will affect the aggregate demand curve.
Answer: Raising the income tax decreases the amount of disposable income available to those
households. Lower disposable income decreases consumption at every price level. The result is a
shift in the aggregate demand curve to the left.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Analytic Skills
Special Feature: None
9-13
Copyright © 2015 Pearson Canada Inc.
39) In September of 2007, Bank of Canada dramatically reduced interest rates. Explain how
lower interest rates affect the aggregate demand curve.
Answer: Reducing the interest rate lowers the cost of borrowing to firms and to households. As
a result, both firms and households will increase expenditures. This increase in expenditures will
shift the aggregate demand curve to the right.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 257
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Analytic Skills
Special Feature: None
40) Using an aggregate demand graph, illustrate the impact of an increase in the price level on
aggregate demand.
Answer:
This illustrates an increase in the price level on the aggregate demand curve. The actual
movement is shown by moving from point B to point A. The price level moves up from P1 to P2,
and the quantity of real GDP demanded declines from Y1 to Y2.
Diff: 2
Type: ES
Page Ref: 256
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Analytic Skills
Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts
of the Aggregate Demand Curve
9-14
Copyright © 2015 Pearson Canada Inc.
41) Using an aggregate demand graph, illustrate the impact of an increase in the interest rate.
Answer:
The increase in the interest rate will cause consumption expenditures and investment
expenditures to decline. This will result in a parallel leftward shift in the aggregate demand
curve. We start on the curve AD1 and the increase in the interest rate will move us to AD2. At the
price level P1, the demand for real GDP declines from Y1 to Y2.
Diff: 1
Type: ES
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between
a movement along the aggregate demand curve and a shift of the curve
AACSB: Analytic Skills
Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts
of the Aggregate Demand Curve
42) The basic aggregate demand and aggregate supply curve model helps explain ________
fluctuations in real GDP and the price level.
A) short-term
B) long-term
C) both short-term and long-term
D) unrelated
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 254
Topic: Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
9-15
Copyright © 2015 Pearson Canada Inc.
43) The business cycle ________ on Canadian National Railway since the company's inception
almost 100 years ago.
A) has had virtually no effect
B) has always had a negative effect
C) has had a large effect
D) has always had a positive effect
Answer: C
Diff: 1
Type: MC
Page Ref: 253
Topic: The Business Cycle
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Canadian National Railway and the Business Cycle
44) When the economy enters a recession, your employer is unlikely to reduce your wages
because ________ during a recession.
A) output and input prices generally fall
B) lower wages reduce productivity and morale
C) output prices always fall
D) output prices generally fall and input prices generally rise
Answer: A
Diff: 1
Type: MC
Page Ref: 253
Topic: The Business Cycle
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: Economics in Your Life: Is an Employer Likely to Cut Your Pay During a
Recession?
45) The aggregate demand curve shows the relationship between the ________ and ________.
A) inflation rate; quantity of real GDP demanded
B) real interest rate; quantity of real GDP supplied
C) nominal interest rate; quantity of real GDP demanded
D) price level; quantity of real GDP demanded
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 254-256
Topic: Aggregate Demand
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
9-16
Copyright © 2015 Pearson Canada Inc.
46) Because of the slope(s) of the ________, we can say that a decrease in the price level leads to
a higher level of real GDP demanded.
A) aggregate demand curve
B) short-run aggregate supply curve
C) long-run aggregate supply curve
D) short-run and long-run aggregate supply curves
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 254
Topic: Aggregate Demand
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
47) Which of the following would not be considered a positive addition to household wealth?
A) the equity in one's home
B) 1000 shares of Bank of Montreal stock
C) a credit card balance
D) the balance in your chequing account
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 255
Topic: Household Wealth
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
48) According to the "wealth effect," when the ________ falls, the ________ rises.
A) inflation rate; nominal value of household assets
B) unemployment rate; average level of household income
C) price level; the nominal value of household wealth
D) price level; the real value of household wealth
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 255
Topic: Wealth Effect
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
9-17
Copyright © 2015 Pearson Canada Inc.
49) Which of the following best describes the "interest rate effect"?
A) An increase in the price level raises the interest rate and chokes off government spending.
B) An increase in the price level lowers the interest rate and chokes off government spending.
C) An increase in the price level raises the interest rate and chokes off investment and
consumption spending.
D) An increase in the price level lowers the interest rate and chokes off investment and
consumption spending.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 255
Topic: Interest Rate Effect
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
50) A decrease in the price level results in a(n) ________ in the quantity of real GDP demanded
because a lower price level ________ consumption, investment, and net exports.
A) decrease; increases
B) increase; increases
C) decrease; decreases
D) increase; decreases
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 254-256
Topic: Aggregate Demand
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
51) When the price level in Canada rises relative to the price level of other countries, ________
will rise, ________ will fall, and ________ will fall.
A) imports; exports; net exports
B) exports; imports; net exports
C) net exports; exports; imports
D) net exports; imports; exports
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256
Topic: International Trade Effect
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
9-18
Copyright © 2015 Pearson Canada Inc.
52) The international trade effect states that a(n) ________ in the price level will ________ net
exports.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; not affect
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 256
Topic: International Trade Effect
Updated: Yes
Learning Outcome: Macro 15: Describe how government policies and exchange rates affect
open economy macroeconomics
AACSB: Reflective Thinking
Special Feature: None
53) The global recession caused a recession in Germany because
A) German companies had purchased more toxic financial assets than companies in any other
country.
B) German consumers dramatically reduced their consumption spending in response to a fall in
wealth.
C) German imports rose dramatically in response to the rising value of the euro.
D) German exports fell dramatically as firms in other countries reduced their investment
spending.
Answer: D
Diff: 1
Type: MC
Page Ref: 258-259
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: Making the Connection: The Role of Exports in Aggregate Demand
9-19
Copyright © 2015 Pearson Canada Inc.
54) Which of the following is one explanation as to why the aggregate demand curve slopes
downward?
A) Increases in the price level lower the interest rate and decrease consumption spending.
B) Increases in the price level lower the interest rate and decrease investment spending.
C) Increases in the Canadian price level relative to the price level in other countries lower net
exports.
D) Increases in the price level raise real wealth and lower consumption spending.
Answer: C
Diff: 2
Type: MC
Page Ref: 255-256
Topic: Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: Don't Let This Happen to You: Understand Why the Aggregate Demand Curve
is Downward Sloping
55) A decrease in the price level will
A) shift the aggregate demand curve to the left.
B) shift the aggregate demand curve to the right.
C) move the economy up along a stationary aggregate demand curve.
D) move the economy down along a stationary aggregate demand curve.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 255-256
Topic: Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
56) Inflation will
A) increase aggregate demand.
B) increase the quantity of real GDP demanded.
C) decrease aggregate demand.
D) decrease the quantity of real GDP demanded.
Answer: D
Diff: 2
Type: MC
Page Ref: 255-256
Topic: Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts
of the Aggregate Demand Curve
9-20
Copyright © 2015 Pearson Canada Inc.
57) Spending on the military is essentially categorized as government purchases. How do
increases in spending on a military campaign affect the aggregate demand curve?
A) They will move the economy down along a stationary aggregate demand curve.
B) They will move the economy up along a stationary aggregate demand curve.
C) They will shift the aggregate demand curve to the right.
D) They will shift the aggregate demand curve to the left.
Answer: C
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
58) Falling oil prices made consumers in Alberta very pessimistic about their future incomes.
How will this increased pessimism affect the aggregate demand curve?
A) It will move the economy up along a stationary aggregate demand curve.
B) It will move the economy down along a stationary aggregate demand curve.
C) It will shift the aggregate demand curve to the left.
D) It will shift the aggregate demand curve to the right.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 257
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
59) Lower personal income taxes
A) increase aggregate demand.
B) decrease disposable income.
C) decrease aggregate demand.
D) increase transfer payments.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Aggregate Demand
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
9-21
Copyright © 2015 Pearson Canada Inc.
60) Which of the following will shift the aggregate demand curve to the left, ceteris paribus?
A) an increase in interest rates
B) an increase in disposable income
C) an increase in expected profits for firms
D) an increase in net exports
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Aggregate Demand
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
61) German automobile exports were hurt in 2008 as a result of the recession. How would this
decrease in exports have affected Germany's aggregate demand curve?
A) The aggregate demand curve would have shifted to the right.
B) The aggregate demand curve would not have shifted, but there would have been a movement
up the aggregate demand curve.
C) The aggregate demand curve would not have shifted, but there would have been a movement
down the aggregate demand curve.
D) The aggregate demand curve would have shifted to the left.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 258-259
Topic: Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking, Multicultural and Diversity
Special Feature: Making the Connection: The Role of Exports in Aggregate Demand
62) If the Canadian dollar increases in value relative to other currencies, how does this affect the
aggregate demand curve?
A) This will move the economy up along a stationary aggregate demand curve.
B) This will move the economy down along a stationary aggregate demand curve.
C) This will shift the aggregate demand curve to the left.
D) This will shift the aggregate demand curve to the right.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 255-256
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Analytic Skills
Special Feature: None
9-22
Copyright © 2015 Pearson Canada Inc.
63) Last week, 13 Mexican pesos could purchase one Canadian dollar. This week, it takes 11
Mexican pesos to purchase one Canadian dollar. This change in the value of the dollar will
________ exports from Canada to Mexico and ________ Canadian aggregate demand.
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 255-256
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
64) Suppose the Canadian GDP growth rate is slower relative to other countries' GDP growth
rates. This will
A) move the economy up along a stationary aggregate demand curve.
B) move the economy down along a stationary aggregate demand curve.
C) shift the aggregate demand curve to the left.
D) shift the aggregate demand curve to the right.
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 257
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
65) If aggregate demand just decreased, which of the following may have caused the decrease?
A) a decrease in exports
B) a decrease in the interest rate
C) a decrease in the price level
D) a decrease in imports
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
9-23
Copyright © 2015 Pearson Canada Inc.
66) How do changes in income tax policies affect aggregate demand?
A) Higher taxes increase disposable income, consumption, and aggregate demand.
B) Higher taxes reduce disposable income, consumption, and aggregate demand.
C) Higher taxes increase corporate investment and aggregate demand.
D) Higher taxes increase aggregate supply and thus increase aggregate demand as well.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
Figure 9.2
67) Refer to Figure 9.2. Ceteris paribus, a decrease in the price level would be represented by a
movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 255-257
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Analytic Skills
Special Feature: None
9-24
Copyright © 2015 Pearson Canada Inc.
68) Refer to Figure 9.2. Ceteris paribus, a decrease in interest rates would be represented by a
movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Analytic Skills
Special Feature: None
69) Refer to Figure 9.2. Ceteris paribus, a decrease in personal income taxes would be
represented by a movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Analytic Skills
Special Feature: None
70) Refer to Figure 9.2. Ceteris paribus, an increase in government spending would be
represented by a movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Analytic Skills
Special Feature: None
9-25
Copyright © 2015 Pearson Canada Inc.
71) Refer to Figure 9.2. Ceteris paribus, a decrease in households' expectations of their future
income would be represented by a movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Analytic Skills
Special Feature: None
72) Refer to Figure 9.2. Ceteris paribus, an increase in firms' expectations of the future
profitability of investment spending would be represented by a movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Analytic Skills
Special Feature: None
9-26
Copyright © 2015 Pearson Canada Inc.
73) Refer to Figure 9.2. Ceteris paribus, an increase in the growth rate of domestic GDP relative
to the growth rate of foreign GDP would be represented by a movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Analytic Skills
Special Feature: None
74) Refer to Figure 9.2. Ceteris paribus, a decrease in the value of the domestic currency
relative to foreign currencies would be represented by a movement from
A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Analytic Skills
Special Feature: None
75) An increase in exports decreases aggregate demand.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 254
Topic: Aggregate Demand
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
9-27
Copyright © 2015 Pearson Canada Inc.
76) An increase in disposable income will shift the aggregate demand curve to the right.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 256-257
Topic: Aggregate Demand
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
77) An increase in the price level causes a movement down the aggregate demand curve.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 796/422
Topic: Aggregate Demand
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
78) The federal government lowered income taxes for individuals in 2009. Explain how lower
income taxes affect the aggregate demand curve.
Answer: Lowering the income tax increases the amount of disposable income available to
households. Higher disposable income increases consumption at every price level. The result is
a shift in the aggregate demand curve to the right.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Analytic Skills
Special Feature: None
9-28
Copyright © 2015 Pearson Canada Inc.
79) Explain the three reasons the aggregate demand curve slopes downward.
Answer: The three reasons are the wealth effect, the interest-rate effect, and the internationaltrade effect. In the wealth effect, an increase in the price level decreases the real value of
household wealth, which decreases consumption. In the interest-rate effect, an increase in the
price level raises interest rates, which decreases investment spending and consumption spending,
particularly on durable goods. In the international-trade effect, an increase in the price level
makes Canadian exports more expensive and foreign imports less expensive, which decreases net
exports.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 255-256
Topic: Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Analytic Skills
Special Feature: None
80) Explain how each of the following events would affect the aggregate demand curve.
a. lower interest rates
b. a decrease in net exports
c. a decrease in the price level
d. slower income growth in other countries
e. a decrease in imports
Answer:
a. Lower interest rates would increase investment spending and consumer spending, particularly
on durable goods, which would cause the aggregate demand curve to shift to the right.
b. A decrease in net exports would cause the aggregate demand curve to shift to the left.
c. A decrease in the price level would cause a movement along the aggregate demand curve.
d. Slower income growth in other countries would decrease Canadian exports, which would
cause the aggregate demand curve to shift to the left.
e. A decrease in imports would cause net exports to be greater, causing the aggregate demand
curve to shift to the right.
Diff: 2
Type: SA Page Ref: 256-257
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts
of the Aggregate Demand Curve
9-29
Copyright © 2015 Pearson Canada Inc.
81) Using an aggregate demand graph, illustrate the impact of an increase in the growth rate of
Canadian GDP relative to the growth rate of foreign GDP.
Answer:
The increase in the growth rate of Canadian GDP relative to the growth rate of foreign GDP will
cause Canadian imports to increase faster than Canadian exports, and net exports will fall. This
will result in a parallel leftward shift in the aggregate demand curve. We start on the curve AD1,
and the increase in the growth rate of Canadian GDP relative to the growth rate of foreign GDP
will move us to AD2.
At the price level P1, the quantity of real GDP demanded declines from Y1 to Y2.
Diff: 1
Type: SA Page Ref: 259-260
Topic: Shifts in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Analytic Skills
Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts
of the Aggregate Demand Curve
9.2 Aggregate Supply
1) The level of aggregate supply in the long run is not affected by
A) changes in technology.
B) changes in the capital stock.
C) changes in the price level.
D) changes in the number of workers.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-30
Copyright © 2015 Pearson Canada Inc.
2) Potential GDP refers to the level of
A) real GDP in the long run.
B) nominal GDP in the long run.
C) real GDP in the short run.
D) nominal GDP in the short run.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
3) The long-run aggregate supply curve
A) has a negative slope.
B) has a steep but positive slope.
