ECON 1010 F2020 Quiz Practice Questions
Quiz 1 (Chapter 4 and 5)
4.1 Key Term Quiz (Static)
1. Gross Domestic Product (GDP) is the market value of all the ___ goods and
services produced ___ a country in a given time period.
a) Final; within
b) Intermediate; within
c) Final; outside
d) Intermediate; out
Answer: a)
2. Which of the following is an example of a final good or service?
a) GM buys Firestone tires
b) Dell buys Intel chips
c) Dan bought a Toyota Camry
d) PCL construction company buys Lafarge cement
Answer: c)
3. Which of the following is an example of an intermediate good or service?
a) Sarah bought a Sony HDTV
b) Air Canada buys Boeing aircrafts
c) Samsung buys compressors for manufacturing refrigerators
d) Mike bought Puma shoes
Answer: c)
4. Which of the following is an example of consumption expenditure?
a) Rachel buying a TV
b) Mary buying a house
c) Air Canada buying Dell PCs
d) Peter buying stocks
Answer: a)
5. Which of the following is an example of investment?
a) Randy buying a BMW
b) Mike buying an Apple iPad
c) Ron buying stocks and bonds
d) WestJet buying Airbus planes
Answer: d)
6. Which of the following is an example of government expenditure on goods and
services?
a. Apple outsourcing the manufacture of iPhones
b. The Prime Minister’s Office buying internet services
c. The Indian government lowering import tariffs
d. The government of Canada lowering the interest rate
Answer: b)
7. Exports of goods and services are items that firms in ___ produce and sell to
___.
a. Any other country; Canada
b. Canada; other firms within the country
c. Canada; the government of Canada
d. Canada; any other country
Answer: d)
8. Imports of goods and services are items that ___ in Canada ___ the rest of the
world.
a. Households and governments, but not firms; sell to
b. Households, firms, but not governments; buy from
c. Firms and governments, but not households; sell to
d. Households, firms, and governments; buy from
Answer: d)
9. Net exports of goods and services is the value of ___ of goods and services
___ the value of ___ of goods and services.
a. Exports; minus; imports
b. Exports; times; imports
c. Exports; plus; imports
d. Imports; minus; exports
Answer: a)
10. Depreciation is the ___ in the value of ___ that results from its use and from
obsolescence.
a. Decrease; capital
b. Increase; land
c. Decrease; residual assets
d. Decrease; the dollar
Answer: a)
11. The total amount spent ___ is called gross investment
a. Buying goods and services
b. Replacing depreciated capital
c. Both buying new capital and replacing depreciated capital
d. Buying new capital
Answer: c)
12. The amount by which ___ is called net investment
a. The value of capital decreases
b. Firms’ profits increase
c. Firms’ costs decrease
d. The value of capital increases
Answer: d)
4.1 Review Quiz 1 (Static)
Define GDP and distinguish between a final good and an intermediate good. Provide
examples.
1. Gross Domestic Product is ___
a. The factor cost of all the final goods and services produced by all citizens of a
country in a given time period
b. The factor cost of all the consumption goods and services produced by all
citizens of a country in a given time period
c. The market value of all the consumption goods and services produced within
a country in a given time period
d. The market value of all the final goods and services produced within a country
in a given time period
Answer: d)
2. An intermediate good is ___. An example of an intermediate good is ___.
a. An item that is produced by one firm, bought by another firm, and used as a
component of a final good or service; wheat sold to a baker to make bread
b. An item that is used for a given period of time and then must be replaced;
winter boots
c. A good that is used for only part of the year; snow tires
d. An item that is produced by one firm, bought by another firm, and used as a
component of a final good or service; a used car
Answer: a)
3. A final good is ____. An example of a final good is ___.
a. An item that is bought by its final user or an item that is a component of a final
good’ tires
b. The last item of a given type that a consumer will buy; a house that is
purchased by a retired couple
c. An item that is bought by its final user during a specified time period; bread
sold to a consumer
d. An item that is bought by its final user during a specified time period; the ice
cream that an ice cream parlor buys to make milkshakes
Answer: c)
4.1 Review Quiz 2 (Static)
Why does GDP equal aggregate income and also equals aggregate expenditures?
1. GDP equals aggregate income and also equals aggregate expenditures
because ___?
a. Labour produces final goods and all purchases in the economy are purchases
of final goods
b. Aggregate income measures profit as net profit and aggregate expenditure
measures investment as net investment
c. Firms pay out as incomes (aggregate income) everything they receive from
the sale of their output (aggregate expenditure)
d. Statistics Canada has defined GDP in such a way that it can be calculated by
either summing total income or by summing total expenditures
Answer: c)
4.1 Study Plan Problem 1 (algo)
Classify each of the following items as a final good or service or an intermediate good
or service and identify which is a component of consumption expenditure,
investment, or government expenditure on goods and services:
Item 1: The purchase of a new security system for Parliament
Item 2: Aluminum cans bought by CocaCola
Item 3: A textbook bought by a student
Item 4: A new bridge across the creek in the Glen Abbey Golf Club
1. Item 1 is ____ and item 2 is ___.
a. A final good which is government expenditure; a final good that is an
investment
b. A final good that is investment; an intermediate good
c. A final good that is investment; a final good that is investment
d. A final good which is government expenditure; an intermediate good
Answer: d)
2. Item 3 is ____ and item 4 is ___.
a. A final good that is consumption expenditure; a final good that is an
investment
b. An intermediate good; a final good that is a consumption expenditure
c. An intermediate good; a final good that is investment
d. A final good that is consumption expenditure; a final good that is consumption
expenditure
Answer: a)
4.1 Study Plan Problem 3 (algo)
Use the data in the table to calculate aggregate expenditure and imports of goods and
services.
1. Aggregate expenditure is $ 120 billion
Aggregate Expenditure = Aggregate Income
2. Imports of goods and services is $ 25 billion
Aggregate Expenditure = C + I + G + X - M
120 = 75 + 20 + 15 + 35 - M
M = 75 + 20 + 15 + 35 - 120
M = 25
4.1 Study Plan Problem 4 (Static)
1. The Figure shows the flows of expenditure and income
a. Business investment is included in flow D
b. Imports are included in flow E
c. Exports are included in flow E
2. Is it possible for GDP to rise by only 0.9 percent given increases of more than
0.9 percent in business investment and imports because ___.
a. The growth in imports decreases real GDP, and the growth of consumption
expenditure and government expenditure was less than 0.9 percent
b. The amount of GDP attributable to business investment and imports
decreased
c. Consumption expenditure must have increased by more than 0.9 percent
d. Of a large statistical discrepancy
Answer: a)
4.1 Extra Problem 1 (Static)
The firm that printed your textbook bought the paper from XYZ Paper Mills
Was this purchase of paper part of GDP? If not, how does the value of the paper get
counted in GDP?
1. This purchase of paper ___ part of GDP because the paper is ___ good.
a. Is; a final
b. Is not; an intermediate
c. Is; an intermediate
d. Is not; a final
Answer: b)
2. The value of the paper is counted in GDP as ___.
a. An intermediate good
b. Part of the value of the textbook
c. An import because most paper is imported into Canada
d. investment
Answer: b)
4.2 Key Term Quiz (Static)
1. Real GDP is the value of the ___ goods and services produced in a given year
expressed in terms of the prices in ___ year.
Nominal GDP is the value of the ___ goods and services produced in a given
year expressed in terms of the prices of ___ year.
a. Final; that same; intermediate; a base
b. Final; that same; final; a base
c. Intermediate; a base; final; that same
d. Final; a base; final; that same
Answer: d)
4.2 Review Quiz 1 (Static)
What is the expenditure approach to measuring GDP?
1. The expenditure approach to measuring GDP sums together ___, and the
largest component is ___.
a. Wages, salaries, and supplementary labour income and other factor incomes;
wages, salaries, and supplementary labour income
b. Net domestic income at factor cost, indirect taxes less subsidies, and
depreciation; net domestic income at factor cost
c. Consumption expenditure, investment, government expenditure on goods and
services, and net exports; government expenditure on goods and services
d. Consumption expenditure, investment, government expenditure on goods and
services, and net exports; consumption expenditure
Answer: d)
4.2 Review Quiz 2 (Static)
What is the income approach to measuring GDP?
1. The income approach to measuring GDP sums together ___. The largest
component is ___.
a. Wages, salaries, and supplementary labour income, other factor incomes,
indirect taxes less subsidies, and depreciation; wages, salaries, and
supplementary labour income
b. Consumption expenditure, investment, government expenditure on goods and
services, and net exports; government expenditure on goods and services
c. Consumption expenditure, investment, government expenditure on goods and
services, and net exports; consumption expenditure
d. Wages, salaries, and supplementary labour income, other factor incomes,
indirect taxes less subsidies, and depreciation; other factor incomes
Answer: a)
4.2 Review Quiz 3 (Static)
What adjustments must be made to total income to make it equal GDP?
1. To make total income equal to GDP we ___ indirect taxes less subsidies and
___ depreciation
a. Add; subtract
b. Subtract; add
c. Add; add
d. Subtract; subtract
Answer: c)
4.2 Review Quiz 4 (algo)
What is the distinction between nominal GDP and real GDP?
1. Nominal GDP is ___. Real GDP is ___.
a. The value of the final goods and services produced in a given year valued at
the prices of that year; the value of final goods and services produced in a
given year when valued at the prices of reference base year
b. The value of final goods and services produced in a given year when valued
at the prices of reference base year; calculated as the quantity produced in a
given year multiplied by the prices that prevailed in that year
c. The value of final goods and services produced in a given year when valued
at the prices of a reference base year; calculated as the quantity produced in
the base year multiplied by the prices that prevailed in the given year
d. The value of the final goods and services produced in a given year valued at
the prices of that year; a more precise name for GDP
Answer: a)
4.2 Review Quiz 5 (algo)
How is real GDP calculated?
1. Real GDP is calculated by ___.
a. Summing together the value of the year’s production using the prices of the
year in which the production occurred
b. Dividing the value of the year’s production at reference base year prices by
the value of the year’s production at the prices of the year in which the
production occurred
c. Summing together the value of the year’s production using the prices of the
reference base year
d. Dividing the value of the year’s production at the prices of the year in which
the production occurred by the value of the year’s production at reference
base year prices
Answer: c)
2. An economy produces only digital cameras, chocolate bars, and watches.
The table gives the quantity produced and prices in 2015 and 2016. The
reference base year is 2015.
What is the real GDP in 2016 in terms of the reference base-year prices?
Real GDP in 2016 in terms of reference base-year prices is $___
Digital Camera: 9 x $1 = $9
Chocolate Bars: 3 x $1 = $3
Watches: 2 x $3 = $6
Real GDP in 2016 = Total = $18
4.2 Study Plan Problem 5 (algo)
1. The table shows items of income and expenditure in an economy in 2016.
Calculate this economy’s GDP in 2016
GDP in this economy in 2016 equals $___ billion
GDP = Consumption Expenditure + Investment + Government Expenditure + (Exports Imports)
= 793 + 162 + 229 - 35
= 1149
4.2 Study Plan Problem 7 (algo)
1. Tropical Republic produces only bananas and coconuts.
The base year is 2016, and the tables give the quantities produced and the
prices.
Calculate nominal GDP in 2016 and 2017.
Nominal GDP in 2016 is $___
Nominal GDP in 2017 is $___
2016: (1200 x 2) + (700 x 6) = $6600
2017: (1100 x 3) + (650 x 5) = $6550
4.2 Study Plan Problem 8 (algo)
1. Tropical Republic produces only bananas and coconuts. The base year is 2016,
and the tables give the quantities produced and the prices. Calculate real GDP
in 2017 expressed in base-year prices.
Real GDP in 2017 expressed in base-year prices is $____
2017: (800 x 2) + (575 x 6) = $5050
4.2 Extra Problem 1 (algo)
The national accounts of Parchment Paradise are kept on parchment. A fire destroys
the statistics office. The accounts are now incomplete but they contain the data in the
table. Calculate GDP (expenditure approach) and depreciation.
1. GDP (expenditure approach) is $___
GDP (expenditure approach) = C + I + G +(X - M)
= 2000 + 800 + 400 + (-200)
= $3000
2. Depreciation is $___
Depreciation = GDP (income approach) - (Net Domestic Income + Indirect Taxes
Less Subsidies)
= 2900 - (2500 +100)
= 2900 - 2600
= $300
4.2 Extra Problem 3 (Static)
1. Assuming that Toyota previously built its sport utility vehicle outside of
Canada, Canada’s GDP ___ when Toyota builds the RAV4 in Canada because
___.
a. Increases; government expenditure increases
b. Decreases; Toyota is a Japanese firm so all of Toyota’s production is part of
Japan’s GDP
c. Increases; net exports increase
d. Decreases; imports decrease
Answer: c)
4.2 Extra Problem 4 (Static)
1. Toyota’s decision to build the RAV4 in Canada influences the factor incomes
that make up Canada’s GDP by increasing ___.
a. Japan’s wages, salaries, and supplementary labour income, and other factor
incomes
b. Canada’s wages, salaries, and supplementary labour income and also
increasing Japan’s other factor incomes
c. Consumption expenditures and investment
d. Canada’s wages, salaries, and supplementary labour income, and other
factor incomes
Answer: d)
4.3 Key Term Quiz (Static)
1. Real GDP per person is real GDP ___.
a.
b.
c.
d.
2.
3.
4.
5.
Divided by the total labour hours
Divided by the population
Multiplied by the population
Divided by aggregate demand
Answer: b)
Potential GDP is the value of real GDP when all the economy’s factors of
production - ___, ____, ____, and ___ - are fully ____.
a. Average costs; marginal costs; variable costs; fixed costs ; minimized
b. Labour; capital; land; entrepreneurial ability; employed
c. Wages; rent; interest profits; optimized
d. Labour; capital; stocks; bonds; employed
Answer: b)
The business cycle is a ___ but ___ up-and-down movement of total ___ and
other measures of economic activity
a. Periodic; irregular; production
b. Occasional; regular; production
c. Occasional; regular; consumption
d. Periodic; irregular; consumption
Answer: a)
An expansion is a period during which ___.
a. The economy faces hyperinflation
b. Unemployment increases
c. Real GDP increases
d. Interest rate rises
Answer: c)
Which of the following countries is facing a recession?
a. Japan’s real GDP of 3.8 percent in the first quarter decreased by 0.3 and 0.4
percent respectively in the second and third quarter of 2012
b. The Bank of England raised the country’s interest rate from 0.5 percent in the
first quarter to 0.9 percent in the second quarter of 2013
c. India’s real GDP of 5.3 percent in the second quarter increased by 0.4
percent in the third quarter of 2012
d. Canada faced a change in the inflation rate from 2.2 percent in 2012 to 1.7
percent in 2013.
Answer: a)
4.3 Review Quiz 2 (Static)
How does the growth rate of real GDP contribute to an improved standard of living?
1. The growth rate of real GDP contributes to an improved standard of living
because ___.
a. More resources are devoted to household production, underground economic
activity, and leisure time
b. Prices fall and the average person can afford to buy more consumption goods
and services
c. A higher real GDP increases potential GDP, which increases employment of
labour, land, capital, and entrepreneurship
d. The average person enjoys more consumption goods and services and more
resources are devoted to health care, research, and environmental protection
Answer: d)
4.3 Review Quiz 3 (algo)
What is a business cycle and what are its phases and turning points?
1. A business cycle is ___.
a. A regular, predictable cycle of total production and other measures of
economic activity
b. A periodic but irregular up-and-down movement of total production and other
measures of economic activity
c. The regular, predictable cycle of potential GDP
d. The periodic growth cycle of potential GDP
Answer: b)
2. The phases of the business cycle are ___. The turning points of the business
cycle are ___.
a. Peak and trough; expansion and recession
b. Expansion and recession; direct and indirect
c. Expansion and recession; peak and trough
d. Positive and negative; minimum and maximum
Answer: c)
4.3 Review Quiz 4 (Static)
What is PPP and how does it help us to make valid international comparisons of real
GDP?
1. PPP is ___.
a. Price point parity
b. Preferred purchasing prices
c. Parallel purchasing power
d. Purchasing power parity
Answer: d)
2. When we use PPP we can make valid international comparisons of real GDP
because we ___.
a. Calculate the value of goods and services produced in two countries using
the same quantities
b. Use data that is calculated at the market exchange rate
c. Calculate the value of goods and services produced in two countries using
the same prices
d. Use the price date provided by the two countries but not the quantities
Answer: c)
4.3 Review Quiz 5 (Static)
Explain why real GDP might be an unreliable indicator of the standard of living.
1. Real GDP might be an unreliable indicator of the standard of living because
___.
a. The standard of living depends on many factors, some of which are not part
of real GDP
b. Real GDP is measured differently in various parts of the country
c. Real GDP values all production in constant prices
d. Real GDP numbers are constantly being updated
Answer: a)
5.1 Key Term Quiz (Static)
1. The working-age population is the total number of ___ aged ____ years and
over
a. People; 15
b. People; 16
c. Graduates; 20
d. Workers; 18
Answer: a)
2. The labour force is the number of people employed plus the ___.
a. Working-age population
b. Number of women unemployed
c. Number unemployed
d. Working-age population
Answer: c)
3. The unemployment rate is the percentage of the people ___ who are
unemployed.
a. In the working-age population
b. Who are not institutionalized
c. In the age group of 20-60
d. In the labour force
Answer: d)
4. The labour force participation rate is the percentage of the ___ who are
members of the labour force.
a. Part-time workers
b. Working-age population
c. Number unemployed
d. Number of women
Answer: b)
5. The employment-to-population ratio is the percentage of the ____.
a. Labour force that is employed full time
b. Labour force that is employed
c. People of working age who have full-time jobs
d. People of working age who have jobs
Answer: d)
6. Who in the following statements is a discouraged searcher?
a. Dan is available to work but has not looked for a job in the past eight weeks
because of repeated applications but no single offer
b. Nick is changing his job because he has had differences with his co-workers
in his current company
c. Rachel does not find her current job profile interesting and is looking for
alternate opportunities
d. Ned is available to work and has been sending job applications whenever he
sees any suitable opportunity
Answer: a)
5.1 Review Quiz 1 (Static)
What distinguishes an unemployed person from one who is not in the labour force?
1. An unemployed person ____.
a. Can hold a part-time job and be searching for a full-time job
b. Is available for work and on temporary layoff with an expectation of recall,
without work but has looked for work in the past four weeks, or has a new job
to start within four weeks
c. May be a person who is employed at a job that does not use the skills they
have accumulated at university or on previous jobs
d. Is not in the labour force
Answer: b)
2. A person is not in the labour force if they are ___
a. In the working-age population but neither employed or unemployed
b. Between the ages of 16 and 19
c. Over 65 years of age
d. Unemployed
Answer: a)
5.1 Review Quiz 4 (Static)
Describe the alternative measures of unemployment
1. ____ are those unemployed for 1 year or more and ___ are those unemployed
for 3 months or less.
a. R3; R4
b. R1; R2
c. R2; R1
d. R5;R6
Answer: b)
2. R5 includes ____. R7 includes ___.
a. Long-term future starts; discouraged searchers
b. Discouraged searchers; long-term future starts
c. Discouraged searchers; involuntary part-timers
d. Involuntary part-timers; long-term future starts
Answer: c)
Worked Problem (Static)
Use the data reported by the Labour Force Survey in July 2014 to answer the
following question.
1. Who does the LFS classify as being unemployed, a part-time worker, an
employed person, a discouraged searcher, and not in the labour force? Explain
your classification.
___ are unemployed, ___ is a part-time worker, ___ is a discouraged worker,
and ___ is not in the labour force
a.
b.
c.
d.
Mary and Sarah; Kevin; Johnnie; Pat
Pat and Mary; Sarah; Kevin; Johnnie
Mary and Kevin; Pat; Johnnie; Sarah
Pat and Kevin; Mary; Johnnie; Sarah
Answer: b)
2. How will the labour force change if the following events occur? 1. Sarah starts
a second job 2. Pat finds a good job and is hired. 3. Mary takes a job at
McDonald’s while she waits to start her new job.
a. Events 1, 2, and 3 will not change the labour force
b. Event 1 will not change the labour force, 2 will increase it, and 3 will decrease
it
c. Event 1 will decrease the labour force while 2 and 3 will increase it
d. Event 1 will increase the labour force, but events 2 and 3 will decrease it
Answer: a)
3. How will the unemployment rate change if Sarah quits and starts to search for
a full-time job? The unemployment rate will ____ if Sarah quits and starts to
search for a full-time job.
a. Fall
b. Rise
c. Remain unchanged
Answer: b)
4. How will the labour force participation rate change if Kevin starts creating
football apps in his garage and they turn out to be very popular? The labour
force participation will ___ Kevin starts creating football apps in his garage and
they turn out to be very popular.
a. Rise
b. Remain unchanged
c. Fall
Answer: a)
Worked Problem 1,2 (Static)
Use the data reported by the Labour Force Survey in July 2014 to answer the
following question
1. Who does the LFS classify as being unemployed, a part-time worker, an
employed person, a discouraged searcher, and not in the labour force? Explain
your classification. ___ are unemployed, ___ is a part-time worker, ___ is a
discouraged worker, and ___ is not in the labour force.
a.
b.
c.
d.
Pat and Kevin; Mary; Johnnie; Sarah
Mary and Sarah; Kevin; Johnnie; Pat
Pat and Mary; Sarah; Kevin; Johnnie
Mary and Kevin; Pat; Johnnie; Sarah
Answer: c)
2. How will the labour force change if the following events occur? 1. Sarah starts
a second job 2. Pat finds a good job and is hired 3. Mary takes a job at
McDonald’s while she waits to start her new job.
a. Event 1 will not change the labour force, 2 will increase it, and 3 will decrease
it
b. Events 1, 2, and 3 will not change the labour force
c. Event 1 will decrease the labour force while 2 and 3 will increase it
d. Event 1 will increase the labour force, but events 2 and 3 will decrease it.
Answer: b)
Worked Problem 3,4 (Static)
Use the data reported by the Labour Force Survey in July 2014 to answer the
following question
3. How will the unemployment rate change if Sarah quits and starts to search for
a full-time job? The unemployment rate will ___ if Sarah quits and starts to
search for a full-time job.
a. Fall
b. Remain unchanged
c. Rise
Answer: b)
4. How will the labour force participation rate change if Kevin starts creating
football apps in his garage and they turn out to be very popular? The labour
force participation will ___ Kevin starts creating football apps in his garage and
they turn out to be very popular.
a. Fall
b. Remain unchanged
c. Rise
Answer: c
5.1 Study Plan Problem 1 (algo)
The Statistics Canada reported the data given in the table for 2012. Calculate the
unemployment rate, the labour force participation rate, and the employment rate.
1. The unemployment rate is ___percent.
Unemployment rate = (Number of unemployed / Labour Force) x 100
Labour Force = Number of employed + Number of unemployed
18.8 = 17.4 + Number of unemployed
1.4 = Number of unemployed
Unemployment Rate = (1.4 / 18.8) x 100
= 7.4
2. The labour force participation rate is ___ percent.
Labour Force Participation Rate = (Labour Force / Working-Age Population) x 100
= (18.8 / 28.3) x 100
= 66.4
3. The employment rate is ___ percent.
Employment rate = (Number of people employed / Working-age population) x 100
= (17.4 / 28.3) x 100
= 61.5
5.1 Study Plan Problem 2 (algo)
The table gives information about the labour market in October 2017 in the economy
of Sandy Island. Calculate for October 2017 a) the unemployment rate b) The
employment rate. And calculate for the end of November 2017 c) the number of people
unemployed, the number employed, and the unemployment rate.