C) is horizontal.
D) is vertical.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
4) If stricter immigration laws are imposed and many foreign workers in Canada are forced to go
back to their home countries,
A) the long-run aggregate supply curve will shift to the right.
B) the long-run aggregate supply curve will shift to the left.
C) we will move up along the long-run aggregate supply curve.
D) we will move down along the long-run aggregate supply curve.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-31
Copyright © 2015 Pearson Canada Inc.
5) What is potential GDP?
A) It is the level of real GDP in the long run.
B) It is the difference between current GDP and maximum GDP.
C) It is the level of real GDP in the short run.
D) It is the level of GDP at which inflation is constant.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
6) Full-employment GDP is also known as
A) realized GDP.
B) potential GDP.
C) politico-economic GDP.
D) balanced-budget GDP.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
7) The long-run aggregate supply curve shows the relationship between the ________ and
________.
A) inflation rate; quantity of real GDP demanded
B) real interest rate; quantity of real GDP supplied
C) nominal interest rate; quantity of real GDP supplied
D) price level; quantity of real GDP supplied
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-32
Copyright © 2015 Pearson Canada Inc.
8) On the long-run aggregate supply curve,
A) a decrease in the price level decreases the level of potential GDP.
B) a decrease in the price level increases the aggregate quantity of GDP supplied.
C) a decrease in the price level decreases the aggregate quantity of GDP supplied.
D) a decrease in the price level has no effect on the aggregate quantity of GDP supplied.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9) Changes in the price level
A) increase the level of aggregate supply in the long run.
B) decrease the level of aggregate supply in the long run.
C) do not affect the level of aggregate supply in the long run.
D) increase the level of aggregate supply in the long run only at very high levels of output.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
10) The long-run aggregate supply curve will shift to the right if
A) the economy experiences technological change.
B) the economy has a decrease in population.
C) the economy experiences high levels of inflation.
D) net exports decrease.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 263
Topic: Long-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-33
Copyright © 2015 Pearson Canada Inc.
11) Suppose a developing country receives more machinery and capital equipment as foreign
entrepreneurs increase the amount of investment in the economy. As a result
A) the long-run aggregate supply curve will shift to the right.
B) the long-run aggregate supply curve will shift to the left.
C) the economy will move up along the long-run aggregate supply curve.
D) the economy will move down along the long-run aggregate supply curve.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
12) Which aggregate supply curve has a positive slope?
A) long run only
B) short run only
C) both long run and short run
D) neither long run nor short run
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 262-263
Topic: Short-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
13) The short-run aggregate supply curve has a(n) ________ slope because as prices of
________ rise, prices of ________ rise more slowly.
A) positive; final goods and services; inputs
B) infinite; final goods and services; inputs
C) positive; inputs; final goods and services
D) infinite; inputs; final goods and services
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 263
Topic: Short-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-34
Copyright © 2015 Pearson Canada Inc.
14) All of the following are reasons why the wages of workers and the prices of inputs rise more
slowly than the prices of final goods and services except
A) unions are successful in pushing up wages.
B) firms are often slow to adjust wages.
C) contracts make prices and wages "sticky."
D) menu costs make some prices "sticky."
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 263-264
Topic: Short-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
15) An increase in the price level will
A) shift the short-run aggregate supply curve to the left.
B) shift the short-run aggregate supply curve to the right.
C) move the economy up along a stationary short-run aggregate supply curve.
D) move the economy down along a stationary short-run aggregate supply curve.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 264
Topic: Shifts in the Short-Run Aggregate Supply Curve
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
16) If, due to a recession, workers begin to leave Canada to search for temporary work in other
countries until the recession has ended, this will
A) shift the short-run aggregate supply curve of the other country to the left.
B) shift the short-run aggregate supply curve of the other country to the right.
C) move the other country's economy up along a stationary short-run aggregate supply curve.
D) move the other country's economy down along a stationary short-run aggregate supply curve.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-35
Copyright © 2015 Pearson Canada Inc.
17) The invention of the cotton gin ushered in the Industrial Revolution and began a long period
of technological innovation. What did this technological change do the short-run supply curve?
A) It shifted the short-run aggregate supply curve to the left.
B) It shifted the short-run aggregate supply curve to the right.
C) It moved the economy up along a stationary short-run aggregate supply curve.
D) It moved the economy down along a stationary short-run aggregate supply curve.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
18) Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico
which subsequently drove up natural gas, gasoline, and heating oil prices. Three years later, once
the refining capacity was restored, these prices came back down. The restoration of refining
capacity should
A) shift the short-run aggregate supply curve to the left.
B) shift the short-run aggregate supply curve to the right.
C) move the economy up along a stationary short-run aggregate supply curve.
D) move the economy down along a stationary short-run aggregate supply curve.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
19) When the price level rises from 110 to 115, the aggregate level of GDP supplied rises from
$80 billion to $120 billion. This ________ relationship represents the ________ relationship
between the quantity of real GDP firms are willing to supply and the price level.
A) negative; short-run
B) positive; short-run
C) negative; long-run
D) positive; long-run
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 263-264
Topic: Short-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-36
Copyright © 2015 Pearson Canada Inc.
20) If full-employment GDP is equal to $1.9 trillion, what does the long-run aggregate supply
curve look like?
A) It is a horizontal line at $1.9 trillion of real GDP.
B) It is a vertical line at a level of real GDP below $1.9 trillion.
C) It is a vertical line at $1.9 trillion of real GDP.
D) It is a vertical line at a level of real GDP above $1.9 trillion.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
21) Workers expect inflation to rise from 3% to 5% next year. As a result, this should
A) shift the short-run aggregate supply curve to the left.
B) shift the short-run aggregate supply curve to the right.
C) move the economy up along a stationary short-run aggregate supply curve.
D) move the economy down along a stationary short-run aggregate supply curve.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 264-265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
22) Workers and firms both expect that prices will be 2.5% higher next year than they are this
year. As a result
A) workers will be willing to take lower wages next year, but not lower than a 2.5 percent
decrease.
B) the purchasing power of wages will rise if wages increase by 2.5%.
C) the short-run aggregate supply curve will shift to the left as wages increase.
D) aggregate demand will increase by 2.5%.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-37
Copyright © 2015 Pearson Canada Inc.
23) Which of the following would cause the short-run aggregate supply curve to shift to the
right?
A) an increase in the price level
B) a decrease in inflation expectations
C) a technological advance
D) an increase in interest rates
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
Figure 9.3
24) Refer to Figure 9.3. Ceteris paribus, an increase in the labour force would be represented by
a movement from
A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-38
Copyright © 2015 Pearson Canada Inc.
25) Refer to Figure 9.3. Ceteris paribus, a decrease in the capital stock would be represented by
a movement from
A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
26) Refer to Figure 9.3. Ceteris paribus, an increase in productivity would be represented by a
movement from
A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
27) Refer to Figure 9.3. Ceteris paribus, an increase in the price level would be represented by a
movement from
A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 264
Topic: Shifts in the Short-Run Aggregate Supply Curve
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-39
Copyright © 2015 Pearson Canada Inc.
28) Refer to Figure 9.3. Ceteris paribus, an increase in the expected future price level would be
represented by a movement from
A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
29) Refer to Figure 9.3. Ceteris paribus, an increase in workers and firms adjusting to having
previously overestimated the price level would be represented by a movement from
A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
30) Refer to Figure 9.3. Ceteris paribus, an increase in the expected price of an important
natural resource would be represented by a movement from
A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-40
Copyright © 2015 Pearson Canada Inc.
31) The long-run aggregate supply curve is vertical.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 262-263
Topic: Short-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
32) When potential GDP increases, long-run aggregate supply also increases.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
33) A supply shock causes the long-run aggregate supply curve to shift left, decreasing the price
level.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 262-263
Topic: Supply Shock
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
34) Explain why the long-run aggregate supply curve is vertical.
Answer: The long-run aggregate supply curve is vertical because in the long run, changes in the
price level do not affect the number of workers, the capital stock, or technology, which are the
factors that determine potential GDP.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
9-41
Copyright © 2015 Pearson Canada Inc.
35) What variables cause the short-run aggregate supply curve to shift? For each variable,
identify whether an increase in that variable will cause the short-run aggregate supply curve to
shift to the right or to the left.
Answer: The variables that will cause the short-run aggregate supply to shift are: the size of the
labour force, the size of the capital stock, productivity, the expected future price level, workers
and firms adjusting to having previously underestimated the price level, and the expected price
of an important natural resource. Increases in the labour force, the capital stock, or productivity
will cause the short-run aggregate supply curve to shift to the right. Increases in the expected
future price level, increases in the price of an important natural resource, and workers and firms
adjusting to having previously underestimated the price level will cause the short-run aggregate
supply curve to shift to the left.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 264-266
Topic: Short-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
36) Explain how "menu costs" affect the slope of the short-run aggregate supply curve.
Answer: Menu costs make some prices sticky. As the price level rises, some firms will be
reluctant to raise their prices. Sales at those firms will increase, and their output will increase.
This creates the possibility that an increase in the price level will increase output. More menu
costs can make the short-run aggregate supply curve flatter.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 264
Topic: Short-Run Aggregate Supply
Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a
movement along the short-run aggregate supply curve and a shift of the curve
AACSB: Reflective Thinking
Special Feature: None
37) The level of long-run aggregate supply is affected by all of the following, except
A) changes in the price level.
B) changes in technology.
C) changes in capital stock.
D) changes in the number of workers.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
9-42
Copyright © 2015 Pearson Canada Inc.
38) The level of real GDP in the long run is called
A) potential GDP.
B) short-run GDP.
C) frictional GDP.
D) low-capacity GDP.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
39) The ________ curve is vertical.
A) short-run aggregate supply
B) short-run aggregate demand
C) long-run aggregate supply
D) long-run aggregate demand
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
40) If the economy receives an influx of new workers from immigration,
A) the long-run aggregate supply curve will shift to the right.
B) the long-run aggregate supply curve will shift to the left.
C) we will move up along the long-run aggregate supply curve.
D) we will move down along the long-run aggregate supply curve.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
9-43
Copyright © 2015 Pearson Canada Inc.
41) The level of real GDP in the long run is
A) potential GDP.
B) affected by changes in the price level.
C) determined solely by aggregate demand.
D) the same as the level of nominal GDP in the long run.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
42) Potential GDP is also referred to as
A) realized GDP.
B) full-employment GDP.
C) politico-economic GDP.
D) balanced-budget GDP.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
43) The long-run aggregate supply curve shows the relationship between
A) short-run aggregate supply and short-run aggregate demand.
B) the price level and quantity of real GDP supplied.
C) the real interest rate and the nominal interest rate.
D) the quantity of real GDP supplied and the quantity of nominal GDP supplied.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
9-44
Copyright © 2015 Pearson Canada Inc.
44) On the long-run aggregate supply curve,
A) an increase in the price level increases the aggregate quantity of GDP supplied.
B) an increase in the price level reduces the aggregate quantity of GDP supplied.
C) an increase in the price level has no effect on the aggregate quantity of GDP supplied.
D) an increase in the price level increases the level of potential GDP.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
45) Changes in ________ do not affect the level of aggregate supply in the long run.
A) technology
B) the number of workers in the economy
C) the price level
D) the amount of accumulated capital equipment
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
46) If technological change occurs in the economy,
A) the long-run aggregate supply curve will shift to the right.
B) the long-run aggregate supply curve will shift to the left.
C) we will move up along the long-run aggregate supply curve.
D) we will move down along the long-run aggregate supply curve.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking, Use of Information Technology
Special Feature: None
9-45
Copyright © 2015 Pearson Canada Inc.
47) Suppose a developing country experiences a reduction in machinery and capital equipment
as foreign entrepreneurs decrease the amount of investment in the economy. As a result,
A) the long-run aggregate supply curve will shift to the right.
B) the long-run aggregate supply curve will shift to the left.
C) the economy will move up along the long-run aggregate supply curve.
D) the economy will move down along the long-run aggregate supply curve.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
48) The short-run aggregate supply curve has a
A) negative slope.
B) positive slope.
C) slope equal to infinity.
D) slope equal to zero.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 263-265
Topic: Short-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
49) The ________ curve has a positive slope because as prices of final goods and services rise,
prices of inputs rise more slowly.
A) short-run aggregate supply
B) long-run aggregate supply
C) short-run aggregate demand
D) long-run aggregate demand
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 263-265
Topic: Short-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
9-46
Copyright © 2015 Pearson Canada Inc.
50) Which of the following is not a reason why the wages of workers and the prices of inputs rise
more slowly than the prices of final goods and services?
A) Contracts make prices and wages "sticky."
B) Firms are often slow to adjust wages.
C) Menu costs make some prices "sticky."
D) Unions are successful in pushing up wages.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 263-264
Topic: Short-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
51) A decrease in the price level will
A) shift the short-run aggregate supply curve to the left.
B) shift the short-run aggregate supply curve to the right.
C) move the economy up along a stationary short-run aggregate supply curve.
D) move the economy down along a stationary short-run aggregate supply curve.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 264
Topic: Shifts in the Short-Run Aggregate Supply Curve
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
52) If workers leave a country to seek out better opportunities in another country, then this will
A) shift the short-run aggregate supply curve of the original country to the left.
B) shift the short-run aggregate supply curve of the original country to the right.
C) move the original economy up along a stationary short-run aggregate supply curve.
D) move the original economy down along a stationary short-run aggregate supply curve.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
9-47
Copyright © 2015 Pearson Canada Inc.
53) The invention of the integrated circuit by Jack Kilby of Texas Instruments gave rise to the
information age. What did this technological change do to the short-run supply curve?
A) It shifted the short-run aggregate supply curve to the left.
B) It shifted the short-run aggregate supply curve to the right.
C) It moved the economy up along a stationary short-run aggregate supply curve.
D) It moved the economy down along a stationary short-run aggregate supply curve.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking, Use of Information Technology
Special Feature: None
54) During the winter of 2015, incredible snowfall in the Maritimes and Ontario brought down
power lines and closed whole cities. The result of this extreme weather was
A) a shift of the short-run aggregate supply curve to the left.
B) a shift of the short-run aggregate supply curve to the right.
C) movement of the economy up along a stationary short-run aggregate supply curve.
D) movement of the economy down along a stationary short-run aggregate supply curve.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
55) When the price level falls from 135 to 120, the aggregate level of GDP supplied falls from
$140 billion to $125 billion. This ________ relationship represents the ________ relationship
between GDP and the price level.
A) negative; short-run
B) positive; short-run
C) negative; long-run
D) positive; long-run
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 263-265
Topic: Short-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 3: Identify and interpret key macroeconomic measures
AACSB: Reflective Thinking
Special Feature: None
9-48
Copyright © 2015 Pearson Canada Inc.
56) If potential GDP is equal to $600 billion, what does the long-run aggregate supply curve look
like?
A) It is a horizontal line at $600 billion of GDP.
B) It is a vertical line at a level of GDP below $600 billion.
C) It is a vertical line at $600 billion of GDP.
D) It is a vertical line at a level of GDP above $600 billion.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
57) Workers expect inflation to fall from 4% to 1% next year. As a result, this should
A) shift the short-run aggregate supply curve to the left.
B) shift the short-run aggregate supply curve to the right.
C) move the economy up along a stationary short-run aggregate supply curve.
D) move the economy down along a stationary short-run aggregate supply curve.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
58) Workers and firms both expect that prices will be 3% higher next year than they are this
year. As a result,
A) workers will be willing to take lower wages next year.
B) the purchasing power of wages will rise if wages increase by 3%.
C) the short-run aggregate supply curve will shift to the left as wages increase.
D) aggregate demand will increase by 3%.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
9-49
Copyright © 2015 Pearson Canada Inc.
59) Which of the following would cause the short-run aggregate supply curve to shift to the left?
A) an increase in the price level
B) an increase in inflation expectations
C) a technological advance
D) a decrease in interest rates
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
Figure 9.4
60) Refer to Figure 9.4. Ceteris paribus, a decrease in the labour force would be represented by
a movement from
A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
9-50
Copyright © 2015 Pearson Canada Inc.
61) Refer to Figure 9.4. Ceteris paribus, an increase in the capital stock would be represented by
a movement from
A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
62) Refer to Figure 9.4. Ceteris paribus, a decrease in productivity would be represented by a
movement from
A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
9-51
Copyright © 2015 Pearson Canada Inc.
63) Refer to Figure 9.4. Ceteris paribus, a decrease in the price level would be represented by a
movement from
A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
64) Refer to Figure 9.4. Ceteris paribus, a decrease in the expected future price level would be
represented by a movement from
A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
65) Refer to Figure 9.4. Ceteris paribus, an increase in workers and firms adjusting to having
previously underestimated the price level would be represented by a movement from
A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
9-52
Copyright © 2015 Pearson Canada Inc.
66) Refer to Figure 9.4. Ceteris paribus, a decrease in the expected price of an important natural
resource would be represented by a movement from
A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 265
Topic: Shifts in the Short-Run Aggregate Supply Curve
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
67) The short-run aggregate supply curve is vertical.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 263
Topic: Short-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
68) When potential GDP increases, short-run aggregate supply also increases, but long-run
aggregate supply does not change.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 262-265
Topic: Long-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
9-53
Copyright © 2015 Pearson Canada Inc.
69) An adverse supply shock causes the short-run aggregate supply curve to shift left, increasing
the price level.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 265-266
Topic: Supply Shock
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
70) What are sticky prices and how can contracts make them "sticky"?
Answer: Prices or wages are said to be "sticky" when they do not respond quickly to changes in
demand or supply. Contracts are legal agreements between the firm and another party that
establishes a particular price to be paid over a period of time. For example, a union contract is a
legal agreement between the firm and the union that workers are to be paid a certain wage. If
conditions change over the contract period, the firm still must pay the wage agreed upon in the
contract. This can make this firm's wages sticky. Firms also buy raw materials on contract. This
fixes the price at which the firm buys the raw material over the contract period, so it also
becomes a sticky price.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 263-264
Topic: Short-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
71) Why does the short-run aggregate supply curve slope upward?
Answer: The short-run aggregate supply curve slopes upward because as the prices of final
goods and services rise, the prices of inputs rise more slowly. The higher price level increases
profits and the willingness of firms to supply more goods and services. A secondary reason the
SRAS slopes upward is that, as the price level rises, some firms are slow to adjust their prices. A
firm that raises its prices slowly when the price level increases may find that its sales increase
and therefore it will increase production.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 263
Topic: Short-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
9-54
Copyright © 2015 Pearson Canada Inc.
72) Explain how each of the following events would affect the long-run aggregate supply curve.
a. a lower price level
b. a decrease in the labour force
c. a decrease in the quantity of capital goods
d. technological change
Answer:
a. A lower price level would cause a movement along the long-run aggregate supply curve.
b. A decrease in the labour force would cause the long-run aggregate supply curve to shift to the
left.
c. A decrease in the quantity of capital goods would cause the long-run aggregate supply curve to
shift to the left.
d. Technological change would cause the long-run aggregate supply curve to shift to the right.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 262-263
Topic: Long-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
73) Explain how each of the following events would affect the short-run aggregate supply curve.
a. a decrease in the price level
b. a decrease in what the price level is expected to be in the future
c. a price level that is currently lower than expected
d. an unexpected decrease in the price of an important raw material
e. a decrease in the labour force
Answer:
a. A lower price level would cause a movement along the short-run aggregate supply curve.
b. A decrease in what the price level is expected to be in the future would cause the short-run
aggregate supply curve to shift to the right.
c. A price level currently lower than expected would lead firms to decrease prices, causing the
short-run aggregate supply curve to shift to the right.
d. An unexpected decrease in the price of an important raw material would cause the short-run
aggregate supply curve to shift to the right.
e. A decrease in the labour force would cause the short-run aggregate supply curve to shift to the
left.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 264-266
Topic: Short-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
9-55
Copyright © 2015 Pearson Canada Inc.
9.3 Macroeconomic Equilibrium in the Long Run and the Short Run
1) Long-run macroeconomic equilibrium occurs when
A) aggregate demand equals short-run aggregate supply.
B) aggregate demand equals short-run aggregate supply and they intersect at a point on the longrun supply curve.
C) structural and frictional unemployment equals zero.
D) output is above potential GDP.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 267
Topic: Long-Run Macroeconomic Equilibrium
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
2) An increase in aggregate demand results in a(n) ________ in the ________.
A) recession; long run
B) expansion; long run
C) expansion; short run
D) recession; short run
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 268
Topic: Short -Run Macroeconomic Equilibrium
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
3) Suppose there has been an increase in investment. As a result, real GDP will ________ in the
short run, and ________ in the long run.
A) increase; increase further
B) increase; decrease to its initial value
C) decrease; decrease further
D) decrease; increase to its initial level
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 268
Topic: Short-Run and Long-Run Effects of a Change in Aggregate Demand
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
9-56
Copyright © 2015 Pearson Canada Inc.
4) A decrease in investment causes the price level to ________ in the short run and ________ in
the long run.
A) increase; increase further
B) increase; decrease
C) decrease; decrease further
D) decrease; increase
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 269-270
Topic: Short-Run and Long-Run Effects of a Change in Aggregate Demand
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
5) An increase in aggregate demand causes an increase in ________ only in the short run, but
causes an increase in ________ in both the short run and the long run.
A) the price level; real GDP
B) real GDP; real GDP
C) the price level; the price level
D) real GDP; the price level
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 269-270
Topic: Short-Run and Long-Run Effects of a Change in Aggregate Demand
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
6) A decline in the American economy means
A) a decline in Canadian exports and a potential Canadian recession.
B) a decline in Canadian exports and a guaranteed Canadian recession.
C) an increase in Canadian exports and a potential Canadian boom.
D) a Canadian stock market crash.
Answer: A
Diff: 2
Type: MC
Page Ref: 269
Topic: Short-Run and Long-Run Effects of a Change in Aggregate Demand
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: Making the Connection: Does the Canadian Economy Import Recessions?
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Copyright © 2015 Pearson Canada Inc.
7) When the aggregate demand curve and the short-run aggregate supply curve intersect,
A) the long-run aggregate supply curve must also intersect at the same point.
B) inflation must be increasing.
C) structural and frictional unemployment equal zero.
D) the economy is in short-run macroeconomic equilibrium.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 267
Topic: Short -Run Macroeconomic Equilibrium
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
8) Assume interest rates in the economy have fallen. How will this affect aggregate demand and
equilibrium in the short run?
A) Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of
GDP will rise.
B) Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of
GDP will rise.
C) Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of
GDP will fall.
D) Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of
GDP will fall.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 269-270
Topic: Short -Run Macroeconomic Equilibrium
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
9) A decrease in aggregate demand in the economy will have what effect on macroeconomic
equilibrium in the long run?
A) The price level will fall, and the level of GDP will be unaffected.
B) The price level will fall, and the level of GDP will fall.
C) The price level will rise, and the level of GDP will fall.
D) The price level will rise, and the level of GDP will be unaffected.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 268
Topic: Long-Run Macroeconomic Equilibrium
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
9-58
Copyright © 2015 Pearson Canada Inc.
10) If the short-run aggregate supply increases by less than the long-run aggregate supply, then,
at the short-run equilibrium,
A) GDP will be below potential GDP.
B) aggregate demand will increase.
C) GDP will be above potential GDP.
D) GDP will be equal to potential GDP.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 267-268
Topic: Short -Run Macroeconomic Equilibrium
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
11) The process of an economy adjusting from a recession back to potential GDP in the long run
without any government intervention is known as
A) monetary policy.
B) an automatic mechanism.
C) "releasing sticky prices."
D) fiscal policy.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 268
Topic: Long-Run Macroeconomic Equilibrium
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
12) Suppose the economy is at full employment and firms become more optimistic about the
future profitability of new investment. Which of the following will happen in the short run?
A) Output will decline.
B) Prices will decline.
C) Unemployment will decline.
D) The aggregate demand curve will shift to the left.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 269-270
Topic: Expansion in the Short Run
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
9-59
Copyright © 2015 Pearson Canada Inc.
13) Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP.
Which of the following will occur because of the automatic mechanism adjusting the economy
back to potential GDP?
A) Output will decrease.
B) Prices will increase.
C) Unemployment will rise.
D) Short-run aggregate supply will shift to the right.
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 268
Topic: Expansion in the Long Run
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
14) Why does the short-run aggregate supply curve shift to the right in the long run, following a
decrease in aggregate demand?
A) Workers and firms adjust their expectations of wages and prices downward and they accept
lower wages and prices.
B) Workers and firms adjust their expectations of wages and prices downward and they push for
higher wages and prices.
C) Workers and firms adjust their expectations of wages and prices upward and they push for
higher wages and prices.
D) Workers and firms adjust their expectations of wages and prices upward and they accept
lower wages and prices.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 268
Topic: Long-Run Macroeconomic Equilibrium
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
9-60
Copyright © 2015 Pearson Canada Inc.
15) The automatic mechanism ________ the price level in the case of ________ and ________
the price level in the case of ________.
A) raises; recession; lowers; expansion
B) raises; expansion raises; recession
C) lowers; expansion; lowers; recession
D) lowers; recession; raises; expansion
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 268
Topic: Long-Run Macroeconomic Equilibrium
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
Figure 9.5
16) Refer to Figure 9.5. Which of the points in the above graph are possible long-run equilibria?
A) A and B
B) A and C
C) A and D
D) B and D
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 269-270
Topic: Long-Run Macroeconomic Equilibrium
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
9-61
Copyright © 2015 Pearson Canada Inc.
17) Refer to Figure 9.5. Which of the points in the above graph are possible short-run equilibria
but not long-run equilibria? Assume that Y1 represents potential GDP.
A) A and B
B) A and C
C) C and D
D) B and D
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 267
Topic: Short -Run Macroeconomic Equilibrium
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
18) Refer to Figure 9.5. Suppose the economy is at point A. If investment spending increases in
the economy, where will the eventual long-run equilibrium be?
A) A
B) B
C) C
D) D
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 269-270
Topic: Expansion in the Long Run
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
19) Refer to Figure 9.5. Suppose the economy is at point C. If government spending decreases
in the economy, where will the eventual long-run equilibrium be?
A) A
B) B
C) C
D) D
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 268-269
Topic: Recession in the Long Run
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
9-62
Copyright © 2015 Pearson Canada Inc.
20) Refer to Figure 9.5. Suppose the economy is at point A. If the economy experiences a supply
shock, where will the eventual short-run equilibrium be?
A) A
B) B
C) C
D) D
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 270-271
Topic: Supply Shock
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
21) ________ of unemployment during ________ make it easier for workers to ________ wages.
A) High levels; a recession; negotiate higher
B) Low levels; an expansion; negotiate higher
C) Low levels; a recession; accept lower
D) High levels; an expansion; accept lower
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 269-270
Topic: Expansion and Automatic Adjustment
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
22) A negative supply shock in the short run causes
A) the aggregate supply curve to shift to the left.
B) the price level to fall.
C) unemployment to fall.
D) equilibrium real GDP to rise.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 270-271
Topic: Supply Shock
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
9-63
Copyright © 2015 Pearson Canada Inc.
23) Which of the following is considered a negative supply shock?
A) increasing immigration in the economy causes the labour supply to rise
B) an improvement in technology
C) an increase in unemployment
D) an unexpected decrease in the refining capacity for oil
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 270-271
Topic: Supply Shock
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
24) The long-run adjustment to a negative supply shock results in
A) the short-run aggregate supply curve shifting to the right.
B) the price level rising.
C) unemployment rising.
D) workers being willing to accept higher wages.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 270-271
Topic: Supply Shock
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
25) In the long run,
A) GDP > potential GDP.
B) unemployment is at its natural rate.
C) LRAS and SRAS lie on the same line.
D) the inflation rate is zero.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 267
Topic: Long-Run Macroeconomic Equilibrium
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
9-64
Copyright © 2015 Pearson Canada Inc.
26) When the price of oil rises unexpectedly, the equilibrium price level ________ and the
unemployment rate ________ in the short run.
A) rises; falls
B) rises; rises
C) falls; falls
D) falls; rises
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 270-271
Topic: Supply Shock
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
27) After an unexpected ________ in the price of oil, the long-run adjustment decreases the price
level and ________ the unemployment rate as they return to their original levels.
A) increase; increases
B) increase; decreases
C) decrease; increases
D) decrease; decreases
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 270-271
Topic: Supply Shock
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
28) Stagflation occurs when
A) inflation rises and GDP rises.
B) inflation falls and GDP rises.
C) inflation rises and GDP falls.
D) inflation falls and GDP falls.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 270-271
Topic: Stagflation
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
9-65
Copyright © 2015 Pearson Canada Inc.
29) Stagflation usually results from
A) a supply shock.
B) a decrease in aggregate demand.
C) an increase in aggregate supply.
D) an increase in aggregate demand.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 270-271
Topic: Stagflation
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
30) An economy is likely to recover from a recession quickly (without government intervention)
when
A) it is caused by a negative supply shock and wages are fixed.
B) it is caused by a leftward shift in aggregate demand and wages are fixed.
C) it is caused by a leftward shift in aggregate demand and wages are flexible.
D) it is caused by a financial crisis.
Answer: C
Diff: 1
Type: MC
Page Ref: 271-272
Topic: Short -Run Macroeconomic Equilibrium
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: Making the Connection: Does Government Intervention Help Fight a
Recession?
31) At a short-run macroeconomic equilibrium, real GDP is always equal to potential GDP.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 267
Topic: Short -Run Macroeconomic Equilibrium
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
9-66
Copyright © 2015 Pearson Canada Inc.
32) Stagflation occurs when aggregate supply and aggregate demand both increase.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 270
Topic: Short-Run Aggregate Supply
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
33) A decrease in government spending will result in a decrease in the price level and a decrease
in real GDP in the long run.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 268
Topic: Long-Run Macroeconomic Equilibrium
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Reflective Thinking
Special Feature: None
34) Using aggregate demand and aggregate supply, explain what happens in the short run if the
Bank of Canada lowers interest rates in the economy. Be sure to detail what happens to
aggregate demand, the price level, the level of GDP, and unemployment. Assume that the
economy is at full employment before the interest rate decrease.