1. In October 2017: the unemployment rate is ___ percent.
Unemployment rate = (Number of people unemployed / Labour Force) x 100
= (3000 / 15000) x 100
= 20
2. In October 2017: the employment rate is __ percent.
Employment rate = (number of people employed / Working Age Group) x 100
= (12000 / 18000) x 100
= 66.7
3. At the end of November 2017: the number of people unemployed is __.
Number of unemployed = Number unemployed in October 2017 - Number of
unemployed people who were hired - the number that left the labour force + the
number who entered the labour force to look for work.
= 3000 - 120 - 30 + 50
= 3000 - 100
= 2900
4. At the end of November 2017: The number of people employed is ___.
Number of employed = Number of people employed in 2018 - The number of people
who lost their jobs and didn’t look for work - the people who quit their jobs and
retired + unemployed people who were hired
= 12000 - 120 - 20 +120
= 11980
5. At the end of November 2017: The unemployment rate is ___ percent.
Unemployment Rate = (Number of Unemployed / Labour Force) x 100
= (2900 / 14880) x 100
= 19.5
5.1 Study Plan Problem 3 (Static)
In March 2016, Canada’s unemployment rate was 7.7 percent. In November 2016, it
was 6.3 percent. If the labour force was constant during 2016, explain what happened
to unemployment.
1. Assuming the labour force was constant, unemployment between March 2016
and November 2016 ____.
a. Decreased
b. Increased
c. Either increased or decreased but we can’t predict for sure
d. Did not change
Answer: a)
2. Assuming that unemployment was constant, the labour force ___ between
March 2016 and November 2016.
a. Decreased
b. Did not change
c. Increased
d. Either increase or decreased but we can’t predict for sure
Answer: c)
5.1 Extra Problem 2 (Static)
1. Who is not a member of the labour force?
a. A person working at either a full-time job or a part-time job
b. A discouraged searcher
c. A person without work who has made specific efforts to find a job within the
previous four weeks
d. A person waiting to start a new job within four weeks
Answer: b)
5.2 Key Term Quiz (Static)
1. Which of the following statements illustrates frictional unemployment?
a. Many bank tellers lost their jobs due to the installation of ATM machines
b. Dave lost his job as he did not possess the technical skills required to do his
duty
c. Robin is quitting his current job to find another that has better prospects
d. Thousands of employees were laid off during the 2008-09 recession
Answer: c)
2. Which of the following statements illustrates structural unemployment?
a. Many women quit jobs to raise their kids
b. Outsourcing resulted in many job losses in the mid 2000s
c. Jen quit her current job and found another one with a better pay scale
d. Dell laid off many employees when the company’s profits dropped during the
recession
Answer: b)
3. Cyclical unemployment is the fluctuating unemployment over the business
cycle that increases during ___ and decreases during ____.
a. A recession; an expansion
b. Technological stagnation; technological advancements
c. An expansion; a recession
d. Imports; exports
Answer: a)
4. The natural unemployment rate is the unemployment rate when the economy is
____.
a. Facing high interest rates
b. Not at full employment
c. At full employment
d. Facing high inflation
Answer: c)
5. Full employment is when there is no ___ unemployment or, equivalently, when
all the unemployment is ___ or ___.
a. Cyclical; structural; natural
b. Structural; frictional; natural
c. Frictional; structural; cyclical
d. Cyclical; frictional; structural
Answer: d)
6. The output gap is real GDP minus ___ expressed as a percentage of ___.
a. Potential GDP; real GDP
b. Investment; potential GDP
c. Potential GDP; potential GDP
d. Interest rate; interest rate
Answer: c)
5.2 Review Quiz 1 (Static)
Why does unemployment arise and what makes some unemployment unavoidable?
1. Unemployment arises when ____.
a. People leave their jobs and spend time searching for another job that better
suits their abilities
b. People leave the labour force
c. Students decide to take time to travel following graduation
d. Firms close, people lose their jobs, and they become discouraged searchers.
Answer: a)
2. Some unemployment is unavoidable because ___.
a. Often people become discouraged searchers
b. Many part-time workers would like to have full-time work
c. Many people in the working-age population attend school and are
unemployed
d. People are making transitions through the stages of life and businesses are
making transitions
Answer: d)
5.2 Review Quiz 2 (algo)
Define frictional unemployment, structural unemployment, and cyclical
unemployment. Give examples of each type of unemployment.
1. Frictional unemployment is ___. An example of frictional unemployment is
____.
a. The unemployment that arises from normal labour turnover - from people
entering and leaving the labour force and from the ongoing creation and
destruction of jobs; new college graduates looking for work.
b. The unemployment that arises from normal labour turnover - from people
entering and leaving the labour force and from the ongoing creation and
destruction of jobs; an autoworker who loses his job because the automaker
moved production to Mexico.
c. The unemployment that arises when changes in technology or international
competition change the skills needed to perform jobs or change the location
of jobs; coal miners who are unemployed because new technology makes
other types of energy cheaper and more accessible
d. the higher than normal unemployment at a business cycle trough and the
lower the normal unemployment at a business cycle peak; a ski instructor
who loses his job during the summer
Answer: a)
2. Structural unemployment is ___. An example of structural unemployment is
___.
a. The unemployment that arises from normal labour turnover - from people
entering and leaving the labour force and from the ongoing creation and
destruction of jobs; an autoworker who loses his job because the automaker
moved production to Mexico.
b. The unemployment that arises when changes in technology or international
competition change the skills needed to perform jobs or change the locations
of jobs; coal miners who are unemployed because new technology makes
other types of energy cheaper and more accessible
c. The unemployment that arises when changes in technology or international
competition change the skills needed to perform jobs or change the locations
of jobs; older workers who leave the labour force rather than learn new skills.
d. The higher than normal unemployment at a business cycle trough and the
lower the normal unemployment at a business cycle peak; a ski instructor
who loses his job during the summer
Answer: b)
3. Cyclical unemployment is ___. An example of cyclical unemployment is ___.
a. The higher than normal unemployment at a business cycle trough and the
lower the normal unemployment at a business cycle peak; a ski instructor
who loses his job during the summer.
b. The unemployment that arises at full employment; an artist who paints but
has no success selling her paintings
c. A combination of structural unemployment and frictional unemployment; coal
miners who are unemployed because new technology has made other types
of energy cheaper and more accessible
d. The higher than normal unemployment at a business cycle trough and the
lower the normal unemployment at a business cycle peak; a restaurant
worker who loses her job because of a downturn in the economy.
Answer: d)
5.2 Review Quiz 3 (algo)
What is the natural unemployment rate?
1. The natural unemployment rate is ___.
a. Zero percent when an economy is experiencing a business cycle peak
b. The unemployment rate when the economy is in an expansion
c. The unemployment rate when the economy is at full employment
d. The unemployment rate when all unemployment is cyclical
Answer: c)
5.2 Review Quiz 4 (algo)
How does the natural unemployment rate change and what factors might make it
change?
1. The natural unemployment rate ___.
a. Changes with the business cycle
b. Constantly increases as technology moves jobs from labour to capital
c. Changes as frictions and structural change occur in the economy
d. Does not change. It remains constant until recalculated by Statistics Canada
Answer: c)
2. The factors that might make the natural unemployment rate change include
___.
a. The scale of structural change, the flow of labour between provinces, the
output gap, and unemployment benefits
b. The age distribution of the population, the output gap, the actual
unemployment rate, and the real wage rate
c. The actual unemployment rate, the scale of structural change, the nominal
wage rate, and unemployment benefits
d. The age distribution of the population, the scale of structural change, the real
wage rate, and unemployment benefits
Answer: d)
5.2 Review Quiz 5 (static)
Why is the un employment rate never zero, even at full employment?
1. The unemployment rate is never zero, even at full employment because ___.
a. People make lifestyle choices such as early retirements, gap years, and
movements from high-stress to low-stress jobs
b. There are always new workers entering the labour market to search for work,
workers leaving one job to search for another job, and workers who have
been laid off and are searching for another job
c. Cyclical unemployment is always present in the economy
d. There are always people without jobs because of family responsibilities such
as caring for children or elderly parents
Answer: b)
5.2 Review Quiz 6 (static)
What is the output gap? How does it change when the economy goes into recession?
1. The output gap is the gap between ___.
a. Real GDP and nominal GDP
b. Real GDP and potential GDP
c. Nominal GDP and potential GDP
d. The actual unemployment rate and the natural unemployment rate
Answer: b)
2. When the economy goes into recession, the output gap is ___.
a. Greater than the natural unemployment rate
b. Negative
c. Positive
d. Zero
Answer: b)
5.2 Study Plan Problem 6 (static)
1. If the labour market is working properly, unemployment continues to exist
because ___.
a. The baby boomers are moving into retirement
b. There are always new workers entering the labour market to search for work,
workers leaving one job to search for another, and laid-off workers searching
for employment
c. Younger people in the working-age population remain in school
d. There are always discouraged searchers
Answer: b)
5.2 Study Plan Problem 7 (static)
How would a government-funded skills training program influence frictional,
structural, and cyclical unemployment?
1. A government-funded skills training program would ___.
a. Decrease structural and frictional unemployment and have no effect on
cyclical unemployment
b. Decrease all types of unemployment
c. Decrease structural unemployment, increase frictional unemployment and
have not effect on cyclical unemployment
d. Have no effect on any type of unemployment
Answer: a)
5.2 Extra Problem 1 (static)
1. The 5 million workers who cannot find jobs because of mismatching in the
labour market are counted as part of the economy’s ___ unemployment
because ___.
a. Structural; there is a mismatch between their skills and the skills required for
their available jobs
b. Cyclical; there is a mismatch between their skills and the skills required for
their available jobs
c. Structural; the economy is rebounding from a recession
d. Cyclical; the economy is rebounding from a recession
Answer: a)
5.2 Extra Problem 2 (static)
1. If the labour market is working properly, unemployment continues to exist
because ___.
a. The baby boomers are moving into retirement
b. There are always discouraged searchers
c. Younger people in the working-age population remain in school
d. There are always new workers entering the labour market to search for work,
workers leaving one job to search for another, and laid-off workers searching
for employment
Answer: d)
5.3 Key Term Quiz (static)
1. The price level is the ___.
a. Average level of prices
b. Percentage change in prices
c. Sum of all prices
d. Value of money
Answer: a)
2. The inflation rate is the percentage change in the ___ from one year to the next.
Deflation is a situation in which the ___ is ___ and the inflation rate is ___.
a. Interest rate; interest rate; falling; negative
b. Interest rate; interest rate; rising; positive
c. Price level; price level; falling; negative
d. Price level; input cost; rising; positive
Answer: c)
3. Hyperinflation is an inflation rate of ___ or higher that grinds the economy to a
halt and causes a society to collapse
a. 20 percent a month
b. 20 percent a year
c. 50 percent a year
d. 50 percent a month
Answer: d)
4. The Consumer Price Index is a measure of the ___ of the prices paid by ___
consumers for a fixed market basket of consumption goods and services
a.
b.
c.
d.
Sum; urban
Average; urban
Sum; rural
Average; rich
Answer: b)
5. The core inflation rate is ___.
a. Another name for the CPI inflation rate
b. The inflation rate excluding volatile elements
c. The inflation rate including food and fuel
d. The inflation rate including domestically priced fuel but excluding
internationally produced fuel
Answer: b)
5.3 Review Quiz 1 (static)
What is the price level?
1. The price level is ___.
a. The average level of prices paid by urban consumers
b. Equal to the inflation rate
c. The average level of prices
d. The average level of prices paid by urban consumers for all goods excluding
food and energy
Answer: c)
5.3 Review Quiz 2 (static)
What is the CPI and how is it calculated?