Answer: A decrease in the interest rate will cause aggregate demand to increase. Interest costs
are part of the cost of borrowing and as they fall, both firms and households will increase
spending. This shifts the aggregate demand curve to the right. This raises equilibrium GDP
above potential GDP. As production increases for many firms, they begin to hire more workers,
and unemployment falls. The increasing demand also raises the price level. The economy is
expanding.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 269-270
Topic: Recession in the Short Run
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
9-67
Copyright © 2015 Pearson Canada Inc.
35) Explain how the economy moves back to full employment from recession. Be sure to detail
what happens to short-run aggregate supply, unemployment, equilibrium GDP and the price
level.
Answer: When an economy enters a recession, sales fall and unemployment rises via the
automatic adjustment mechanism. The unemployment resulting from the recession makes
workers more willing to accept lower wages. The slack demand will make firms willing to accept
lower prices for their goods. In addition, the decline in the price level that occurs when the
economy went into recession also makes workers willing to accept lower wages, and firms
accept lower prices. This shifts the short-run aggregate supply curve to the right and moves the
economy back toward potential GDP. Unemployment falls back to the natural level, and the
price level falls.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 268
Topic: Recession in the Long Run
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
9-68
Copyright © 2015 Pearson Canada Inc.
36) Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply
diagram to show what happens in both the long run and the short run when there is a decline in
wealth.
Answer:
Before the decline in demand, the economy begins at point C with GDP at Y1. The decline in
wealth shifts the aggregate demand curve to the left from AD1 to AD2. As a result, prices fall and
output declines. Unemployment also rises as the economy falls below potential GDP (point B).
The slowing economy causes workers and firms to adjust their expectations about wages and
prices downward. Eventually this will cause them to accept lower wages and prices, which will
shift the short-run aggregate supply curve to the right. Eventually, the economy moves to point
A, with real GDP restored back to potential GDP at Y1 and prices even lower. The
unemployment rate goes back to the natural level.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 268
Topic: Long-Run Macroeconomic Equilibrium
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
9-69
Copyright © 2015 Pearson Canada Inc.
37) Beginning with long-run equilibrium, use the aggregate demand and aggregate supply model
to illustrate what happens in the short run when the economy suffers a negative supply shock.
Answer:
The economy is at point A with the price level equal to P1 and the amount of real GDP at Y1. Y1
is also the level of potential output. A negative supply shock, such as an unexpected increase in
the price of oil, will shift the SRAS curve to the left, so that the economy ends up at point B. This
will increase the price level from P1 to P2. Unemployment rises as real GDP falls to Y2 which is
below potential GDP.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 270-271
Topic: Supply Shock
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
9-70
Copyright © 2015 Pearson Canada Inc.
38) Using the aggregate supply and demand model, illustrate what happens in the long run when
the economy suffers a supply shock. Begin your analysis by assuming the economy has suffered
the supply shock in the short run, but has not yet adjusted to it in the long run.
Answer:
The economy is at point B with the price level equal to P2 and the amount of real GDP at Y2.
The economy is at short-run equilibrium after a supply shock. Rising unemployment and falling
output result in workers being willing to accept lower wages and firms being willing to accept
lower prices. This will shift the SRAS curve to the right as their expectations change. This lowers
the price level from P2 to P1 and raises real GDP from Y2 to Y1. Unemployment falls as real
GDP rises back to potential GDP at Y1.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 270-271
Topic: Supply Shock
Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the
difference between short-run and long-run macroeconomic equilibrium
AACSB: Analytic Skills
Special Feature: None
39) Long-run macroeconomic equilibrium occurs when aggregate demand ________ short-run
aggregate supply and they ________ the long-run supply curve.
A) equals; intersect at a point to the right of
B) equals; intersect at a point on
C) is greater than; intersect at a point to the left of
D) is less than; intersect at a point to the right of
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 267
Topic: Long-Run Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
9-71
Copyright © 2015 Pearson Canada Inc.
40) A decrease in aggregate demand results in a(n) ________ in the ________.
A) recession; long run
B) expansion; long run
C) expansion; short run
D) recession; short run
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 268
Topic: Short -Run Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
41) There has been a decrease in investment. As a result, real GDP will ________ in the short
run, and ________ in the long run.
A) increase; increase further
B) increase; decrease to its initial value
C) decrease; decrease further
D) decrease; increase to its initial level
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 267-268
Topic: Short-Run and Long-Run Effects of an Increase in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
42) An increase in investment causes the price level to ________ in the short run and ________
in the long run.
A) increase; increase further
B) increase; decrease
C) decrease; decrease further
D) decrease; increase
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 269-270
Topic: Short-Run and Long-Run Effects of an Increase in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
9-72
Copyright © 2015 Pearson Canada Inc.
43) A decrease in aggregate demand causes a decrease in ________ only in the short run, but
causes a decrease in ________ in both the short run and the long run.
A) the price level; real GDP
B) real GDP; real GDP
C) the price level; the price level
D) real GDP; the price level
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 267-268
Topic: Short-Run and Long-Run Effects of an Increase in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
44) Short-run macroeconomic equilibrium occurs when
A) aggregate demand and short-run aggregate supply intersect.
B) the equilibrium lies on the long-run aggregate supply curve.
C) structural and frictional unemployment equal zero.
D) A and B
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 267
Topic: Short -Run Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
9-73
Copyright © 2015 Pearson Canada Inc.
45) Interest rates in the economy have risen. How will this affect aggregate demand and
equilibrium in the short run?
A) Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of
GDP will fall.
B) Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of
GDP will fall.
C) Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of
GDP will rise.
D) Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of
GDP will rise.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 267-270
Topic: Short -Run Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Analytic Skills
Special Feature: None
46) Canada followed the U.S. into recession in 2008, but not in 2001. One important reason why
Canada did not follow the U.S. into recession in 2001 is
A) prices of natural resources and raw materials did not fall in 2001, but did in 2008.
B) the majority of Canada's trade partners were experiencing rapid inflation in 2008.
C) Canadian banks cut lending more in 2001 than they did in 2008.
D) the U.S. banned Canadian imports in 2008, but not in 2001.
Answer: A
Diff: 1
Type: MC
Page Ref: 269
Topic: Short-Run and Long-Run Effects of a Change in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: Making the Connection: Does the Canadian Economy Import Recessions?
9-74
Copyright © 2015 Pearson Canada Inc.
47) An increase in aggregate demand in the economy will have what effect on macroeconomic
equilibrium in the long run?
A) The price level will fall and the level of GDP will rise.
B) The price level will fall and the level of GDP will fall.
C) The price level will rise and the level of GDP will fall.
D) The price level will rise and the level of GDP will be unaffected.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 270
Topic: Long-Run Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
48) Which of the following correctly describes the automatic mechanism through which the
economy adjusts to long-run equilibrium?
A) the leftward shift of the short-run aggregate supply curve that occurs after a recession
B) the rightward shift of the short-run aggregate supply curve that occurs after a recession
C) the leftward shift of the aggregate demand curve that occurs after a recession
D) the rightward shift of the aggregate demand curve that occurs after a recession
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 270
Topic: Long-Run Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
49) Suppose the economy is at full employment and firms become more pessimistic about the
future profitability of new investment. Which of the following will happen in the short run?
A) Output will rise.
B) Prices will rise.
C) Unemployment will rise.
D) The aggregate demand curve will shift to the right.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 267-270
Topic: Expansion in the Short Run
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
9-75
Copyright © 2015 Pearson Canada Inc.
50) Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP.
Which of the following will occur because of the automatic mechanism adjusting the economy
back to potential GDP?
A) Output will increase.
B) Prices will decline.
C) Unemployment will decline.
D) Short-run aggregate supply will shift to the left.
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 270
Topic: Expansion in the Long Run
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
51) Why does the short-run aggregate supply curve shift to the left in the long run, following an
increase in aggregate demand?
A) Workers and firms adjust their expectations of wages and prices downward, and they accept
lower wages and prices.
B) Workers and firms adjust their expectations of wages and prices downward, and they push for
higher wages and prices.
C) Workers and firms adjust their expectations of wages and prices upward, and they push for
higher wages and prices.
D) Workers and firms adjust their expectations of wages and prices upward, and they accept
lower wages and prices.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 269-270
Topic: Long-Run Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
9-76
Copyright © 2015 Pearson Canada Inc.
52) The automatic mechanism ________ the price level in the case of ________ and ________
the price level in the case of ________.
A) raises; recession; lowers; expansion
B) lowers; expansion; lowers; recession
C) raises; expansion; raises; recession
D) lowers; recession; raises; expansion
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 267-270
Topic: Long-Run Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
Figure 9.6
53) Refer to Figure 9.6. Which of the points in the above graph are possible short-run equilibria?
A) A and B
B) A and C
C) A and D
D) A, B, C, and D
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 267-270
Topic: Long-Run Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
9-77
Copyright © 2015 Pearson Canada Inc.
54) Refer to Figure 9.6. Which of the points in the above graph are possible long-run equilibria?
A) A and B
B) A and C
C) B and D
D) C and D
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 267-270
Topic: Short -Run Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
55) Refer to Figure 9.6. Suppose the economy is at point C. If investment spending decreases in
the economy, where will the eventual long-run equilibrium be?
A) A
B) B
C) C
D) D
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 267-268
Topic: Expansion in the Long Run
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
56) Refer to Figure 9.6. Suppose the economy is at point A. If government spending increases in
the economy, where will the eventual long-run equilibrium be?
A) A
B) B
C) C
D) D
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 269-270
Topic: Recession in the Long Run
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
9-78
Copyright © 2015 Pearson Canada Inc.
57) ________ of unemployment during ________ make it more likely that workers will
________ wages.
A) High levels; a recession; accept lower
B) Low levels; an expansion; accept lower
C) Low levels; a recession; negotiate higher
D) High levels; an expansion; negotiate higher
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 268-270
Topic: Expansion and Automatic Adjustment
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
58) Ceteris paribus, in the long run, a negative supply shock causes
A) the long-run aggregate supply curve to shift to the left.
B) the price level to rise initially, and then return to its lower level.
C) unemployment to fall below its short-run level.
D) equilibrium real GDP to fall.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 270
Topic: Supply Shock
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
59) Which of the following is considered a negative supply shock?
A) increasing investment in the economy causes the capital stock to rise
B) an unexpected increase in the price of natural gas
C) a decline in wages
D) an improvement in technology
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 270
Topic: Supply Shock
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
9-79
Copyright © 2015 Pearson Canada Inc.
60) In the long run,
A) GDP = potential GDP.
B) unemployment is below its natural rate.
C) LRAS and SRAS lie on the same line.
D) unemployment is above its natural rate.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 270
Topic: Supply Shock
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
61) When the price of oil falls unexpectedly, the equilibrium price level ________ and the
unemployment rate ________ in the short run.
A) rises; falls
B) rises; rises
C) falls; falls
D) falls; rises
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 270
Topic: Supply Shock
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
62) After an unexpected increase in the price of oil, the long-run adjustment ________ the price
level and ________ the unemployment rate as they return to their original levels.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 270
Topic: Supply Shock
Updated: Yes
Learning Outcome: Macro 14: Identify different types and measures of unemployment and
discuss its causes
AACSB: Reflective Thinking
Special Feature: None
9-80
Copyright © 2015 Pearson Canada Inc.
63) A rapid increase in the price of oil will tend to
A) shift short-run aggregate supply to the left.
B) shift long-run aggregate supply to the left.
C) shift long-run aggregate supply to the right.
D) shift aggregate demand to the right.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 270
Topic: Supply Shock
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
64) If rapid increases in oil prices caused price levels to increase and real GDP to decrease in the
short run, the economy would experience
A) stagflation.
B) long-run economic decline.
C) hyperinflation.
D) an increase in the natural rate of unemployment.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 270
Topic: Supply Shock
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
65) Stagflation occurs when inflation ________ and GDP ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 270
Topic: Stagflation
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
9-81
Copyright © 2015 Pearson Canada Inc.
66) Stagflation is often a result of
A) a negative supply shock.
B) a decrease in aggregate demand.
C) an increase in aggregate demand.
D) an increase in aggregate supply.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 270
Topic: Stagflation
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
67) Many economists believe that increases in government spending were necessary to help the
Canadian economy recover from the recession of 2008-2009. Neils Veldhuis and Charles
Lammam, on the other hand, believe that the recovery was due to
A) increases in net exports.
B) decreases in the price level.
C) increases in private spending.
D) a fall in potential GDP.
Answer: C
Diff: 1
Type: MC
Page Ref: 271-272
Topic: Short -Run Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: Making the Connection: Does Government Intervention Help Fight a
Recession?
68) At a long-run macroeconomic equilibrium, real GDP is always equal to potential GDP.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 267
Topic: Long-Run Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
9-82
Copyright © 2015 Pearson Canada Inc.
69) Stagflation occurs when short-run aggregate supply decreases.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 270
Topic: Short-Run Aggregate Supply
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
70) An increase in government spending will result in an increase in the price level and an
increase in real GDP in the long run.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 269-270
Topic: Long-Run Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
71) What is the relationship among the AD, SRAS, and LRAS curves when the economy is in
macroeconomic equilibrium?
Answer: When the economy is in long-run equilibrium, the short-run aggregate supply curve
and the aggregate demand curve intersect at a point on the long-run aggregate supply curve.
Comment: Recurring
Diff: 1
Type: SA Page Ref: 267-270
Topic: Long-Run Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Analytic Skills
Special Feature: None
9-83
Copyright © 2015 Pearson Canada Inc.
72) Using aggregate demand and aggregate supply, explain what happens in the short run if the
Bank of Canada raises interest rates in the economy. Be sure to detail what happens to aggregate
demand, the price level, the level of GDP, and unemployment. Assume that the economy is at
full employment before the interest rate increase.
Answer: An increase in the interest rate will cause aggregate demand to decline. Interest costs
are part of the cost of borrowing and as they rise, both firms and households will cut back on
spending. This shifts the aggregate demand curve to the left. This lowers equilibrium GDP below
potential GDP. As production falls for many firms, they begin to lay off workers and
unemployment rises. The declining demand also lowers the price level. The economy is in
recession.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 267-270
Topic: Recession in the Short Run
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Analytic Skills
Special Feature: None
73) What is a supply shock, and why might a supply shock lead to stagflation?
Answer: A supply shock is an unexpected event that causes a shift in short-run aggregate
supply. An adverse supply shock causes the short-run aggregate supply curve to shift to the left,
causing an increase in the price level and a decrease in real GDP. An increase in the price level
occurring at the same time as a decrease in real GDP is known as stagflation.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 270
Topic: Supply Shock
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Analytic Skills
Special Feature: None
9-84
Copyright © 2015 Pearson Canada Inc.
74) Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply
diagram to show what happens in both the long run and the short run when there is an increase in
wealth.
Answer:
Before the increase in demand, the economy begins at point A with GDP at Y1. The increase in
wealth shifts the aggregate demand curve to the right from AD2 to AD1. As a result, prices rise
and output increases. Unemployment also falls as the economy rises above potential GDP (point
D). The growing economy causes workers and firms to adjust their expectations about wages
and prices upward. As wages and prices rise, this will shift the short-run aggregate supply curve
to the left. Eventually, the economy moves to point C, with real GDP restored back to potential
GDP at Y1 and prices are even higher. The unemployment rate goes back to the natural level.
Comment: Recurring
Diff: 3
Type: SA Page Ref: 267-270
Topic: Long-Run Macroeconomic Equilibrium
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Analytic Skills
Special Feature: None
9-85
Copyright © 2015 Pearson Canada Inc.
75) Why are the long-run effects of an increase in aggregate demand on price and output
different from the short-run effects?
Answer: The long-run effects differ from the short-run effects of an increase in aggregate
demand because the long-run and the short-run aggregate supply curves differ. With a vertical
LRAS, changes in AD only affect the price level, not real GDP. With an upward sloping SRAS,
changes in AD impact both the price level and real GDP.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 267-270
Topic: Short-Run and Long-Run Effects of an Increase in Aggregate Demand
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
9.4 A Dynamic Aggregate Demand and Aggregate Supply Model
1) Which of the following is not an assumption made by the dynamic model of aggregate
demand and aggregate supply?
A) Potential real GDP increases continuously.
B) The aggregate demand curve shifts to the right during most periods.
C) The short-run aggregate supply curve shifts to the right except during periods when workers
and firms expect higher wages.
D) Aggregate demand and potential real GDP decrease continuously.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 272
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Reflective Thinking
Special Feature: None
2) Which of the following is one reason for the decline in aggregate demand that led to the
recession of 2008-2009?
A) falling oil prices
B) increases in housing prices
C) the U.S. financial crisis
D) a decline in government spending
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 275-276
Topic: The Canadian Recession of 2008-2009
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Reflective Thinking
Special Feature: None
9-86
Copyright © 2015 Pearson Canada Inc.
Figure 9.7
3) Refer to Figure 9.7. In the figure above, LRAS1 and SRAS1 denote LRAS and SRAS in year 1,
while LRAS2 and SRAS2 denote LRAS and SRAS in year 2. Given the economy is at point A in
year 1, what is the growth rate in potential GDP in year 2?
A) 8%
B) 9.1%
C) 10%
D) 12%
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 273-274
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Analytic Skills
Special Feature: None
4) Refer to Figure 9.7. Given the economy is at point A in year 1, what is the inflation rate
between year 1 and year 2?
A) 0.9%
B) 1.8%
C) 2.7%
D) 3.0%
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 273-274
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Analytic Skills
Special Feature: None
9-87
Copyright © 2015 Pearson Canada Inc.
5) Refer to Figure 9.7. Given the economy is at point A in year 1, what will happen to the
unemployment rate in year 2?
A) It will rise.
B) It will fall.
C) It will remain constant.
D) There is not enough information to answer the question.
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 273-274
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Analytic Skills
Special Feature: None
6) When people became less concerned with the underlying value of their houses and instead
focused on the expectations of the prices of their houses increasing, ________ occurred.
A) stagflation
B) an automatic destabilizer
C) a housing bubble
D) a supply shock
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 275-276
Topic: The Canadian Recession of 2008-2009
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Reflective Thinking
Special Feature: None
7) At the beginning of the recession of 2008-2009, real GDP in Canada was ________ potential
GDP, and in mid-2010, real GDP was ________ potential GDP.
A) below; above
B) below; below
C) above; below
D) above; above
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 275-276
Topic: The Canadian Recession of 2008-2009
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Reflective Thinking
Special Feature: None
9-88
Copyright © 2015 Pearson Canada Inc.
8) In the dynamic aggregated demand and aggregate supply model, if AD shifts faster than AS,
A) inflation occurs.
B) deflation occurs.
C) stagflation occurs.
D) disinflation occurs.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 274
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Reflective Thinking
Special Feature: None
9) Which of the following could explain why there is an increase in potential GDP but the
equilibrium level of GDP does not rise?
A) SRAS shifted to the right by more than LRAS.
B) AD shifted to the right by more than SRAS.
C) AD shifted to the right by less than SRAS.
D) SRAS and AD do not shift.
Answer: D
Diff: 2
Type: MC
Page Ref: 277-278
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Reflective Thinking
Special Feature: Solved Problem: Showing the Millennium Economic Boom on a Dynamic
Aggregate Demand and Aggregate Supply Graph
10) In Canada, because shipping plays such an important role in the economy, declines in cargo
volumes reflect
A) increases in short-run aggregate supply.
B) increases in inflation.
C) declines in aggregate demand.
D) decreases in long-run aggregate supply.
Answer: C
Diff: 2
Type: MC
Page Ref: 280-281
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Reflective Thinking
Special Feature: An Inside LOOK: Higher Freight Volumes Signal Good News for the Canadian
Economy
9-89
Copyright © 2015 Pearson Canada Inc.
11) The dynamic aggregate demand and aggregate supply model assumes that potential GDP
increases over time.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 272
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Reflective Thinking
Special Feature: None
12) Inflation is generally the result of total spending growing faster than total production.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 275
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Reflective Thinking
Special Feature: None
13) One factor which brought on the recession of 2008-2009 was the collapse of the U.S.
housing bubble.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 275-276
Topic: The Canadian Recession of 2008-2009
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Reflective Thinking
Special Feature: None
14) In the dynamic aggregate demand and aggregate supply model, what is the result of
aggregate demand increasing slower than potential real GDP?
Answer: Aggregate demand increasing slower than potential real GDP results in recession.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 274
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Reflective Thinking
Special Feature: None
9-90
Copyright © 2015 Pearson Canada Inc.
15) Explain how the aggregate demand and aggregate supply model can be made more dynamic.
Answer: We can make the aggregate demand and aggregate supply model dynamic rather than
static by making three changes to the basic model. First, potential real GDP increases continually
because the long-run aggregate supply curve continually shifts to the right. This is because
workers are continually entering the labour force, technological change occurs, and the economy
accumulates machinery and tools. Second, aggregate demand increases during most years. This
is because population and income increases over time. Finally, the short-run aggregate supply
curve shifts to the right, except for periods of time when workers and firms expect high rates of
inflation.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 272-273
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Reflective Thinking
Special Feature: None
16) Explain how the static aggregate demand and aggregate supply model gives us misleading
results about the price level, particularly with respect to decreases in aggregate demand. Describe
how the aggregate demand curve is different in the dynamic model as compared to the static
model. Describe how potential GDP is different in the dynamic model as compared to the static
model.
Answer: The static model incorrectly predicts that a recession caused by a shift to the left in the
aggregate demand curve will cause the price level to fall. This has not happened for an entire
year since the 1930s. The misleading results stem from one assumption of the static model: the
economy does not experience continuing inflation. The dynamic model changes this by assuming
instead that the aggregate demand curve will shift to the right during most years. Even if demand
growth slows, the price level rises.
Also in the dynamic model, potential GDP is constantly growing. If the aggregate demand
curve shifts to the right by less than the shift in the long-run aggregate supply curve, then
equilibrium GDP falls below potential GDP, but the price level is still rising.
Comment: Recurring
Diff: 3
Type: ES
Page Ref: 272-273
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Reflective Thinking
Special Feature: None
9-91
Copyright © 2015 Pearson Canada Inc.
17) Use the dynamic model of aggregate demand and supply to illustrate a situation where the
economy is growing but experiencing inflation in the long run.
Answer:
If the aggregate demand curve shifts to the right faster than the short-run aggregate supply curve,
this can cause inflation. Beginning at point A, AD1 shifts to the right, say because of an increase
in government spending due to the war in Iraq. LRAS1 shifts to the right because of the long-run
growth in the economy. However, it shifts by less than the aggregate demand curve. The graph
also shows the short-run aggregate supply curve shifting to the right by a horizontal distance that
is a relatively smaller amount than the aggregate demand curve shift. As a result, the economy
ends up at a final equilibrium at point B. The price level has increased.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 272-274
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to
analyze macroeconomic conditions
AACSB: Analytic Skills
Special Feature: None
9-92
Copyright © 2015 Pearson Canada Inc.
18) All of the following are assumptions made by the dynamic model of aggregate demand and
aggregate supply, except
A) aggregate demand and potential real GDP decrease continuously.
B) the aggregate demand curve shifts to the right during most periods.
C) potential real GDP increases continuously.
D) the short-run aggregate supply curve shifts to the right except during periods when workers
and firms expect higher wages.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 272
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
19) Which of the following is one reason for the decline in aggregate demand that led to the
recession of 2008-2009?
A) high oil prices
B) an increase in investment
C) a drop in net exports
D) a decline in government spending
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 275-277
Topic: Recession of 2008-2009
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
9-93
Copyright © 2015 Pearson Canada Inc.
Figure 9.8
20) Refer to Figure 9.8. In the figure above, AD1, LRAS1, and SRAS1 denote AD, LRAS ,and
SRAS in year 1, while AD2, LRAS2, and SRAS2 denote AD, LRAS, and SRAS in year 2. Given the
economy is at point A in year 1, what is the actual growth rate in GDP in year 2?
A) 1.6%
B) 2.5%
C) 3.1%
D) 5.25%
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 272-276
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Analytic Skills
Special Feature: None
21) Refer to Figure 9.8. Given the economy is at point A in year 1, what is the difference
between the actual growth rate in GDP in year 2 and the potential growth rate in GDP in year 2?
A) 0.05%
B) 0.625%
C) 2.5%
D) 3.125%
Answer: B
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 272-277
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Analytic Skills
Special Feature: None
9-94
Copyright © 2015 Pearson Canada Inc.
22) Refer to Figure 9.8. Given the economy is at point A in year 1, the unemployment rate will
________ and the price level will ________ in year 2.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Answer: A
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 272-277
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Analytic Skills
Special Feature: None
23) When people became ________ concerned with the underlying value of their assets and
became ________ concerned with the expectations that the prices of their houses would continue
increasing, a housing bubble occurred.
A) less; less
B) less; more
C) more; less
D) more; more
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 275-277
Topic: Recession of 2008-2009
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
24) During 2008-2009, falling oil prices
A) shifted the Canadian short-run aggregate supply curve dramatically to the right.
B) shifted the Canadian aggregate demand curve to the left.
C) shifted the Canadian aggregate demand curve to the right.
D) shifted the Canadian aggregate supply curve to the left.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 276
Topic: Recession of 2008-2009
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
9-95
Copyright © 2015 Pearson Canada Inc.
25) Which of the following was not a cause the Canadian recession of 2008-2009?
A) the recession in the U.S.
B) the collapse of the Canadian housing market
C) the global financial crisis
D) the rapid drop in commodity prices
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 275-277
Topic: Recession of 2008-2009
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
Special Feature: None
26) In the dynamic aggregate demand and aggregate supply model, inflation occurs if
A) AD shifts faster than SRAS.
B) AD shifts slower than SRAS.
C) SRAS shifts faster than AD.
D) LRAS shifts faster than AD.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 275
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: None
27) Which of the following could explain why there is an increase in potential GDP but the
equilibrium level of GDP falls?
A) SRAS shifted to the right by more than LRAS.
B) AD shifted to the right by more than SRAS.
C) AD shifted to the right by less than SRAS.
D) AD did not shift and SRAS shifted to the left.
Answer: D
Diff: 2
Type: MC
Page Ref: 277-288
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: Solved Problem: Showing the Millennium Economic Boom on a Dynamic
Aggregate Demand and Aggregate Supply Graph
9-96
Copyright © 2015 Pearson Canada Inc.
28) Economists and industry analysts pay close attention to the volume of rail cargo shipments
because changes in rail shipments have historically been good indicators of
A) future oil prices.
B) future exchange rate changes.
C) future economic activity.
D) past decreases in marginal tax rates.
Answer: C
Diff: 2
Type: MC
Page Ref: 280-281
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: An Inside LOOK: Higher Freight Volumes Signal Good News for the Canadian
Economy
29) The dynamic aggregate demand and aggregate supply model assumes that potential GDP is
constant across time.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 272
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
30) Inflation is generally the result of total spending growing slower than total production.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 275
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
31) One factor that brought on the recession of 2008-2009 was the financial crisis in 2008.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 275
Topic: Recession of 2008-2009
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
9-97
Copyright © 2015 Pearson Canada Inc.
32) In the dynamic aggregate demand and aggregate supply model, what is the result of
aggregate demand increasing faster than potential real GDP?
Answer: Aggregate demand increasing faster than potential real GDP results in inflation.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 275
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Updated: Yes
Learning Outcome: Macro 6: Explain the aggregate supply-aggregate demand model
AACSB: Reflective Thinking
Special Feature: None
33) Explain whether Canadian National Railway's sales are likely to fluctuate more or less than
the sales of each of the following firms as the economy moves from recession to expansion and
back to recession.
-Whirlpool Corporation (appliance manufacturer)
-Taco Bell
-Bombardier (aircraft manufacturer)
-EB Games (video game sales)
Answer: Canadian National Railway's sales are likely to fluctuate during the business cycle less
than the sales of Whirlpool and Bombardier, but more than the sales of Taco Bell and EB
Games. Appliances and aircraft are expensive durable goods that are sensitive to changes in
economic conditions. On the other hand, fast food and video games are relatively inexpensive
consumer goods that are relatively less sensitive to changes in economic conditions.
Diff: 2
Type: SA Page Ref: 280-281
Topic: The Business Cycle
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Canadian National Railway and the Business Cycle
9-98
Copyright © 2015 Pearson Canada Inc.
34) Use the dynamic model of aggregate demand and supply to illustrate a situation where
aggregate demand and short-run aggregate supply are both increasing from year 1 to year 2,
resulting in a higher price level and higher level of real GDP at macroeconomic equilibrium in
year 2.
Answer:
AD1, SRAS1, and LRAS1 all represent year 1. AD2, SRAS2, and LRAS2 all represent year 2.
Beginning at point A, AD1 shifts to the right by more than SRAS1 shifts to the right. LRAS1 shifts
to the right because of the long-run growth in the economy. However, it shifts by less than the
aggregate demand curve. The graph also shows the short-run aggregate supply curve shifting to
the right by a horizontal distance that is a relatively smaller amount than the aggregate demand
curve shift. As a result, the economy ends up at a final equilibrium at point B, with a higher price
level (P2) and a higher level of real GDP (Y2).
Comment: Recurring
Diff: 2
Type: SA Page Ref: 272-275
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Analytic Skills
Special Feature: None
9-99
Copyright © 2015 Pearson Canada Inc.
35) The winter of 2015 saw ridiculous levels of snowfall in the Maritimes and parts of eastern
Canada. As a result, there were unexpected closures of business and government offices.
Suppose that this caused an increase in the price level and a decline in real GDP in 2015. Also
assume that potential real GDP continued to grow due to other factors. You can assume the
aggregate demand curve did not change. Show the macroeconomic equilibrium for 2014 and
2015 using the dynamic aggregate supply and aggregate demand model.