1. The CPI is a ___.
a. Measure of the price level of all goods and services that are counted as part
of GDP
b. Measure of the average of the prices paid by urban consumers for a fixed
basket of consumer goods and services
c. Measure of inflation
d. List of the items that an average urban household buys and the percentage
weight of total expenditure given to each item
Answer: b)
2. CPI = ___.
a. (Cost of CPI basket at base-period prices / Cost of CPI basket at currentperiod prices) x 100
b. [(Cost of CPI basket at base-period prices - Cost of CPI basket at currentperiod prices) / Cost of CPI basket at current-period prices] x 100
c. [(Cost of CPI basket at current-period prices - Cost of CPI basket at baseperiod prices) / Cost of CPI basket at current-period prices] x 100
d. (Cost of CPI basket at current-period prices / Cost of CPI basket at baseperiod prices) x 100
Answer: d)
5.3 Review Quiz 3 (algo)
How do we calculate the inflation rate and what is its relationship with the CPI?
1. The inflation rate is calculated as ___.
a. [(CPI this year - CPI in the base year) / CPI in the base year] x 100
b. [(CPI in the base year - CPI last year) / CPI this year] x 100
c. [(CPI this year - CPI last year) / CPI this year] x 100
d. [(CPI this year - CPI last year) / CPI last year] x 100
Answer: d)
2. When the CPI ___.
a. Rises slowly, the inflation rate is low
b. Is constant, the inflation rate is negative
c. Rises slowly, the inflation rate is negative
d. Falls, the inflation rate is positive and low
Answer: a)
3. The CPI in 2013 was 122.8. The CPI in 2014 was 125.2
a. The Inflation rate in 2014 was __ percent.
[(CPI this year - CPI last year) / CPI last year] x 100
[(125.2 - 122.8) / 122.8] x 100
2.0
5.3 Review Quiz 4 (algo)
What are the four main ways in which the CPI is an upward-biased measure of the
price level?
1. The four main ways in which the CPI is an upward-biased measure of the price
level are through ____.
a. The new goods bias, the quality change bias, the commodity substitution
bias, and the outlet substitution bias
b. Sales taxes, subsidies, quotas, and vouchers
c. The intermediate goods bias, the bricks-and-mortar bias, the online bias, and
the quality change bias
d. Differences in wholesale and retail prices, differences in domestic and
international prices, differences among various supply chain costs, and
differences among wage rates in different states
Answer: a)
2. Choose the correct statement
a. The CPI calculation assumes that everyone shops at discount stores and no
one shops at convenience stores
b. Changes in relative prices lead consumers to change the items they buy, and
the CPI reflects this substitution
c. The outlet substitution bias injects an upward bias into the CPI
d. When the quality of a good improves over time, the CPI does not include the
portion of the price rise attributable to the higher quality in its calculation
Answer: c)
5.3 Review Quiz 5 (algo)
What problems arise from the CPI bias?
1. Choose the correct statement
a. The bias in the CPI distorts private contracts
b. A wage contract linked to the CPI gives the workers less real income than the
firm intended
c. The bias in the CPI eliminates the need for people to shop in discount stores
d. The CPI bias decreases government expenditure on programs that help
poorer Canadias
Answer: a)
5.3 Review Quiz 6 (static)
What are the alternative measures of the price level and how do they address the
problem of bias in the CPI?
1. The two price indexes that are alternatives to the CPI are ___.
a. The chained price index for consumption and the core GDP deflator
b. The chained price index for consumption and the GDP deflator
c. The chained price index for consumption and the core inflation rate
d. The GDP deflator and the core inflation rate
Answer: b)
2. The chained price index for consumption ___.
a. Overcomes the sources of bias in the CPI by incorporating substitution and
new goods and using current and previous period quantities
b. Does not overcome the sources of bias in the CPI
c. Overcomes the sources of bias in the CPI by eliminating measures of the
goods and services with the most volatile prices
d. Overcomes the sources of bias in the CPI by giving extra weight to the
measure of the goods and services with the most volatile prices
Answers: a)
5.3 Study Plan Problem 8 (algo)
1. The CPI basket __ _____ and ___ ______
a. 34 / 2 = 17
b. Bottles of juice
c. 40 / 8 = 5
d. Yards of cloth
2. The percentage of the household’s budget spent on juice in 2013 is ___
percent
a. (34 / 74 ) x 100 = 45.9
5.3 Study Plan Problem 9 (algo)
1. The CPI in 2014 is ___.
CPI = [(Cost of CPI basket in 2014 prices) / (Cost of CPI basket in base period
prices)] x 100
CPI = [($4 x 30) + ($6 x 6)] / [($2 x 30) + ($5 x 6)] x 100 = 173.3
2. The inflation rate in 2014 is ___ percent.
Inflation Rate in 2014 = [(CPI in 2014 - CPI in 2013) / CPI in 2013] x 100
= [(173.3 - 100) / 100] x 100
= 73.3
5.3 Study Plan Problem 10 (algo)
The table shows three years of CPI data for Borduria. Calculate the inflation rate for
the year ended December 2015 and for the year ended December 2016. How did the
inflation rate change in 2016?
1. The inflation rate for the year ended December 2015 is ___ percent.
Inflation Rate in 2015 = [(CPI in 2015 - CPI in 2014) / CPI in 2014] x 100
= [(189.7 - 183.7) / 183.7] x 100
= 3.3
2. The inflation rate for the year ended December 2016 is ___ percent.
Inflation Rate in 2016 = [(CPI in 2016 - CPI in 2015) / CPI in 2015] x 100
= [(194.5 - 189.7) / 189.7] x 100
= 2.5
3. Between December 2015 and December 2016, inflation ____
a. Increase
b. Decreased
c. Stayed the same
Answer: b)
5.3 Study Plan Problem 11 (algo)
The table shows three years of CPI data. Why might these CPI numbers be biased?
How can alternative price indexes avoid this bias?
1. The bias in these CPI numbers might arise from ___.
a. New goods bias only
b. New goods bias, quality change bias, commodity substitution bias, and outlet
substitution bias
c. New goods bias and quality change bias only
d. Commodity substitution bias and outlet substitution bias only
Answer: b)
2. Alternative price indexes can avoid the bias by ____.
a. Including intermediate goods and used goods
b. Including new housing and housing built in prior years
c. Using current and previous period quantities
d. Using a smaller basket of goods and services
Answer: c)
5.3 Extra Problem 1 (static)
1. Inflation ____ the real wage rate, everything else remaining the same because
____.
a. Does not change; wage rates are determined independently of the price
b. Lowers; the real wage rate is calculated as (nominal wage rate / CPI) x 100
c. Sometimes lowers and sometimes raises; the real wage rate moves in cycle
with the inflation rate
d. Raises; the real wage rate is calculated as (nominal wage rate x CPI) / 100
Answer: b)
2. People are more likely to accept a real wage cut that arises from an increase in
the price level than a cut in their nominal wage rate because ___.
a. Inflation decreases the real wage rate gradually and a cut in the nominal
wage decreases the real wage rate suddenly
b. Workers will quit before they will accept a cut in their nominal wage rate
c. A cut in the real wage rate does not change the quantity of goods and
services a worker can buy but a cut in the nominal wage rate does change
the quantity of goods and services a worker can buy
d. A cut in the nominal wage rate comes from a management and a cut in the
real wage rate comes from government
Answer: a)
5.3 Extra Problem 3 (static)
1. On a year-over-year basis, the CPI inflation rate ____ and the core CPI inflation
rate ___ in the 12 months to July 2011.
a. Rose; rose
b. Fell; fell
c. Rose; fell
d. Fell; rose
Answer: b)
2. Core CPI is a useful measure because ____. Core CPI is a misleading measure
because ____.
a. It smooths out short-term jumps in the CPI inflation rate; it is lower than CPI
inflation
b. It places greater emphasis on housing and fuel prices; it is higher than CPI
inflation
c. It smooths out short-term fluctuations that arise from the volatility in food and
fuel prices; it does not include food and fuel prices price rises
d. It places greater emphasis on food and housing prices; it is lower than CPI
inflation
Answer: c)
Quiz 2 (Chapter 6 and 7)
6.1 Key Term Quiz (static)
1. Economic growth is the ___.
a. Expansion of production possibilities
b. Expansion of consumption possibilities
c. Increase in real GDP
d. Decrease in real GDP
Answer: a)
2. The growth rate is the ___ of a variable - the change in the level expressed as
a percentage of the initial level
a. Increase or decrease
b. Change in the level
c. Daily percentage change
d. Annual percentage change
Answer: d)
3. Real GDP per person is real GDP ___.
a. Multiplied by the population
b. Divided by the total labour hours
c. Divided by aggregate demand
d. Divided by the population
Answer: d)
4. The rule of 70 is the number of years it takes for the level of any variable to
double. It is approximately 70 ___ by the annual percentage ___.
a. Multiplied; growth rate of the variable
b. Divided; inflation rate
c. Multiplied; interest rate
d. Divided; growth rate of the variable
Answer: d)
6.1 Review Quiz 1 (Static)
What is economic growth and how do we calculate its rate?
1. Economic growth is ___.
a. The annual percentage change in the quantity of money
b. The expansion of production possibilities
c. The return to full employment in an expansion phase of the business cycle
d. The annual percentage change in labour productivity
Answer: b)
2. Growth rates are calculated in a similar manner for all variables. Real GDP
growth rate = [(Real GDP in ___ year - Real GDP in ___ year) / Real GDP in ___
year] x 100.
a. Current; previous; current
b. Previous; current; current
c. Current; previous; previous
d. Previous; current; previous
Answer: c)
6.1 Review Quiz 2 (Static)
What is the relationship between the growth rate of real GDP and the growth rate of
real GDP per person?
1. The growth rate of real GDP per person ___.
a. Tells us about changes in the standard of living and the growth rate of real
GDP tells us how rapidly the total economy is expanding
b. Is calculated by multiplying the growth rate of real GDP by the growth rate of
the population
c. Tells us how rapidly the total economy is expanding and the growth rate of
real GDP tells us about changes in the standard of living
d. Is calculated by dividing the growth rate of real GDP by the growth rate of the
population
Answer: a)
6.1 Review Quiz 3 (static)
Use the Rule of 70 to calculate the growth rate that leads to a doubling of real GDP per
person in 20 years.
1. The Rule of 70 states that the number of years it takes for the level of any
variable to ____ is approximately ____
a. Double; 70 divided by the annual percentage growth rate of the variable
b. Increase by a factor of 70; 1/70 multiplied by the annual percentage growth
rate of the variable
c. Double; 70 multiplied by the annual percentage growth rate of the variable
d. Increase by a factor of 70; 70 divided by the annual percentage growth rate of
the variable
Answer: a)
2. If real GDP per person doubles in 20 years, then the annual growth rate of real
GDP per person is ___ percent a year.
a. 14.3
b. 14.0
c. 3.5
d. 28.5
Answer: c)
6.1 Study Plan Problem 1 (algo)
1. The growth rate of real GDP in Singapore in 2015 was ___ percent
Growth Rate in 2015 = [(Real GDP in current year - Real GDP in previous year) /
Real GDP in previous year] x 100.
= [(394 - 369) / 369] x 100
= 6.8
2. The growth rate of real GDP per person in Singapore in 2015 was ___ percent
Growth Rate of Real GDP per Person in 2015 = Growth Rate in 2015 / Population
Growth Rate
= 6.8 / 1.2
= 5.7
3. The approximate number of years it takes for real GDP per person in Singapore
to double if the 2015 growth rate of real GDP and population growth rate are
maintained is ____.
Rule of 70 = 70 / Annual Percentage Growth Rate
= 70 / 5.7
= 12 or 13
6.1 Study Plan Problem 2 (static)
1. By maintaining their current growth rates, ___ will be the first to double its
standard of living, and that will occur in ___.
a. China; 5.5
b. India; 11.1 years
c. India; 6.3
d. China; 12.7
Answer: b)
6.1 Extra Problem 1 (static)
1. The increase in the growth rate of real GDP per person from 2.2 percent per
year to 8.7 percent per year is a ____. The 11.3 percent increase in 2009 is a
___.
a. Rise in China’s economic growth rate; rise in China’s economic growth rate
b. Measurement error; measurement error
c. Rise in China’s economic growth rate; temporary cyclical expansion
d. Temporary cyclical expansion; temporary cyclical expansion
Answer: c)
2. At the current trend growth rate, it will take China ___ years to double its real
GDP per person.
Rule of 70 = 70 / 8.7
=8
6.2 Review Quiz 1 (static)
What has been the average growth rate of Canadian real GDP per person over the
past 90 years? In which periods was growth most rapid and in which periods was it
slowest?
1. Calculated over the past 90 years, the average growth rate of Canadian real
GDP per person is ___ percent.
It has been 2 percent for the past 90 years.
2. Growth was most rapid during the ___ and slowest during the ___.
a. 1960s; 2000s
b. 1970s; 1980s
c. 1990s; 1970s
d. 1960s; Great Depression and the 1980s
Answer: d)
6.3 Key Term Quiz (static)
1. The aggregate production function is a relationship that tells us how ___
changes as the quantity of ___ changes when all other influences on
production remain the same
a. Capital; labour
b. Real GDP; capital
c. Output; investment
d. Real GDP; labour
Answer: d)
2. The real wage rate is $___ when the money wage rate is $2000 and the price
level is $25
a. 1075
b. 45
c. 80
d. 25
Answer: c) 2000 / 25 = 80
3. If real GDP is $1,000,000, exports are $200,000, imports are $300,000, and
aggregate labour hours are 100,000, labour productivity is ___.
a. $2 per hour
b. $11 per hour
c. $3 per hour
d. $10 per hour
Answer: d) $1,000,000 / 100,000 = $10 per hour
6.3 Review Quiz 1 (static)
What is the aggregate production function?
1. The aggregate production function is the relationship that tells us ___, when all
other influences on production remain the same
a. How real GDP changes as the quantity of leisure changes
b. How real GDP changes as the quantity of labour changes
c. How the real wage rate changes as the quantity of labour changes
d. How potential GDP changes as the labour market moves from surplus or
shortage to equilibrium
Answer: b)
6.3 Review Quiz 2 (static)
What determines the demand for labour, the supply of labour, and labour market
equilibrium?
1. The demand for labour is the relationship between the quantity of labour
demanded and the ____. The supply of labour is the relationship between the
quantity of labour supplied and the ____.
a. Money wage rate; money wage rate
b. Nominal interest rate; nominal interest rate
c. Real wage rate; real wage rate
d. Real interest rate; real interest rate
Answer: c)
2. The quantity of labour demanded is the number of labour hours ___ during a
given period. The quantity of labour supplied is the number of labour hours
___ during a given period.
a. That firms are willing to hire at a minimum wage rate; that all the households
in the economy are willing to work at a minimum wage rate
b. That all households in the economy are willing to work; that all the firms in the
economy are willing to hire
c. Hired by all the firms in the economy; that all the households in the economy
plan to work
d. That produce the desired quantity of real GDP; that firms hire to produce the
desired quantity of real GDP
Answer: c)
3. Labour market equilibrium occurs ___.
a. When there is zero unemployment
b. At the real wage rate at which the quantity of labour demanded equals the
quantity of labour
c. At the nominal wage rate at which the quantity of labour demanded equals
the quantity of labour supplied
d. When the demand for labour is maximized
Answer: b)
6.3 Review Quiz 3 (static)
What determines potential GDP?
1. Potential GDP is determined by ____
a. The demand for labour
b. The supply of labour
c. Labour productivity
d. The full-employment quantity of labour
Answer: d)
6.3 Review Quiz 4 (static)
What are the two broad sources of potential GDP growth?
1. The two broad sources of potential GDP growth are growth of ___ and growth
of ___.
a. The supply of labour; labour productivity
b. Government; the private sector
c. Exports; imports
d. Corporations; private firms
Answer: a)
6.3 Review Quiz 5 (static)
What are the effects of an increase in the population GDP, the quantity of labour, the
real wage rate, and potential GDP per hour of labour??
1. An increase in the population ___ the real wage rate and ___ the equilibrium
quantity of labour.
a.
b.
c.
d.
Increases; increases
Increases;increases
Decreases; increases
Decreases; increases
Answer: c)
2. Potential GDP ___ and potential GDP per hour of labour
a. Increases; decreases
b. Increases; increases
c. Increases; increases
d. Decreases; decreases
Answer: a)
6.3 Review Quiz 6 (static)
What are the effects of an increase in labour productivity on potential GDP, the
quantity of labour, the real wage rate, and potential GDP per hour of labour?
1. An increase in labour productivity ___ potential GDP and ___ potential GDP per
hour of labour.
a. Decreases; increases
b. Increases; increases
c. Increases; decreases
d. Decreases; decreases
Answer: b)
2. An increase in labour productivity ___ the real wage rate and ___ the
equilibrium quantity of labour
a. Increases; decreases
b. Increases; increases
c. Decreases; increases
d. Decreases; decreases
Answer: b)
6.3 Study Plan Problem 5 (algo)
The tables describe an economy’s labour market and its production function in 2017.
In 2017, what are the equilibrium real wage rate, the quantity of labour employed,
labour productivity, and potential GDP?
1. The equilibrium real wage rate is $___ an hour
a. 40
2. The quantity of labour employed is ___ hours
a. 125
3. Potential GDP is $___.
a. 8125
4. Labour productivity is $___ per hour of labour
a. 8125 / 125 = 65
6.3 Extra Problem 3 (static)
1. The article defines productivity as ___. Real GDP per person is____.
a. Real GDP divided by the population; GDP divided by the number of people
employed
b. The quantity of real GDP produced by an hour of labour; real GDP divided by
the population
c. GDP divided by the number of people employed; real GDP divided by the
population
d. Real GDP divided by the population; the quantity of real GDP produced by an
hour of labour
Answer: c)
6.3 Extra Problem 4 (static)
1. Choose the correct statement
a. The level of productivity is the same as the growth rate of productivity
b. As the level of productivity increases, the growth rate of productivity also
increases
c. Changing the number of hours employed has no effect on either the level of
productivity or the growth of productivity. Productivity is determined by capital
accumulation and technological change
d. Changing the number of hours employed changes the level of productivity,
but it does not change the growth of productivity
Answer: d)
6.3 Extra Problem 5 (static)
1. Workers in developing Asian economies who work more hours than Americans
are not the world’s most productive workers because ____.
a. Productivity depends on how much real GDP each hour of labour can
produce
b. Firms that produce in developing Asian economies have smaller profits than
firms that produce in the United States
c. The extra hours worked by people in the developing Asian economies bring
diminishing returns
d. Americans are paid more than workers in the developing Asian economies
Answer: a)
6.3 Extra Problem 6 (static)
1. An increase in labour productivity ____. A decrease in labour productivity
____.
a. Has no effect on the labour market; has no effect on the labour market
b. Increases the demand for labour; decreases the demand for labour
c. Increases the supply of labour; decreases the supply of labour
d. Increases the demand for labour and the supply of labour; decreases the
demand for labour and the supply of labour
Answer: b)
2. An increase in labour productivity _____ employment and ____ real GDP.
a. Decreases; increases
b. Increases; has no effect
c. Does not change; has no effect
d. Increases; increases
Answer: d)
3. The graph shows the production function. Show the effect of an increase in
labour productivity. Draw either a new production function labelled PF1 or an
arrow along the existing production function.
7.1 Key Term Quiz (static)
1. Which of the following is an example of financial capital?
a. Subway uses convection bread ovens
b. The Bank of Canada has raised the overnight loans rate by 0.25 percent
c. Maggie has bought a new HDTV
d. Rachel has taken a loan to buy a new home
Answer: d)
2. Using a government grant of $150,000, a research lab buys equipment for
$75,000 that has depreciated by $11,000 after two years. Calculate gross
investment and net investment
a. $150,000; $139,000
b. $64,000; $75,000
c. $150,000; $86,000
d. $75,000; $64,0000
Answer: d)
3. Wealth is the value of all the things that people ___.
a. Save
b. Spend
c. Demand
d. Own
Answer: d)
4. Saving is the amount of income that is ___ in net taxes or spent on ____ goods
and services.
a. Not paid; consumption
b. Not paid; capital
c. Paid; capital
d. Paid; consumption
Answer: a)
5. A mortgage is a legal contract that gives ownership of a ____ to the ____ in the
event that the ____ fails to meet the agreed loan payments (repayments and
interest)
a. Home; borrower; lender
b. Car; lender; borrower
c. Home; lender; borrower
d. Car; borrower; lender
Answer: c)
6. A bond is a promise to pay ___ sums of money on ____ dates.
a. Large; specified
b. Specified; specified
c. Large; current
d. Specified; future
Answer: b)
7. Bonds issued by ___ are traded in the bond market.
a. Commercial banks
b. Firms and households
c. Governments
d. Firms and governments
Answer: d)
8. A type of ____ is a mortgage-backed security, which entitles ____ to the
income from a package of mortgages.
a. A stock; its holder
b. A bond; its holder
c. A bond; the government
d. A stock; the government
Answer: b)
9. A stock is a certificate of ____ and claims to the ____ that a firm makes.
a. Saving; profits
b. Ownership; profits
c. Secured loan; revenues
d. Deposit; loans
Answer: b)
10. A stock market is a financial market in which shares of stocks of ___ are
traded.
a. Corporations
b. Central banks
c. Retail banks
d. Government
Answer: a)
11. A financial institution is a firm that operates on both sides of the markets for
___: It _____ in one market and ____ in another.
a. Investment; buys; sells
b. Profits; earns; spends
c. Financial capital; borrows; lends
d. Loans; lends; saves
Answer: c)
12. Net worth is the total market value of what a financial institution has ____
minus the market value of what it has ___.
a. Spent; earned
b. Lent; borrowed
c. Earned; saved
d. Lent; spent
Answer: b)
13. The loanable funds market is the aggregate of all the individual ___ markets.
a. Labour
b. Financial
c. Auction
d. Commodity
Answer: b)
14. Net taxes are paid to the government minus ____.
a. Consumption expenditure of households
b. Subsidies
c. The cash transfers received from government
d. Capital expenditures
Answer: c)
15. The sum of ____ is called national saving
a. Private investment and government saving
b. Consumption spending and household saving
c. Government budget surplus and subsidies
d. Private saving and government saving
Answer: d)
16. If the annual interest paid on a $500 loan is $25, the nominal interest rate is ___
percent per year. If the nominal interest rate is 5 percent per year and the
inflation rate is 2 percent a year, the real interest rate is ____ percent per year
a. 4; 4
b. 5; 3
c. 3; 5
d. 5; 7
Answer: b) (25/500)x100 = 5%, 5-2=3
7.1 Review Quiz (static)
Distinguish between physical capital and financial capital and give two examples of
each.
1. Physical capital is ____. Financial capital is ____.
a. Money in the bank or in the ATM; the stocks that can be purchased on the
stock market and the bonds that can be purchased on the bond market
b. Inventories of raw materials and semi finished goods; the tools, instruments,
machines, buildings, and other items that have been produced in the past and
that are used today to produce goods and services
c. The tools, instruments, machines, buildings, and other items that have been
produced in the past and that are used today to produce goods and services;
the funds that firms use to buy physical capital
d. The stocks that can be purchased on the stock market and the bonds that can
be purchased on the bond market; money in the bank
Answer: c)
2. Examples of physical capital are ___. Examples of financial capital are ____.
a. Bonds issued by CN Railways and stocks issued by Bombardier; the $20 in
your pocket
b. $20 in the ATM; bonds issued by CN Railways and stocks issued by
Bombardier
c. Inventories of steel and glass at Bombardier; the $20 in your pocket
d. Ovens used by Pizza Hut and lawn mowers used by Larry’s Mowing; bonds
issued by CN Railways and stocks issued by Bombardier
Answer: d)
7.1 Review Quiz 2 (static)
What is the distinction between gross investment and net investment?