Answer:
The economy began at the point (Y1, P1) on the aggregate demand curve in 2014. The severe
weather events were supply shocks, which shifted the SRAS curve to the left. The economy
ended up at the short-run equilibrium in 2015 with the price level rising from P1 to P2 and real
GDP falling from Y1 to Y2. The economy ended up at a real GDP level Y2, which was below the
potential level of GDP for 2015 which was at Y3. Unemployment rose in the economy as a
result.
Comment: Recurring
Diff: 3
Type: SA Page Ref: 272-275
Topic: Dynamic Aggregate Demand and Aggregate Supply Model
Updated: Yes
Learning Outcome: Macro 7: Use the aggregate supply-aggregate demand model to explain
aggregate fluctuations in output and inflation
AACSB: Analytic Skills
Special Feature: None
9-100
Copyright © 2015 Pearson Canada Inc.
9.5 Appendix: Macroeconomic Schools of Thought
1) Which of the following models relies on emphasizing the importance of sticky wages and
prices?
A) the monetarist model
B) the new classical model
C) the real business cycle model
D) the new Keynesian model
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 287
Topic: New Keynesians
Learning Outcome: 9.5 Appendix D
AACSB: Reflective Thinking
Special Feature: None
2) The new classical model has as its central idea that
A) wage and price stickiness explains fluctuations in real GDP.
B) workers and firms have rational expectations.
C) the Federal Reserve should adopt a monetary growth rule.
D) shifts in aggregate demand have no impact on real GDP.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 288
Topic: New Classical Model
Learning Outcome: 9.5 Appendix D
AACSB: Reflective Thinking
Special Feature: None
3) Which of the following models advocate that the quantity of money should be increased at a
constant rate?
A) the monetarist model
B) the new classical model
C) the real business cycle model
D) the new Keynesian model
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 288
Topic: Monetarist Model
Learning Outcome: 9.5 Appendix D
AACSB: Reflective Thinking
Special Feature: None
9-101
Copyright © 2015 Pearson Canada Inc.
4) The real business cycle model focuses on how
A) wage and price stickiness explains fluctuations in real GDP.
B) the labour theory of value is the best measure of value of a good or service.
C) the Federal Reserve should adopt a monetary growth rule.
D) productivity shocks explain fluctuations in real GDP.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 288
Topic: New Classical Model
Learning Outcome: 9.5 Appendix D
AACSB: Reflective Thinking
Special Feature: None
5) Proponents of the real business cycle model argue that the short-run aggregate supply curve is
A) flat.
B) positively sloped.
C) vertical.
D) negatively sloped.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 288
Topic: Real Business Cycle Models
Learning Outcome: 9.5 Appendix D
AACSB: Reflective Thinking
Special Feature: None
6) According to the real business cycle model, ________ in aggregate demand ________ GDP.
A) increases; decrease
B) increases; increase
C) increases; do not affect
D) decreases; increase
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 288
Topic: Real Business Cycle Models
Learning Outcome: 9.5 Appendix D
AACSB: Reflective Thinking
Special Feature: None
9-102
Copyright © 2015 Pearson Canada Inc.
7) If workers and firms have rational expectations, they form their expectations using
A) all the information available to them.
B) only information from the past.
C) only information provided to them by the government.
D) only information gathered from random sources.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 288
Topic: New Classical Model
Learning Outcome: 9.5 Appendix D
AACSB: Reflective Thinking
Special Feature: None
8) The proponents of ________ and ________ think that the Bank of Canada should adopt a
constant monetary growth rule.
A) new Keynesianism; the new classical model
B) the real business cycle model; Marxism
C) rational expectations; monetarism
D) the monetarist model; the Keynesian model
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 287-288
Topic: New Classical Model
Learning Outcome: 9.5 Appendix D
AACSB: Reflective Thinking
Special Feature: None
9) According to Marx, which of the following factors of production did not contribute anything
of value to production?
A) labour
B) capital
C) natural resources
D) entrepreneurship
Answer: D
Diff: 1
Type: MC
Page Ref: 289
Topic: Marxism
Learning Outcome: 9.5 Appendix D
AACSB: Reflective Thinking
Special Feature: Making the Connection: Karl Marx: Capitalism's Severest Critic
9-103
Copyright © 2015 Pearson Canada Inc.
10) Monetarism is a school of thought put forth by ________, who argued that the economy
would most likely be at potential GDP.
A) Karl Marx
B) Milton Friedman
C) Finn Kydland and Edward Prescott
D) Robert Lucas and Thomas Sargent
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 287-288
Topic: Monetarist Model
Learning Outcome: 9.5 Appendix D
AACSB: Reflective Thinking
Special Feature: None
11) New classical macroeconomic theory emphasizes the role of "sticky" prices in the economy.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 288
Topic: New Classical Model
Learning Outcome: 9.5 Appendix D
AACSB: Reflective Thinking
Special Feature: None
12) Monetarists believe that the quantity of money should be increased at an increasing rate.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 287-288
Topic: Monetarist Model
Learning Outcome: 9.5 Appendix D
AACSB: Reflective Thinking
Special Feature: None
13) Briefly describe monetarism and the monetary growth rule.
Answer: Monetarism refers to the macroeconomic theories of Milton Friedman and his
followers, particularly the idea that the quantity of money should be increased at a constant rate.
The monetary growth rule is a rule adhered to by monetarists. It is a plan for increasing the
quantity of money at a fixed rate that does not respond to changes in economic conditions.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 287-288
Topic: Monetarist Model
Learning Outcome: 9.5 Appendix D
AACSB: Reflective Thinking
Special Feature: None
9-104
Copyright © 2015 Pearson Canada Inc.
14) The new Keynesians emphasize the importance of
A) rational expectations.
B) the monetary growth rule.
C) real causes of the business cycle.
D) sticky wages and prices.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 287
Topic: New Keynesians
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
15) Which of the following models has as its central idea that workers and firms have rational
expectations?
A) the monetarist model
B) the new classical model
C) the real business cycle model
D) the new Keynesian model
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 288
Topic: New Classical Model
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
16) The main result of the monetarist model is that
A) workers and firms have rational expectations.
B) the quantity of money should be increased at a constant rate.
C) productivity shocks explain fluctuations in real GDP.
D) the economy is slow to adjust to sticky wages and prices.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 287-288
Topic: Monetarist Model
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
9-105
Copyright © 2015 Pearson Canada Inc.
17) Which of the following models focuses on how productivity shocks explain fluctuations in
real GDP?
A) the monetarist model
B) the new classical model
C) the real business cycle model
D) the new Keynesian model
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 288
Topic: Real Business Cycle Models
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
18) Proponents of the ________ model argue that the short-run supply curve is vertical.
A) monetarist model
B) new classical model
C) real business cycle model
D) new Keynesian model
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 288
Topic: Real Business Cycle Models
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
19) According to the real business cycle model,
A) increases in aggregate demand raise GDP.
B) increases in aggregate demand lower GDP.
C) increases in aggregate demand do not affect GDP.
D) increases in aggregate demand lower the price level.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 288
Topic: Real Business Cycle Models
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
9-106
Copyright © 2015 Pearson Canada Inc.
20) The monetary growth rule is a plan for increasing the quantity of money
A) at a fixed rate that does not respond to changes in the economic condition.
B) at a rate which increases as the economy grows.
C) at a rate which decreases as the economy declines.
D) at a rate which increases during recessions and decreases during expansions.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 288
Topic: New Classical Model
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
21) The proponents of rational expectations and monetarism think that the Bank of Canada
should adopt
A) an inflation target.
B) a monetary aggregate target.
C) a constant monetary growth rule.
D) an interest rate target.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 287-288
Topic: New Classical Model
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
22) According to ________, entrepreneurship does not contribute anything of value to
production.
A) Robert Lucas and Thomas Sargent
B) Milton Friedman
C) John Maynard Keynes
D) Karl Marx
Answer: D
Diff: 1
Type: MC
Page Ref: 289
Topic: Marxism
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: Making the Connection: Karl Marx: Capitalism's Severest Critic
9-107
Copyright © 2015 Pearson Canada Inc.
23) Monetarism is a school of thought put forth by Milton Friedman. He argued that the
economy would most likely
A) be below potential GDP.
B) be at potential GDP.
C) be unstable.
D) be above potential GDP.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 287-288
Topic: Monetarist Model
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
24) New Keynesian macroeconomic theory emphasizes the role of "sticky" prices in the
economy.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 287
Topic: New Keynesians
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
25) Monetarists believe that the quantity of money should be increased at a constant rate.
Answer: TRUE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 287-288
Topic: Monetarist Model
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
26) What does the phrase "Keynesian revolution" refer to?
Answer: The Keynesian revolution is the name given to the widespread acceptance during the
1930s and 1940s of John Maynard Keynes's macroeconomic model.
Comment: Recurring
Diff: 1
Type: SA Page Ref: 287
Topic: New Keynesians
Updated: Yes
Learning Outcome: Macro 17: Discuss the fundamentals of key macroeconomic theories
AACSB: Reflective Thinking
Special Feature: None
9-108
Copyright © 2015 Pearson Canada Inc.
Macroeconomics, Canadian Edition (Hubbard et al.)
Chapter 10 Money, Banks, and the Bank of Canada
10.1 What Is Money, and Why Do We Need It?
1) Your roommate argues that he can think of no better situation than living in a deflationary
economy because prices of goods and services would continuously fall. You disagree and argue
that during a deflation, people can be made worse off because
A) the purchasing power of people's incomes would increase.
B) the purchasing power of the currency would decrease.
C) the value of the real interest rate will drop below the nominal interest rate.
D) borrowers will have to pay increasing amounts in real terms over time.
Answer: D
Diff: 2
Type: MC
Page Ref: 291
Topic: Money, Income, and Wealth
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: Economics in Your Life: What if Money Became Increasingly Valuable?
2) In economics, money is defined as
A) the total value of one's assets in current prices.
B) the total value of one's assets minus the total value of one's debts, in current prices.
C) the total amount of salary, interest, and rental income earned during a year.
D) any asset people generally accept in exchange for goods and services.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 292
Topic: What is Money?
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
3) Economies where goods and services are traded directly for other goods and services are
called ________ economies.
A) trade
B) barter
C) direct
D) seigniorage
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 292
Topic: Barter
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
10-1
Copyright © 2015 Pearson Canada Inc.
4) The major shortcoming of a barter economy is
A) the requirement of a double coincidence of wants.
B) the requirement of specialization and exchange.
C) that goods and services are not traded.
D) that money loses value from inflation.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 292
Topic: Barter
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
5) Commodity money
A) has value independent of its use as money.
B) has little to no value independent of its use as money.
C) is backed by a valuable commodity such as gold.
D) can be used to purchase commodities, but not services.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 292
Topic: What Can Serve as Money?
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
6) Silver is an example of a
A) commodity money.
B) barter money.
C) fiat money.
D) representative money.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 292
Topic: What Can Serve as Money?
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
10-2
Copyright © 2015 Pearson Canada Inc.
7) Soldiers in a World War II prisoner-of-war camp
A) used gold as a fiat money.
B) used cowrie shells as money.
C) used cigarettes as money.
D) used U.S. dollars as a commodity money.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 292
Topic: What Can Serve as Money?
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
8) Which of the following is one of the most important benefits of money in an economy?
A) Money allows for the exchange of goods and services.
B) Money allows for the accumulation of wealth.
C) Money makes exchange easier, leading to more specialization and higher productivity.
D) Money encourages people to produce all of their own goods (self-sufficiency) and therefore
increases economic stability.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 293
Topic: Functions of Money
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
9) In an economy with ________, there are more prices than in an economy with ________.
A) barter; money
B) money; barter
C) fiat money; commodity money
D) fiat money; barter
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 292
Topic: Barter
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
10-3
Copyright © 2015 Pearson Canada Inc.
10) The statement, "My iPhone is worth $300" represents money's function as
A) a medium of exchange.
B) a unit of account.
C) a store of value.
D) a standard of deferred payment.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 293
Topic: Functions of Money
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
11) Which of the following functions of money would be violated if inflation were high?
A) unit of account
B) store of value
C) certificate of gold
D) medium of exchange
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 293
Topic: Functions of Money
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
12) Which of the following assets is most liquid?
A) money
B) bond
C) savings account
D) stock
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 293
Topic: Functions of Money
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
10-4
Copyright © 2015 Pearson Canada Inc.
13) If whole tomatoes were money, which of the following functions of money would be the
hardest for tomatoes to satisfy?
A) unit of account
B) store of value
C) certificate of gold
D) medium of exchange
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 293
Topic: Functions of Money
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
14) People hold money as opposed to financial assets because money
A) earns interest.
B) is highly liquid.
C) earns no interest.
D) earns a higher return than other financial assets.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 293
Topic: Functions of Money
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
15) Fiat money has
A) little to no intrinsic value but is backed by the quantity of gold held by the central bank.
B) little to no intrinsic value and is authorized by the central bank or governmental body.
C) value, because it can be redeemed for gold by the central bank.
D) a great intrinsic value that is independent of its use as money.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 294
Topic: What Can Serve as Money?
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
10-5
Copyright © 2015 Pearson Canada Inc.
16) Which of the following information about fiat money is false? Fiat money
A) is backed by gold.
B) serves as a medium of exchange.
C) has little to no value except as money.
D) is authorized by a central bank or governmental body.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 294
Topic: What Can Serve as Money?
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
17) Which of the following statements regarding the use of gold as money is false?
A) It has standardized quality.
B) It is durable.
C) It has value other than money.
D) It is acceptable to traders.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 294
Topic: What Can Serve as Money?
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
18) Dollar bills in the modern economy serve as money because
A) they are backed by the gold stored in Ottawa.
B) they can be redeemed for gold by the Bank of Canada.
C) they have value as a commodity independent of their use as money.
D) people have confidence that others will accept them as money.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 294
Topic: What Can Serve as Money?
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
10-6
Copyright © 2015 Pearson Canada Inc.
19) Why would an elementary school student who didn't play the game accept a Pokemon card
in exchange for their lunch?
A) Their teachers would give them extra grades for collecting the most cards.
B) Pokemon cards were part of a weight loss fad in the late 1990s.
C) They believed other students would accept Pokemon cards in exchange for things they did
want.
D) All Pokemon cards had set values.
Answer: C
Diff: 1
Type: MC
Page Ref: 295
Topic: What Can Serve as Money?
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: Making the Connection: The Pokemon Currency System
20) Economies cannot function without money.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 292
Topic: Barter
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
21) If gold is used as money in an economy, the money supply is easy to control.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 292
Topic: What Can Serve as Money?
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
22) Money will fail to serve as a medium of exchange if it ceases to be a store of value.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 293
Topic: What Can Serve as Money?
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
10-7
Copyright © 2015 Pearson Canada Inc.
23) Would the invention of money, as opposed to barter, increase the growth rate of real GDP in
a country over time? Why or why not?
Answer: Yes, because money makes exchanges easier and increases specialization. Greater
specialization raises productivity, which increases the growth rate of real GDP.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 292-293
Topic: What is Money?