1. Gross investment is ____. Net investment is ____
a. Net investment minus depreciation; gross investment plus depreciation
b. The total amount spent on new capital; the change in the value of capital
c. Depreciation minus net investment; depreciation minus gross investment
d. The change in the value of capital; the total amount spent on new capital
Answer: b)
7.1 Review Quiz 3 (static)
What are the three main types of markets for financial capital?
1. The three main types of markets for financial capital are ____.
a. Loan markets, bond markets, and commercial banks
b. Bond markets, stock markets, and commercial banks
c. Investment banks, commercial banks, and insurance companies
d. Loan markets, bond markets, and stock markets
Answer: d)
7.1 Review Quiz 4 (static)
1. Explain the connection between the price of a financial asset and its interest
rate
a. When the price of a financial asset arises, the interest rate falls, everything
else remaining the same
b. Asset prices are constantly rising and interest rates rise and fall depending on
the business cycle
c. A rising interest rate increases the value of a financial asset and increases its
price
d. The relationship between interest rates and asset prices is a causal
relationship
Answer: a)
7.1 Review Quiz 5 (static)
Explain why the real interest rate is the opportunity cost of loanable funds.
1. The real interest rate is the opportunity cost of loanable funds because ____.
a. The real interest paid on borrowed funds is the opportunity cost of borrowing
and the real interest rate forgone is the opportunity cost of not saving or not
lending those funds
b. Although the nominal interest rate is the interest rate forgone when a lender
does not lend the funds, the borrower pays the real interest rate on borrowed
funds
c. The real interest is the number of dollars that the borrower gives up when she
takes a loan
d. When a consumer takes a loan, the interest rate quoted by the bank is the
real interest rate
Answer: a)
Worked Problem Parts 1 and 2 (static)
Use the (approximate) facts on the right about the U.S. economy to answer the
following questions
1. What was the inflation rate in 2005 and 2000? How do you know? The inflation
rates in 2005 and 2009 were ___ because the inflation rate equals ___.
a. 3 percent and 0 percent respectively; the real interest rate minus the nominal
interest rate
b. 3 percent and 0 percent respectively; the nominal interest rate minus the real
interest rate
c. -3 percent and 0 percent respectively; the real interest rate minus the nominal
interest rate
d. 7 percent and 10 percent respectively; the sum of the real interest rate and
the nominal interest rate
Answer: b) the nominal interest rate - the real interest rate = inflation rate
2. What happened to the price of a bond between 2005 and 2009? How do you
know? The price of a bond ___ between 2005 and 2009 because the ___.
a. Rose; real interest rate increased
b. Rose; nominal interest rate increased
c. Dropped; inflation rate declined
d. Remained unchanged; nominal interest rate remained unchanged
Answer: d)
7.1 Study Plan Problem 1 (algo)
1. Michael’s gross investment during 2017 was $___
$300,000
2. Michael’s depreciation during 2017 was $___
$100,000
3. Michael’s net investment during 2017 was $____
$200,000 (Gross Investment - Depreciation)
7.1 Study Plan Problem 2 (algo)
1. The value of Michael’s capital at the end of 2018 is $___
$200,000 + $200,000 = $400,000
7.1 Study Plan Problem 4 (static)
1. What does the news clip mean by “underperformance”? By
“underperformance” the news clip means that ____
a. Investment advisors are doing a poor job at advising their clients
b. The price of the fund is lower than expected
c. Interest rates are rising but at a lower rate than expected
d. The increase in popularity of certain funds increases their supply and lowers
their price
Answer: b)
2. Why might it be smart to avoid some bonds if interest rates are about to rise? It
might be smart because ____.
a. Interest rates and bond prices move in opposite directions
b. When interest rates rise, bond prices fall and bond yields decrease
c. Rising interest rates make m=bond prices unpredictable
d. It is safer to hold stocks
Answer: a)
7.1 Extra Problem 1 (static)
1. The purchase of corporate equities is part of ___. Corporate equities are not
part of ____.
a. Household consumption; saving because the value of corporate equities
changes frequently
b. Saving; household consumption because corporate equities are often
investment in intermediate goods and services
c. Household consumption; saving because corporate equities can be held by
foreigners
d. Saving; household consumption because they cannot be consumed
Answer: d)
2. Corporate equities ___ investment because ____
a. Are not; corporate equities cannot depreciate
b. Are; investment is the purchase of physical capital and financial capital
c. Are not; investment is the purchase of physical capital
d. Are; corporate equities are financial capital used to purchase physical capital
Answer: c)
7.2 Key Term Quiz (static)
1. The loanable funds market is the aggregate of all the individual ___ markets.
a. Auction
b. Financial
c. Labour
d. Commodity
Answer: b)
2. The demand for loanable funds is the relationship between ____ demanded
and the ____ when all other influences on borrowing plans remain the same
a. The quantity of loanable funds; real interest rate
b. Loanable funds; real interest rate
c. The quantity of capital; real interest rate
d. Loanable funds; real wage rate
Answer: a)
3. The supply of loanable funds is the relationship between ___ supplied and the
___ when all other influences on lending plans remain the same
a.
b.
c.
d.
Loanable funds; real interest rate
The quantity of loanable funds; real interest rate
Loanable funds; real wage rate
The quantity of capital; real interest rate
Answer: b)
4. Default risk is the risk that ____.
a. Research and development dollars invested by a pharmaceutical firm will not
result in a profitable drug
b. A publicly traded firm will go bankrupt
c. A catastrophic event will eliminate a crop
d. A loan will not be repaid.
Answer: d)
7.2 Review Quiz 1 (static)
What is the loanable funds market?
1. The loanable funds market is ____.
a. The aggregate of all the individual financial markets
b. The aggregate of the bond and stock markets
c. The same as the loan market
d. The market set up by banks to provide loans to households and businesses
Answer: a)
7.2 Review Quiz 2 (static)
How do firms make investment decisions?
1. Firms make investment decisions by ___.
a. Comparing the expected profit in an expansion with the expected profit in a
recession, and making the investment if the difference in expected profit over
the business cycle is a relatively stable
b. Comparing the expected profit with the nominal interest rate and making the
investment if the project has a positive net present value
c. Approaching financial institutions to determine if they are willing to lend the
necessary funds
d. Comparing the expected profit with the real interest rate and making the
investment if the project has a positive net present value
Answer: d)
7.2 Review Quiz 3 (static)
What determines the demand for loanable funds and what makes it change?
1. The demand for loanable funds is determined by ___. The demand for loanable
funds changes when ___ changes.
a. Disposable income and expected future income; disposable income
b. The real interest rate and expected profit; expected profit
c. The real interest rate and expected profit; the real interest rate
d. disposable income and expected future income; expected future income
Answer: b)
7.2 Review Quiz 4 (static)
How do households make saving decisions?
1. The ____, the greater is the amount that a household decides to save.
a. Higher the expected profit and the greater a household’s disposable income
b. Smaller the default risk and the greater a household’s expected future income
c. Greater a household’s disposable income and the smaller a household’s
expected future income
d. Smaller a household’s expected future income and the greater a household’s
wealth
Answer: c)
7.2 Review Quiz 5 (static)
What determines the supply of loanable funds and what makes it change?
1. The supply of loanable funds is determined by the ____. The supply of loanable
funds changes when ____.
a. Demand for loanable funds; the demand for loanable funds changes
b. Decisions of financial institutions; the real interest rate changes
c. Saving decisions of households, which are influenced by the real interest rate,
disposable income, expected future income, wealth, and default risk;
disposable income, expected future income, wealth, or default risk change
d. Saving decisions of households, which are influenced by the real interest rate,
disposable income, expected future income, wealth, and default risk; the real
interest rate changes
Answer: c)
7.2 Review Quiz 5 (static)
How do changes in the demand for and supply of loanable funds change the real
interest rate and quantity of loanable funds?
1. The demand for loanable funds increases and the supply of loanable funds
increases. As a result, the equilibrium real interest rate ____ and the
equilibrium quantity of loanable funds ____.
a. Rises; increases, decreases, or remains the same
b. Rises, falls, or remains the same; increases
c. Falls; increases
d. Falls; decreases
Answer: b)
2. The demand for loanable funds increases and the supply of loanable funds
decreases. As a result, the equilibrium real interest rate ___ and the
equilibrium quantity of loanable funds ____.
a. Rises, falls, or remains the same; increases, decreases, or remains the same
b. Rises; increases, decreases, or remains the same
c. Rises, falls or remains the same; increases
d. Falls; decreases
Answer: b)
7.2 Study Plan Problem 6 (algo)
1. This decrease in expected profit ____ the demand for loanable funds and
brings ___ the demand for loanable funds curve
a. Decreases; both a movement along and a leftward shift of
b. Increases; a rightward shift of
c. Decreases; a movement along
d. Decreases; a leftward shift of
Answer: d)
7.2 Study Plan Problem 7 (algo)
1. The real interest rate is ___ percent a year.
6 percent
2. The quantity of investment is $___ billion, and the quantity of private saving is
$___ billion
7 billion for both
3. If planned saving increases by $0.5 billion at each real interest rate, the real
interest rate equals ___ percent
5.5 percent
4. If planned investment increases by $1 billion at each real interest rate, the real
interest rate equals ___ percent
7 percent
7.3 Key Term Quiz (static)
1. The crowding-out effect is the tendency for a government budget deficit to
raise the ___ and ___ investment.
a. Price level; increase
b. Real interest rate; decrease
c. Real wage rate; decrease
d. Quantity of output; increase
Answer: b)
7.3 Review Quiz 1 (static)
How does a government budget surplus or deficit influence the loanable funds
market?
1. A government budget surplus ___ loanable funds
a. Increases the demand for
b. Increases the supply of
c. Decreases the demand for
d. Decreases the supply of
Answer: b)
2. A government budget surplus ___ the real interest rate, decreases ____.
a. Lowers; private saving, and increases investment
b. Lowers; investment, and increases private saving
c. Raises; investment, and increases private saving
d. Raises; private saving, and increases
Answer: a)
3. A government budget deficit ___ loanable funds.
a. Decreases the supply of
b. Increases the demand for
c. Decreases the demand for
d. Increases the supply of
Answer: b)
4. A government budget deficit ____ the real interest rate, increases ____.
a. Lowers; investment, and decreases private saving
b. Raises; investment, and decreases private saving
c. Lowers; private saving, and decreases investment
d. Raises; private saving, and decreases investment
Answer: d)
7.3 Review Quiz 2 (static)
What is the crowding-out effect and how does it work?
1. The crowding-out effect is the tendency for a government budget deficit to ___
the real interest rate and decrease ___.
a. Raise; investment by the full amount of the government budget deficit
b. Raise; investment
c. Lower; saving
d. Lower; saving by the full amount of the government budget supply
Answer: b)
2. A government budget deficit ___ the real interest rate because ____.
a.
b.
c.
d.
Lowers; the supply of loanable funds increases
Raises; the supply of loanable funds decreases
Lowers; the demand for loanable funds decreases
Raises; the demand for loanable funds increases
Answer: d)
7.3 Review Quiz 3 (static)
What is the Ricardo-Barro effect and how does it modify the crowding effect?
1. According to the Ricardo-Barro effect, when a government budget deficit
occurs today, ___.
a. Saving increases, the supply of loanable funds increases and the real interest
rate does not change
b. The private demand for loanable funds decreases, the DLF curve shifts
leftward, and the real interest does not change
c. The private demand for loanable funds decreases by more than the
government budget deficit, the DLF curve shifts leftward, and the real interest
falls
d. Saving decreases, the supply of loanable funds decreases, and the real
interest rate rises
Answer: a)
Worked Problem (static)
Use the (approximate) facts on the right about the U.S. economy to answer the
following questions.
1. What was the inflation rate in 2005 and 2009? How do you know? The inflation
rates in 2005 and 2009 were ___ because the inflation rate equals ___.
a. 3 percent and 0 percent respectively; the nominal interest rate minus the real
interest rate
b. 7 percent and 10 percent respectively; the sum of the real interest rate and
the nominal interest rate
c. 3 percent and 0 percent respectively; the real interest rate minus the nominal
interest rate
d. -3 percent and 0 percent respectively; the real interest rate minus the nominal
interest rate
Answer; a)
2. What happened to the price of a bond between 2005 and 2009? How do you
know? The price of a bond ___ between 2005 and 2009 because the ___/
a. Remained unchanged; nominal interest rate remained unchanged
b. Rose; the real interest rate increased
c. Rose; nominal interest rate increased
d. Dropped; inflation rate declined
Answer: a)
3. What happened to the demand for loanable funds between 2005 and 2009?
How do you know? Between 2005 and 2009, the government budget deficit
increased, so the demand for loanable funds ___ between 2005 and 2009.
a. Remained unchanged
b. Decreased
c. Increased
Answer: c)
4. Did the change in the government budget deficit crowd out some investment?
The change in the government budget deficit ___ crowd out some investment
because the ___.
a.
b.
c.
d.
Did not; nominal interest rate remained unchanged
Did; real interest rate fell
Did; real interest rate rose
Did not; inflation rate remained unchanged
Answer: c)
5. What happened to the quantity of saving and investment? The quantity of
saving ___ and the quantity of investment ___.
a. Increased; decreased
b. Decreased; did not change
c. Decreased; increased
d. Did not change; increased
Answer: a)
Worked Problem Part 3 (static)
Use the (approximate) facts on the right about the U.S. economy to answer the
following questions.
1. What happened to the demand for loanable funds between 2005 and 2009?
How do you know? Between 2005 and 2009, the government budget deficit
increased, so the demand for loanable funds ___ between 2005 and 2009.
a. Remained unchanged
b. Decreased
c. Increased
Answer: c)
2. Did the change in the government budget deficit crowd out some investment?
The change in the government budget deficit ___ crowd out some investment
because the ___.
a. Did not; nominal interest rate remained unchanged
b. Did; real interest rate fell
c. Did; real interest rate rose
d. Did not; inflation rate remained unchanged
Answer: c)
3. What happened to the quantity of saving and investment? The quantity of
saving ___ and the quantity of investment ___.
a. Increased; decreased
b. Decreased; did not change
c. Decreased; increased
d. Did not change; increased
Answer: a)
7.3 Study Plan Problem 9 (algo)
7.3 Study Plan Problem 10 (algo)
The table sets out the data for an economy when the government's budget is
balanced. The quantity of loanable funds demanded increases by $
2.0 billion at each real interest rate and the quantity of loanable funds supplied
increases by $1.0 billion at each real interest rate. If the government budget remains
balanced, what are the real interest rate, investment, and private saving? Does any
crowding out occur?
1. The real interest rate is ___ percent a year
6
2. Investment is $___ billion, and saving is $___ billion.
9 for both
3. There ____ crowding out in this situation because ____.
a. is;even though investment is $9.0 billion, it could be higher, so there is some
crowding out
b. is no;both saving and investment are $9.0 billion
Answer: b)
Quiz 3 (Ch. 8)
8.1 Key Term Quiz (static)
1. What of the following is money?
a. Jen’s credit card
b. Charlie’s chequing account deposit at the Bank of Montreal
2.
3.
4.
5.
c. Ron’s debit card
d. Paulo’s stash of Bitcoin
Answer: b)
A means of payment is a method of ___ a debt.
a. Creating
b. Settling
c. Paying interest on
d. Transferring
Answer: b)
Currency consists of ___.
a. Notes (dollar bills) and coins
b. Chequing account deposits
c. Governments of Canada bonds
d. Smart cards
Answer: a)
M1 consists of currency held by ___, and ___ owned by individuals and
businesses.
a. Government and businesses; credit cards
b. Individuals and businesses; chequable deposits
c. Businesses and chartered banks; bonds
d. The Bank of Canada and chartered banks; stocks
Answer: b)
M2 consists of ___ plus ___.
a. Fiat money; chequable deposits, and mutual funds
b. M1; debts, long time deposits, and money market funds
c. Regular expenses; mortgages, fixed term deposits, and individual retirement
accounts
d. M1; personal non-chequable deposits, non-personal non-chequable deposits,
and fixed term deposits
Answer: d)
8.1 Review Quiz 1 (algo)
What makes something money? What functions does money perform?
1. Something is money if it is a commodity or token that is generally acceptable
as a ___.
a. Means of payment
b. Store of value
c. Tool in the absence of a double coincidence of wants
d. Unit of account
Answer: a)
2. Money serves the functions of ___.
a. A unit of account, a means of establishing credit, and investment
b. A store of value, a means of barter, and a means of establishing credit
c. A medium of exchange, a means of barter, and a store of value
d. A medium of exchange, a unit of account, and a store of value
Answer: d)
3.
a.
b.
c.
d.
Statements 1 and 2 are correct
Statements 2 and 4 are correct
Statements 1 and 3 are correct
Statements 3 and 4 are correct
Answer: a)
8.1 Review Quiz 2 (static)
What are the problems that arise when a commodity is used as money?
1. Using a commodity as money creates problems because ___.
a. An obligation remains between two parties of a transaction when a
commodity is used to settle a debt
b. A commodity can never serve as a means of payment
c. A commodity is bulky and its value changes over time
d. It is not possible to use a commodity as a unit of account
Answer: c)
8.1 Review Quiz 3 (static)
What are the main components of money in Canada today?
1. The main components of money in Canada today are ___.
a. Bank reserves and deposits at banks and other depository institutions
b. Cheques and credit cards
c. Currency inside banks and outside banks
d. Currency and deposits at banks and other depository institutions
Answer: d)
8.1 Review Quiz 4 (algo)
What are the official measures of money? Are all the measures really money?
1. The two main official measures of money in Canada today are ___. The two
main official measures of money in Canada ___ really money.
a. M2 and M3; are not
b. M1 and currency; are not
c. Currency and M2; are
d. M1 and M2; are
Answer: d)
2. The table shows the amounts held as the various components of M1 and M2
a. The value of M1 is $___ billion
M1 = Currency + Chequable Personal Deposits
= $110 billion + $150 billion
= $260 billion
b. The value of M2 is $___ billion
M2 = M1 + Non-Chequable Personal Deposits + Non-Chequable NonPersonal Deposits + Fixed Term Deposits
= 260 + 300 + 210 + 300
= $1070 billion
8.1 Review Quiz 5 (static)
Why are cheques, debit cards, and credit cards not money?
a. In the short run, cheques and debit cards are money until the transaction is finalized.
In the long run, cheques and debit cards are not money. A credit card is never
money. It is an ID card that allows you to take out a loan
b. Cheques and debit cards are not money. They are instructions to the bank to transfer
money from one account to another. A credit card is not money. It is an ID card that
allows you to take out a loan
c. Debit cards and credit cards are never money because they are not issued by the
Bank of Canada. A cheque is money in the short run before the recipient deposits it
but in the long run a cheque is not money
d. Cheques, debit cards, and credit cards are not currently considered as money.
Eventually economists expect that they will be included as components of M2.
Answer: b)
8.1 Extra Problem 3 (static)
1. As people use text messaging to make payments and transfer money, currency
___ most likely disappears. Most of M1 will be ___
a. Will; fixed term deposits
b. Will not; chequable deposits
c. Will not; fixed term deposits
d. Will; chequable deposits
Answer: b)
8.2 Key Term Quiz (static)
1. A depository institution is a financial firm that takes deposits from ___.
a. Households and firms
b. Households only
c. Governments
d. The Bank of Canada
Answer: a)
2. A chartered bank is a ___ firm, chartered under the ___ of 1991 to receive
deposits and make loans
a. Private; Bank Act
b. Private; Depository Institution Act
c. Public; Competition Act
d. Public; Reserve Act
Answer: a)
3. A depository institution’s reserves are notes and coins in ___ plus its deposit
account at ___.
a. The bank’s vaults; the Bank of Canada
b. Its ATMs; the Bank of Canada
c. The bank’s vaults; Finance Canada
d. The Royal Canadian Mint; Finance Canada
Answer: a)
8.2 Review Quiz 1 (static)
What are depository institutions?
1. A depository institution is a ___
a. Commercial institution that practices 100 percent reserve banking
b. Financial firm that has three types of liabilities - reserves, securities, and
loans
c. Bank’s bank and a public authority that conducts the nation’s monetary policy
d. Financial firms that takes deposits from households and firms
Answer: d)
8.2 Review Quiz 2 (algo)
What are the functions of depository institutions?
1. The functions of depository institutions include ___
a. Creating liquidity
b. Providing credit ratings
c. Implementing monetary policy
d. Maximizing M1 and M2
Answer: a)
8.2 Review Quiz 3 (static)
How do depository institutions balance risk and return?
1. Depository institutions balance risk and return by ___.
a. Providing credit counselling and debt counselling
b. Converting loans into reserves
c. Placing some funds into safe low interest-earning assets and other funds into
high-interest risky assets
d. Refusing to make risky loans
Answer: c)
8.2 Review Quiz 4 (static)
How do depository institutions create liquidity, pool risks, and lower the cost of
borrowing?
1. A depository institution creates liquidity by ___.
a. Borrowing short and lending long
b. Borrowing long and lending short
c. Paying high interest rates on deposits
d. Eliminating high-risk loans
Answer: a)
2. Depository institutions pool risk because they use funds obtained from ___.
They minimize the cost of monitoring borrowers by ___.
a. Few depositors to make loans to many borrowers; threatening and enforcing
foreclosure on bad debts
b. Making depositors to make loans to few borrowers; making loans only to
households with income that falls within a specified range
c. Many depositors to make loans to many borrowers; using specialized
resources that have a much lower cost than what households would incur if
they had to undertake the activity individually
d. Few depositors to make loans to few borrowers; hiring collection agencies
and using them two payments on a loan are missed
Answer: c)
8.3 Key Term Quiz (static)
1. A central bank is a ___ authority that supervises other banks and financial
institutions; financial markets, and the payments system, and conducts ____
policy.
a. Public; monetary
b. Public; fiscal
c. Private; fiscal
d. Private; monetary
Answer: a)
2. The Bank of Canada is the lender of last resort, which means that if ___ is
short of reserves, it can borrow from ____.
a. A bank; Bank of Canada
b. The Bank of Canada; International Monetary Fund
c. A bank; Government of Canada
d. The Bank of Canada; Government of Canada
Answer: a)
3. The monetary base is the sum of ____, ____, and ____ at the Bank of Canada
a. Loans; Government of Canada securities; investments
b. Coins; Bank of Canada notes; Government of Canada securities
c. Coins; overnight loans; chequable deposits
d. Coins; Bank of Canada notes; depository institution deposits
Answer: d)
4. An open market operation is the purchase or sale of ___ by ___ in the open
market.
a. Government securities; a chartered bank
b. Mortgages; the Bank of Canada
c. Government securities; the Bank of Canada
d. Mortgages; a chartered bank
Answer: c)
5. Bank rate is the interest rate that ____.
a. The Bank of Canada charges big banks on loans
b. The Bank of Canada pays chartered banks on their reserve accounts
c. Chartered banks pay on the deposits of their best customers
d. Chartered banks charge each other in the overnight loans market
Answer: a)
8.3 Review Quiz 1 (static)
What is the central bank in Canada and what functions does it perform?