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
24) What are the four functions of money? Can something be considered money if it does not
fulfill all four functions?
Answer: The four functions are medium of exchange, unit of account, store of value, and
standard of deferred payment. In the long run, something will not serve as money if it does not
fulfill all four functions.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 293
Topic: Functions of Money
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
25) Although gold is highly valued by most people, it is difficult to use as a medium of
exchange. Explain.
Answer: Gold is an example of commodity money. The problem with commodity money is that
its value depends upon the quality of the commodity. The higher the quality, the higher the
value. It violates one of the 5 criteria that make a commodity suitable to use as a medium of
exchange. If someone wanted to cheat another in a trade involving gold, the person could mix
impure metals with precious metals. The purity would have to be checked at each trade.
Gold is also heavy. For large transactions transport of the metal required might be difficult.
Comment: Recurring
Diff: 2
Type: ES
Page Ref: 294
Topic: What Can Serve as Money?
Learning Outcome: 10.1 Define money and discuss the four functions of money
AACSB: Reflective Thinking
Special Feature: None
10-8
Copyright © 2015 Pearson Canada Inc.
26) One reason Zimbabwe suffered from hyperinflation is that the government decided to pay for
all of its expenses by
A) selling government bonds to foreign governments.
B) selling its government-run oil company to a private company, which then defaulted on its
payment.
C) raising interest rates to attract foreign direct investment, then nationalizing the foreign-owned
facilities.
D) printing more and more money.
Answer: D
Diff: 1
Type: MC
Page Ref: 291
Topic: Hyperinflation
Updated: Yes
Learning Outcome: Macro 13: Discuss the key measures, theories, and effects of inflation and
deflation
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Coca-Cola Dries Up as Money Floods Zimbabwe
27) Money is
A) an asset that people are willing to accept in exchange for goods and services.
B) a liability that people are willing to accept in exchange for goods and services.
C) the income one earns over a period of time.
D) one's assets net of one's liabilities at any point in time.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 292
Topic: What is Money?
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
28) A barter economy is an economy where
A) goods and services are exchanged for money.
B) money is exchanged for goods and services.
C) goods and services are exchanged for other goods and services.
D) goods and services are exchanged for liabilities.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 292
Topic: Barter
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
10-9
Copyright © 2015 Pearson Canada Inc.
29) A major source of inefficiency in barter economies is that they require
A) a standard of deferred payment to make trade possible.
B) a double coincidence of wants in exchange.
C) more liquid stores of value than do monetary economies.
D) All of the above are correct.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 292
Topic: Barter
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
AACSB: Reflective Thinking
Special Feature: None
30) Commodity money is a good
A) used as money that has no secondary use.
B) that is designated as money by law.
C) used as money that also has value independent of its use as money.
D) used as money that has no intrinsic value.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 292
Topic: What Can Serve as Money?
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
31) By making exchange ________, money allows for ________ and higher ________.
A) harder; specialization; costs
B) easier; specialization; productivity
C) harder; generalization; productivity
D) easier; specialization; costs
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 292
Topic: Functions of Money
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
10-10
Copyright © 2015 Pearson Canada Inc.
32) Which of the following is a function that money serves?
A) medium of exchange
B) unit of account
C) store of value
D) All of the above are correct.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 293
Topic: Functions of Money
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
33) During World War II, prisoners of war used ________ as money.
A) bullets
B) cowrie shells
C) chocolate
D) cigarettes
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 292
Topic: What Can Serve as Money?
Updated: Yes
Learning Outcome: Macro 1: Define macroeconomics and identify its basic concerns
Special Feature: None
34) When a grocery store accepts your $5 bill in exchange for bread and milk, the $5 bill serves
as a
A) medium of exchange.
B) unit of account.
C) store of value.
D) standard of deferred payment.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 293
Topic: Functions of Money
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
10-11
Copyright © 2015 Pearson Canada Inc.
35) The statement "this Harry Rosen tie costs $120" illustrates which function of money?
A) medium of exchange
B) unit of account
C) store of value
D) standard of deferred payment
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 293
Topic: Functions of Money
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
36) A farm worker gets paid today in money, but plans to spend the money next week. This
illustrates which function of money?
A) medium of exchange
B) unit of account
C) store of value
D) standard of deferred payment
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 293
Topic: Functions of Money
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
37) Which of the following is the most liquid asset?
A) a Renoir painting
B) bonds
C) a car
D) money
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 293
Topic: Functions of Money
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
10-12
Copyright © 2015 Pearson Canada Inc.
38) Liquidity is defined as
A) the ease with which a given asset can be converted to a store of value.
B) the ease with which a given asset can be converted to a unit of account.
C) the ease with which a given asset can be converted to a medium of exchange.
D) the ease with which a given asset can be converted to a standard of deferred payment.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 293
Topic: Functions of Money
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
39) Among potential stores of value, money
A) offers the highest rate of return.
B) increases in value during periods of inflation.
C) has the advantage of being the most liquid asset.
D) provides more services than the other assets.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 293
Topic: Functions of Money
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
40) A car dealer sells you a car today in exchange for money in the future. This illustrates which
function of money?
A) medium of exchange
B) unit of account
C) store of value
D) standard of deferred payment
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 293
Topic: Functions of Money
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
10-13
Copyright © 2015 Pearson Canada Inc.
41) Which is not one of the criteria necessary for a commodity to make a suitable medium of
exchange?
A) It should be durable.
B) It should be of standardized quality.
C) It should be valuable relative to its weight.
D) It should have intrinsic value.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 294
Topic: What Can Serve as Money?
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
42) Gold is an example of
A) commodity money.
B) fiat money.
C) barter money.
D) M1.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 294
Topic: What Can Serve as Money?
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
43) Which of the following qualities would make gold a poor medium of exchange?
A) Its value depends on its purity, and its purity is not easy to visibly identify.
B) It is durable, so its value is not lost by spoilage.
C) Its value is relative to its weight, and amounts large enough to be useful in trade can be easily
transported.
D) It is divisible, so can be used to pay for goods of different values.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 294
Topic: What Can Serve as Money?
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
10-14
Copyright © 2015 Pearson Canada Inc.
44) Paper currency is
A) commodity money.
B) fiat money.
C) barter money.
D) a bond.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 294
Topic: What Can Serve as Money?
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
45) Fiat money
A) has no or very little value except as money.
B) is rarely used in modern economies.
C) functions well only if can be redeemed for gold or other precious metals.
D) serves well as a medium of exchange, but not as a store of value.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 294
Topic: What Can Serve as Money?
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
46) Fiat money is generally issued by
A) private banks.
B) central banks.
C) brokerage firms.
D) major multinational corporations.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 294
Topic: What Can Serve as Money?
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
10-15
Copyright © 2015 Pearson Canada Inc.
47) A good can serve as money only if
A) government mandates that the good must be accepted in payment of debts.
B) it is declared by authorities to be legal tender.
C) it has intrinsic value or if it is backed by precious metals.
D) citizens accept the good as a means of payment for transactions and debts.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 294
Topic: What Can Serve as Money?
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
48) Because Canadian dollars (paper currency) are legal tender,
A) Canadian workers must accept them as payment for labour services.
B) Canadian creditors must accept them in payment of debts.
C) Canadian firms must accept them as payment for goods and services.
D) All of the above are correct.
Answer: B
Diff: 1
Type: MC
Page Ref: 294
Topic: What Can Serve as Money?
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: Making the Connection: Apple Didn't Want My Cash!
49) An economy without money would have no exchanges of goods and services.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 292
Topic: What Can Serve as Money?
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
10-16
Copyright © 2015 Pearson Canada Inc.
50) In an economy with money, as opposed to barter, people are more likely to specialize in the
production of goods and services.
Answer: TRUE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 292
Topic: What Can Serve as Money?
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
51) The supply of money is easier to control with commodity money than it is with fiat money.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 294
Topic: What Can Serve as Money?
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
52) Using the five criteria in the book, explain how Canadian currency is suitable to use as a
medium of exchange.
Answer:
1. Dollars are acceptable to most traders, either in exchange for goods and services or as payment
of debts.
2. Coins and bill in circulation are of standardized quality. Bills of the same denomination are
identical in appearance.
3. Coins and currency in circulation are durable: their value is not altered by spoilage.
4. Bills are light in weight so that they are very valuable relative to their weight and they are
easily transported.
5. Finally, dollars are divisible.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 294
Topic: Functions of Money
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
10-17
Copyright © 2015 Pearson Canada Inc.
53) Money cannot serve as a medium of exchange unless it also serves as a store of value. Is this
statement true or false? Explain.
Answer: This statement is true. If money does not hold its value over time, it will not be
accepted in exchange for goods and services. People must be confident that money they accept
today for a good or service rendered will be considered valuable tomorrow when they seek to
trade it for a good or service. Lacking that confidence, they will not accept money today.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 294
Topic: What Can Serve as Money?
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
10.2 How Is Money Measured in Canada Today?
1) The most liquid measure of money supply is
A) M0.
B) M1+.
C) M2+.
D) M3.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 297
Topic: M1
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: None
2) The M1+ measure of the money supply equals
A) paper money plus coins in circulation.
B) currency plus savings account balances.
C) currency plus chequing account balances.
D) currency plus chequing account balances plus savings account balances.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 297
Topic: M1
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: None
10-18
Copyright © 2015 Pearson Canada Inc.
3) The Bank of Canada's narrowest definition of the money supply is
A) M0.
B) M1.
C) M2+.
D) M3.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 297
Topic: M1
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: None
4) The largest proportion of M1+ is made up of
A) currency.
B) chequing account deposits.
C) traveller's cheques.
D) savings account deposits.
E) time deposits.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 297
Topic: M1
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: None
5) The M2+ measure of money equals
A) currency plus personal deposits plus non-personal deposits plus money market mutual funds.
B) currency plus chequable deposits.
C) currency.
D) currency plus personal deposits plus non-personal deposits plus stocks and bonds.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 297
Topic: M1
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: None
10-19
Copyright © 2015 Pearson Canada Inc.
6) Which of the following is not counted in M1+?
A) chequing account balances
B) credit card balances
C) coins in circulation
D) currency in circulation
E) traveller's cheque balances
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 297
Topic: M1
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: None
7) As recently as 2012, the amount of seigniorage on a Canadian penny was ________, and the
amount of seigniorage on Canadian paper fiat money was ________.
A) positive; negative
B) negative; zero
C) negative; positive
D) zero; positive
Answer: C
Diff: 3
Type: MC
Page Ref: 298
Topic: Seigniorage
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: Making the Connection: Canada Drops the Penny
8) If the current nickel was made worth fifteen cents rather than its current value of five cents,
what would be the effect on M1+?
A) It would rise.
B) It would fall.
C) M1 would rise, and M2 would remain constant.
D) It would only affect M2.
Answer: A
Diff: 3
Type: MC
Page Ref: 297
Topic: M1
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Analytic Skills
Special Feature: Making the Connection: Canada Drops the Penny
10-20
Copyright © 2015 Pearson Canada Inc.
9) Money's most narrow definition is based on its function as a
A) store of value.
B) unit of account.
C) standard of deferred payment.
D) medium of exchange.
E) standard of barter.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 297
Topic: Functions of Money
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: None
10) You earn $500 a month, currently have $200 in currency, $100 in your chequing account,
$2,000 in your savings accounts, $3,000 worth of illiquid assets and $1,000 of debt. You have
A) money = $2,300, annual income = $6,000, and wealth = $5,000.
B) money = $300, annual income = $6,000, and wealth = $4,300.
C) money = $200, annual income = $500, and wealth = $4,300.
D) money = $300, annual income = $6,000, and wealth = $5,000.
Answer: B
Diff: 2
Type: MC
Page Ref: 298
Topic: Money, Income, and Wealth
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Analytic Skills
Special Feature: Don't Let This Happen to You: Don't Confuse Money with Income or Wealth
11) If a person cashes in a $500 Canada Savings Bond and puts it in his/her chequing account,
then M1+ will ________ and M1++ will ________.
A) increase; decrease
B) increase; not change
C) not change; increase
D) not change; decrease
E) not change; not change
Answer: B
Diff: 2
Type: MC
Page Ref: 298-299
Topic: How We Measure Money Today
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Definitions of M1+ and M1++
10-21
Copyright © 2015 Pearson Canada Inc.
12) If a person withdraws $500 from his/her chequing account and holds it as currency, then
M1+ will ________ and M1++ will ________.
A) increase; decrease
B) not change; not change
C) not change; increase
D) decrease; increase
E) decrease; decrease
Answer: B
Diff: 2
Type: MC
Page Ref: 298-299
Topic: How We Measure Money Today
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Definitions of M1+ and M1++
13) If a person takes $100 from his/her piggy bank at home and buys Canada Savings Bonds,
then M1+ will ________ and M1++ will ________.
A) increase; increase
B) not change; increase
C) decrease; increase
D) decrease; not change
E) increase; decrease
Answer: D
Diff: 2
Type: MC
Page Ref: 298-299
Topic: How We Measure Money Today
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Definitions of M1+ and M1++
14) If credit card balances rise in the economy, then M1+ will ________ and M2+ will
________.
A) increase; increase
B) not change; increase
C) decrease; increase
D) not change; not change
E) increase; decrease
Answer: D
Diff: 2
Type: MC
Page Ref: 298-299
Topic: How We Measure Money Today
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Definitions of M1+ and M1++
10-22
Copyright © 2015 Pearson Canada Inc.
Scenario 10.1
Consider the information above for a simple economy. Assume there are no travellers' cheques.
15) Refer to Scenario 10.1. M1+ in this simple economy equals
A) $1,000.
B) $2,000.
C) $3,000.
D) $8,000.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 297
Topic: M1
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: None
16) Refer to Scenario 10.1. M2+ in this simple economy equals
A) $3,000.
B) $8,000.
C) $14,000.
D) $21,000.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 297
Topic: M2
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: None
17) If households and firms decide to hold less of their money in chequing account deposits and
more in currency, then the money supply
A) will not change.
B) will increase.
C) will decrease.
D) may increase or decrease.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 296-297
Topic: M1
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: None
10-23
Copyright © 2015 Pearson Canada Inc.
18) Liquidity increases as we move from the M1+ to the M2+ definition of the money supply.
Answer: FALSE
Comment: Recurring
Diff: 1
Type: TF Page Ref: 297
Topic: How We Measure Money Today
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: None
19) The Canadian government makes a profit from issuing fiat money.
Answer: TRUE
Diff: 2
Type: TF Page Ref: 297-298
Topic: Seigniorage
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: Making the Connection: Canada Drops the Penny
20) The amount of national income in an economy equals the money supply in an economy.
Answer: FALSE
Diff: 2
Type: TF Page Ref: 298
Topic: Money, Income, and Wealth
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: Don't Let This Happen to You: Don't Confuse Money with Income or Wealth
21) Suppose you withdraw $1,000 from your savings account and put it under your mattress.
Briefly explain how this will affect M1+ and M2+.
Answer: M2+ will not change and M1+ will rise by $1,000. When under your mattress, the
$1,000 would be counted as currency. Going from a savings account to currency, would raise
M1+, but both are part of M2+, so M2+ would not change.
Diff: 2
Type: ES
Page Ref: 297
Topic: How We Measure Money Today
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Definitions of M1+ and M1++
22) Suppose you withdraw $1,000 from your savings account and put it in your chequing
account. Briefly explain how this will affect M1+ and M2+.
Answer: M2+ will not change and M1+ will rise by $1,000. Going from a savings account to
chequing account would raise M1+, but both are part of M2+, so M2+ would not change.
Diff: 2
Type: ES
Page Ref: 297
Topic: How We Measure Money Today
Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Definitions of M1+ and M1++
10-24
Copyright © 2015 Pearson Canada Inc.
23) In Canada, currency includes
A) gold, silver, and paper money.
B) chequing and savings account deposits.
C) paper money and coins in circulation.
D) traveller's cheques.
Answer: C
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 295-297
Topic: M1
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
24) The narrowest official definition of the money supply is
A) M1+.
B) M1++.
C) M2+.
D) M3.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 295-297
Topic: M1
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
10-25
Copyright © 2015 Pearson Canada Inc.
25) M1++ includes
A) currency outside banks; and all chequable and non-chequable deposits at chartered banks,
trust and mortgage loan companies, credit unions, and caisses populaires.
B) currency outside banks; everything in M1 and M1+; and all chequable deposits at chartered
banks, trust and mortgage loan companies, credit unions and caisses populaires.
C) currency outside banks; savings account balances; chequing account deposits in banks; and
holdings of traveller's cheques.
D) coins, paper currency, savings account balances, and traveller's cheques.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 295-297
Topic: M1
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
26) Most payments in Canada for goods and services are made using
A) currency.
B) chequing account deposits.
C) traveller's cheques.
D) gold.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 295-297
Topic: M1
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
27) ________ is the profit made by the government from issuing fiat money.
A) Seigniorage
B) The liquidity premium
C) Circulation revenue
D) The currency commission
Answer: A
Diff: 1
Type: MC
Page Ref: 297-298
Topic: Seigniorage
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: Making the Connection: Canada Drops the Penny
10-26
Copyright © 2015 Pearson Canada Inc.
28) A problem that the government confronted regarding the penny was that
A) it often cost more to produce than its face value.
B) it cost less to produce than its face value.
C) the metals used to produce the penny were in limited supply.
D) it no longer served as store of value.
Answer: A
Diff: 1
Type: MC
Page Ref: 297-298
Topic: Seigniorage
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
Special Feature: Making the Connection: Canada Drops the Penny
29) Issues with the penny were
A) production costs for a penny were greater than 1 cent.
B) inflation had reduced the penny's purchasing power to the point that most people considered
them a nuisance.
C) copper had uses outside of coin production, which meant penny production was vulnerable to
those market forces.
D) all of the above.
Answer: D
Diff: 1
Type: MC
Page Ref: 297-298
Topic: Seigniorage
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
Special Feature: Making the Connection: Canada Drops the Penny
30) M2 includes currency held outside banks plus
A) currency in circulation, chequing account deposits in banks, and holdings of traveller's
cheques.
B) personal account balances at chartered banks, non-personal demand and notice deposits at
chartered banks, and fixed-term deposits.
C) chequing account deposits, large-denomination time deposits, and noninstitutional money
market fund shares.
D) currency in circulation, savings account balances, and small-denomination time deposits.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 295-297
Topic: M2
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
10-27
Copyright © 2015 Pearson Canada Inc.
31) A person's wealth
A) is a measure of how much money the person has.
B) equals the value the person's assets minus his or her liabilities.
C) is measured independent of his or her current and expected future income.
D) is all of the above.
Answer: B
Diff: 2
Type: MC
Page Ref: 298/298
Topic: Money, Income, and Wealth
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: Don't Let This Happen to You: Don't Confuse Money with Income or Wealth
32) If households in the economy decide to take money out of chequing account deposits and put
this money into savings accounts, this will initially
A) decrease M1+ and increase M1++.
B) decrease M1+ and decrease M1++.
C) decrease M1+ and not change M1++.
D) increase M1+ and decrease M1++.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 298-299
Topic: How We Measure Money Today
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Definitions of M1+ and M1++
33) If households in the economy decide to take money out of chequing account deposits and
hold it as currency, this will initially
A) not change M1+ and increase M1++.
B) decrease M1+ and decrease M1++.
C) decrease M1+ and not change M1++.
D) not change M1+ and not change M1++.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 298-299
Topic: How We Measure Money Today
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Definitions of M1+ and M1++
10-28
Copyright © 2015 Pearson Canada Inc.
34) If you transfer all of your currency to your chequing account then, initially, M1+ will
________ and M1++ will ________.
A) increase; not change
B) not change; increase
C) not change; not change
D) decrease; increase
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 298-299
Topic: How We Measure Money Today
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Definitions of M1+ and M1++
35) If you liquidate $3,000 of your Canada Savings Bonds and transfer the funds to your
chequing account, then initially, M1+ will ________ and M2++ will ________.
A) not change; decrease
B) increase; decrease
C) increase; not change
D) not change; not change
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 298-299
Topic: How We Measure Money Today
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Definitions of M1+ and M1++
36) Credit card balances are
A) part of M1+.
B) part of M1++.
C) part of M2.
D) not part of the money supply.
Answer: D
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 298-299
Topic: How We Measure Money Today
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
10-29
Copyright © 2015 Pearson Canada Inc.
37) Innovations, including new products and services, in financial markets and institutions have
made the job of defining the money supply easier.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 295-297
Topic: How We Measure Money Today
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
38) The only way money can be removed from circulation is for it to be held by the government.
Answer: FALSE
Comment: Recurring
Diff: 2
Type: TF Page Ref: 295-297
Topic: M1
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
39) A person's wealth is the same as his income.
Answer: FALSE
Diff: 2
Type: TF Page Ref: 298
Topic: Money, Income, and Wealth
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: Don't Let This Happen to You: Don't Confuse Money with Income or Wealth
40) Canada was the first nation to remove the penny from circulation.
Answer: FALSE
Diff: 2
Type: TF Page Ref: 297-298
Topic: Seigniorage
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: Making the Connection: Canada Drops the Penny
10-30
Copyright © 2015 Pearson Canada Inc.
41) Suppose you transfer $2,000 from your non-money market mutual fund account to your
chequing account. What is the immediate impact of this transfer on M1+ and M2++?
Answer: Mutual fund balances are part of M2++, but are not part of M1+. Chequing account
balances are included in both money supply measures. Thus, M1+ will increase by $2,000 with
the increase in your chequing account balance. M2++ will not change, as the $2,000 increase in
your chequing account balance is offset by the $2,000 decrease in mutual fund accounts.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 298-299
Topic: How We Measure Money Today
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
42) Suppose that you decide that you no longer want to hold currency, so you deposit all of your
currency holdings into your chequing account. What is the immediate impact of this transaction
on M1+ and M1++?
Answer: Neither M1+ nor M1++ will change (at least not initially). Both chequing account
balances and currency holdings outside commercial banks are included in M1+ and in M1++.
The decrease in currency holdings would be perfectly offset by the increase in chequing account
balances.
Comment: Recurring
Diff: 2
Type: SA Page Ref: 298-299
Topic: How We Measure Money Today
Updated: Yes
Learning Outcome: Macro 11: Identify key sources of demand for money and explain how that
demand can be influenced
AACSB: Reflective Thinking
Special Feature: None
10.3 How Do Banks Create Money?
1) The major assets on a bank's balance sheet are its
A) chequing and savings account deposits.
B) loans, and chequing and savings account deposits.
C) reserves, loans, and holdings of securities.
D) reserves, chequing and savings account deposits.
E) reserves, loans, and chequing account deposits.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 300
Topic: Bank Balance Sheets
Learning Outcome: 10.3 Explain how banks create money
AACSB: Reflective Thinking
Special Feature: None
10-31
Copyright © 2015 Pearson Canada Inc.
2) The largest liability on the balance sheet of most banks is their
A) loans.
B) holdings of securities.
C) deposits with the Federal Reserve.
D) chequing account and savings account deposits of their customers.
E) vault cash.
Answer: D
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 300
Topic: Bank Balance Sheets
Learning Outcome: 10.3 Explain how banks create money
AACSB: Reflective Thinking
Special Feature: None
3) A bank will consider a car loan to a customer to be ________ and a customer's chequing
account to be ________.
A) a liability; an asset
B) an asset; a liability
C) a liability; a liability
D) an asset; an asset
E) an asset; net worth
Answer: B
Diff: 2
Type: MC
Page Ref: 300
Topic: Bank Balance Sheets
Learning Outcome: 10.3 Explain how banks create money
AACSB: Reflective Thinking
Special Feature: Don't Let This Happen to You: Don't Confuse Assets and Liabilities
4) Bank reserves include
A) vault cash and deposits with the Bank of Canada.
B) loans to bank customers and deposits with the Bank of Canada.
C) vault cash and loans to bank customers.
D) customer chequing accounts and vault cash.
E) deposits with the Bank of Canada and holdings of securities.
Answer: A
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 299
Topic: Bank Balance Sheets
Learning Outcome: 10.3 Explain how banks create money
AACSB: Reflective Thinking
Special Feature: None
10-32
Copyright © 2015 Pearson Canada Inc.
5) The desired reserves of a bank equal its ________ the desired reserve ratio.
A) deposits divided by
B) deposits multiplied by
C) loans divided by
D) loans multiplied by
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 300
Topic: Bank Balance Sheets
Learning Outcome: 10.3 Explain how banks create money
AACSB: Reflective Thinking
Special Feature: None
6) Banks will make additional loans when desired reserves are
A) greater than total reserves.
B) less than total reserves.
C) less than total deposits.
D) less than total loans.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 300-301
Topic: Using T-Accounts to Show How a Bank Can Create Money
Learning Outcome: 10.3 Explain how banks create money
AACSB: Reflective Thinking
Special Feature: None
Scenario 10.2
Imagine that Kristy deposits $10,000 of currency into her chequing account deposit at Bank A
and that the desired reserve ratio is 20%.
7) Refer to Scenario 10.2. As a result of Kristy's deposit, Bank A's reserves immediately
increase by
A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 300-302
Topic: Using T-Accounts to Show How a Bank Can Create Money
Learning Outcome: 10.3 Explain how banks create money
AACSB: Reflective Thinking
Special Feature: None
10-33
Copyright © 2015 Pearson Canada Inc.
8) Refer to Scenario 10.2. As a result of Kristy's deposit, Bank A's desired reserves increase by
A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.
Answer: A
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 300-302
Topic: Using T-Accounts to Show How a Bank Can Create Money
Learning Outcome: 10.3 Explain how banks create money
AACSB: Reflective Thinking
Special Feature: None
9) Refer to Scenario 10.2. As a result of Kristy's deposit, Bank A's excess reserves increase by
A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 300-302
Topic: Using T-Accounts to Show How a Bank Can Create Money
Learning Outcome: 10.3 Explain how banks create money
AACSB: Reflective Thinking
Special Feature: None
10) Refer to Scenario 10.2. As a result of Kristy's deposit, Bank A can make a maximum loan of
A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 300-302
Topic: Using T-Accounts to Show How a Bank Can Create Money
Learning Outcome: 10.3 Explain how banks create money
AACSB: Reflective Thinking
Special Feature: None
10-34
Copyright © 2015 Pearson Canada Inc.
11) Refer to Scenario 10.2. As a result of Kristy's deposit, chequing account deposits in the
banking system as a whole (including the original deposit) could eventually increase up to a
maximum of
A) $8,000.
B) $10,000.
C) $50,000.
D) $100,000.
Answer: C
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 300-302
Topic: Simple Deposit Multiplier
Learning Outcome: 10.3 Explain how banks create money
AACSB: Reflective Thinking
Special Feature: None
12) If the desired reserve ratio is 10 percent, an increase in bank reserves of $1,000 can support
an increase in chequing account deposits (including the original deposit) in the banking system
as a whole of up to
A) $100.
B) $1,000.
C) $10,000.
D) $100,000.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 302-303
Topic: Simple Deposit Multiplier
Learning Outcome: 10.3 Explain how banks create money
AACSB: Analytic Skills
Special Feature: None
13) Suppose you withdraw $500 from your chequing account deposit and bury it in a jar in your
back yard. If the desired reserve ratio is 10 percent, chequing account deposits in the banking
system as a whole could drop up to a maximum of
A) $0.
B) $50.
C) $500.
D) $5,000.
Answer: D
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 302-303
Topic: Simple Deposit Multiplier
Learning Outcome: 10.3 Explain how banks create money
AACSB: Analytic Skills
Special Feature: None
10-35
Copyright © 2015 Pearson Canada Inc.
14) If the desired reserve ratio (rd) is 20 percent, the simple deposit multiplier is
A) 2.
B) 5.
C) 10.
D) 20.
Answer: B
Comment: Recurring
Diff: 1
Type: MC
Page Ref: 302-303
Topic: Simple Deposit Multiplier
Learning Outcome: 10.3 Explain how banks create money
AACSB: Analytic Skills
Special Feature: None
15) Suppose that you deposit $2,000 in your bank and the desired reserve ratio is 10 percent. The
maximum loan your bank can made as a direct result of your deposit is
A) $200.
B) $1,800.
C) $2,000.
D) $20,000.
Answer: B
Comment: Recurring
Diff: 2
Type: MC
Page Ref: 302-303
Topic: Simple Deposit Multiplier
Learning Outcome: 10.3 Explain how banks create money
AACSB: Reflective Thinking
Special Feature: None
Table 10.1
Assets
Reserves
+$4,000
Liabilities
Deposits +$4,000
16) Refer to Table 10.1. Suppose a transaction changes a bank's balance sheet as indicated in the
T-account, and the desired reserve ratio is 10 percent. As a result of the transaction, the bank has
excess reserves of
A) $0.
B) $400.
C) $3,600.
D) $4,000.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 300-302
Topic: Using T-Accounts to Show How a Bank Can Create Money
Learning Outcome: 10.3 Explain how banks create money
AACSB: Analytic Skills
Special Feature: None
10-36
Copyright © 2015 Pearson Canada Inc.
Table 10.2
Assets
Reserves
+$8,000
Liabilities
Deposits
+$8,000
17) Refer to Table 10.2. Suppose a transaction changes a bank's balance sheet as indicated in the
following T-account, and the desired reserve ratio is 10 percent. As a result of the transaction,
the bank can make a maximum loan of
A) $0.
B) $800.
C) $7,200.
D) $8,000.
Answer: C
Comment: Recurring
Diff: 3
Type: MC
Page Ref: 300-302
Topic: Using T-Accounts to Show How a Bank Can Create Money
Learning Outcome: 10.3 Explain how banks create money
AACSB: Analytic Skills
Special Feature: None
Table 10.3
Assets
Reserves
+$7,000
Loans
+$46,000
Liabilities
Deposits
+$50,000
Net Worth
+$3,000
18) Refer