1. The central bank of Canada is the ___.
a. Bank of Montreal
b. Federal Reserve System
c. Canadian Imperial Bank of Commerce
d. Bank of Canada
Answer: d)
2. The central bank in Canada is ____.
a. The bank to banks and governments, provides debt counseling for
individuals, and is the sole issue of bank notes
b. Provides safety deposit boxes for citizens with assets over $200 million, is the
lender of last resort, and is the sole issuer of bank notes
c. The banker to banks and governments, provides general banking services for
businesses and individual citizens, and is the lender of last resort
d. The banker to banks and governments, the lender of last resort, and the sole
issuer of bank notes
Answer: d)
8.3 Review Quiz 2 (static)
What is the monetary base and how does it relate to the Bank of Canada’s balance
sheet?
1. The monetary base is the sum of ___. The monetary base is equal to ___.
a. Bank of Canada notes and depository institution deposits at the Bank of
Canada; the liabilities of the Bank of Canada
b. Coins and depository institution deposits at the Bank of Canada; the liabilities
of the Bank of Canada minus the value of Bank of Canada notes plus coins
issued by the Royal Canadian Mint
c. Bank of Canada notes, coins, and depository institution deposits at the Bank
of Canada; the liabilities of the Bank of Canada plus coins issued by the
Royal Canadian Mint
d. Bank of Canada notes and depository institution deposits at the Bank of
Canada; the assets of the Bank of Canada
Answer: c)
8.3 Review Quiz 3 (static)
What are the Bank of Canada’s two main policy tools?
1. An open market operation is the ___.
a. Sale of government securities by the federal government to the Bank of
Canada
b. Purchase or sale of foreign exchange by the government on the foreign
exchange market
c. Purchase or sale of government securities by the Bank of Canada in the
loanable funds market
d. Purchase or sale of foreign exchange by the Bank of Canada in the foreign
exchange market
Answer: c)
2. Bank rate is the interest rate ___.
a. That banks charge their best customers on loans
b. That credit card companies charge on outstanding balances
c. That the Bank of Canada charges on short-term, typically one-day loans to
major depository institutions when the banking system is temporarily short of
reserves
d. At which banks lend reserves to each other.
Answer: c)
8.3 Review Quiz 4 (static)
How does an open market operation change the monetary base?
1. An open market purchase ____ the monetary base. An open market sale ___
the monetary base.
a. Has no effect on; has no effect on
b. Decreases; increases
c. Increases; decreases
d. Increases the quantity of currency, which increases; decreases the quantity of
currency, which decreases
Answer: c)
Worked Problem Part 2 (static)
1. Calculate the monetary base using the information provided
a. The monetary base is $___ billion.
$450 billion in currency + $100 billion in reserves at the central bank + $50
billion = $600 billion
8.3 Study Plan Problem 4 (algo)
The table shows the balance sheets for the Bank of Canada and the Bank of Nova
Scotia. The Bank of Canada sells $20 million of securities to the Bank of Nova Scotia.
Show how this transaction changes the balance sheets by filling in the numbers in the
table.
Bank of Canada:
Securities: $20 million; Reserves of the Bank of Nova Scotia: $20 million
Bank of Nova Scotia
Securities: -$20 million; Reserves: $20 million
8.3 Extra Problem 1 (static)
Complete the sentence.
1. The Bank of Canada differs from other banks because it ____.
a. Holds government securities as assets
b. Has liabilities but no assets
c. Has assets but no liabilities
d. Is the lender of last resort
Answer: d)
8.4 Key Term Quiz (static)
1. The quantity of desired reserves depends on the level of deposits and is
determined by the desired reserve ratio - the ratio of ___ to ___ that the ___
plan to hold
a. Reserves; deposits; the central banks
b. Deposits; reserves; the banks
c. Reserves; deposits; banks
d. Savings; assets; banks
Answer: c)
2. We call the leakage of bank reserves into currency the currency drain, and we
call the ratio of ___ to ___ the currency drain ratio.
a.
b.
c.
d.
Deposits; currency
Currency; reserves
Reserves; currency
Currency; deposits
Answer: d)
3. Excess reserves are a bank’s ___ reserves minus its ___ reserves.
a. Revenue; capital
b. Actual; desired
c. Desired; actual
d. Capital; revenue
Answer: b)
4. If the monetary base increases by $1 million and the quantity of money
increases by $2.5 million, then the money multiplier is ___.
a. 2.8
b. 2
c. 1
d. 2.5
Answer: 2.5/1 = 2.5 d)
8.4 Review Quiz 1 (static)
How do banks create money?
1. Banks create money by ___.
a. Making loans
b. Increasing the desired reserve ratio
c. Sending out credit cards to depositors
d. Printing more $20 bills
Answer: a)
8.4 Review Quiz 2 (static)
What limits the quantity of money that the banking system can create?
1. The quantity of money that the banking system can create is limited by ___.
a. The number of consumers who apply for loans
b. The monetary base, desired reserves, and desired currency holdings
c. The credit ratings of the consumers who are applying for loans
d. Bank managers’ decisions
Answer: b)
8.4 Review Quiz 3 (static)
A bank manager tells you that she doesn’t create money. She just lends the money
that people deposit. Explain why she is wrong.
1. The bank manager is wrong because ___.
a. In addition to loaning out the money that people deposit, she also lends what
her bank receives from the Bank of Canada
b. When her customers deposit currency in the bank, the quantity of money
increases by the amount of the new deposit
c. The more currency her customers deposit, the greater the incentive for the
Bank of Canada to authorize her bank to create loans
d. Every new loan creates a new deposit, and a new deposit is new money
Answer: d)
Worked Problem Part 3 (static)
Calculate the currency drain ratio and the bank’s reserve ratio using the information
on the right.
1. The currency drain ratio is ___ percent and the banks’ reserve ratio is ___
percent.
Currency Drain Ratio = (Currency held by individuals and businesses / Chequable
Deposits) x 100
= (50 / 1000) x 100
= (50 / 1000) x 100
=5%
Bank’s Reserve Ratio = 55%
8.4 Study Plan Problem 5 (algo)
1. The monetary base is $___ billion.
$60 billion in reserves at the central bank + $40 billion = $100 billion
2. The quantity of money is $___ billion.
$550 + $40 = $540 billion
3. The banks’ desired reserve ratio is ___ percent.
(60 / 500) x 100 = 12 %
4. The currency drain ratio is ___ percent.
(40 / 500) x 100 = 8%
8.4 Study Plan Problem 6 (static)
1. Lowering the required reserve ratio ___, which ___ the quantity of loans that
China’s banks can make and the quantity of money created
a. Decreases excess reserves; decreases
b. Increases excess reserves; increases
c. Decreases the currency drain ratio; increases
d. Increases the currency drain ratio; decreases
Answer: b)
8.4 Extra Problem 1 (algo)
The table gives information about the commercial banks in Zap. If banks have no
excess reserves, what is the bank’s desired reserve ratio?
1. The desired reserve ratio is ___ percent.
(250 / 2000) x 100 = 12.5%
8.4 Extra Problem 2 (static)
1. A lower required reserve ratio increases bank profits because ___.
a. The banks hold fewer reserves
b. Banks can make fewer loans, so their assets increase
c. Actual reserves increases
d. The banks become lenders of last resort
Answer: a)
8.5 Key Term QUiz (static)
1. The demand for money is the relationship between the quantity of money
demanded and the ___, when all other influences on the amount of money that
people wish to ___ remain the same.
a. Nominal interest rate; hold
b. Real wage rate; spend
c. Real interest rate; hold
d. Quantity of output; spend
Answer: a)
8.5 Review Quiz 1 (algo)
What are the main influences on the quantity of real money that people and
businesses plan to hold?
1. The main influences on the quantity of real money that people and businesses
plan to hold to include the ___.
a. Quantity of real money supplied, the nominal interest rate, and the price level
b. Nominal interest rate, real GDP, and financial innovation but the quantity of
real money demanded is independent of the price level
c. Quantity of reserves in the banking system and financial innovation but the
quantity of real money demanded is independent of the price level
d. Number of depository institutions in the economy, the decisions of the Federal
Reserve, and the real interest rate
Answer: b)
8.5 Review Quiz 3 (static)
How is money market equilibrium determined in the short run?
1. In the short run, ___ and ___ adjusts to achieve equilibrium
a. The quantity of money and the nominal interest rate are determined by the
Bank of Canada; real GDP
b. Real GDP and the nominal interest rate are determined by the Bank of
Canada; the quantity of money
c. Real GDP determines the demand for money curve and the Bank of Canada
determines the real interest rate; real GDP
d. Real GDP determines the demand for money curve and the Bank of Canada
determines the quantity of real money supplied; the nominal interest rate
Answer: d)
8.5 Review Quiz 4 (algo)
How does a change in the supply of money change the interest rate in the short run?
1. Starting from a short-run equilibrium, when the Bank of Canada increases the
supply of money, ___.
a. The quantity of excess reserves in the economy decreases and banks made
fewer loans
b. People enter the loanable funds market and sell bonds
c. People enter the loanable funds market and buy bonds
d. Banks conduct an open market operation and buy Treasury bills
Answer: c)
2. The price of a bond ___ and the interest rate in the short run ___.
a.
b.
c.
d.
Rises; rises
Rises; falls
Falls; falls
Falls; rises
Answer: b)
8.5 Review Quiz 5 (static)
How does a change in the supply of money change the interest rate in the long run?
1. In the long run, an increase in the supply of money ___ the interest rate.
a. Raises
b. Lowers
c. Does not change
d. Sometimes raises and sometimes lowers
Answer: c)
8.5 Extra Problem 1 (static)
1. If the interest rate is greater than 4% a year, the price of a bond ___, and the
interest rate ___
a. Falls; rises
b. Falls; falls
c. Rises; rises
d. Rises; falls
Answer: d)
2. If the interest rate is less than 4 % a year, the price of a bond ___, and the
interest rate ___.
a. Rises; rises
b. Falls; falls
c. Rises; falls
d. Falls; rises
Answer: d)
8.6 Key Term Quiz (static)
1. The quantity theory of money is the proposition that when real GDP ___
potential GDP, an increase in the quantity of money brings ___ percentage
increase in the ___.
a. Exceeds; a greater; price level
b. Is less than; a smaller; aggregate supply
c. Equals; an equal; price level
d. Exceeds; a greater; interest rate
Answer: c)
2. The velocity of circulation is the ___ number of times in a ___ that each dollar
of money gets used to buy final goods and services
a. Total; day
b. Average; year
c. Average; month
d. Total; year
Answer: b)
8.6 Review Quiz 1 (static)
What is the quantity theory of money?
1. The quantity theory of money is that in the ___, an increase in the quantity of
money brings an equal percentage increase in the ___.
a. Long run; decrease in the price level
b. Long run; increase in the price level
c. Long run; nominal interest rate
d. Short run; increase in the price level
Answer: b)
8.6 Review Quiz 2 (static)
How is the velocity of circulation calculated?
1. The velocity of circulation is the average number of times a dollar of money is
used annually to buy ___. The formula used to measure the velocity of
circulation, V, is ___, where P is the price level, Y is real GDP, and M is the
quantity of money
a. The goods and services that make up GDP; V = (P / Y) x M
b. Foreign goods and services; V = (P x Y ) / M
c. Stocks and bonds; V = (P / Y) x M
d. The goods and services that make up GDP; V = (P x Y) / M
Answer: d)
8.6 Review Quiz 3 (static)
What is the equation of exchange?
1. The equation of exchange is ___ and it is true ___.
a. MP = YV; in the short run only if the rate of velocity change is approximately
equal to zero
b. MP = YV; by definition
c. MV = PY; by definition
d. MV = PY; in the short run only if the rate of velocity change is approximately
equal to zero
Answer: c)
8.6 Review Quiz 4 (static)
Does the quantity theory correctly predict the effects of money growth on inflation?
1. The long-run historical evidence and international evidence show us that the
relationship between money growth and the inflation rate ___.
a. Is non-existent, and the quantity theory of money which was accurate in the
past is no longer applicable
b. Supports the quantity theory, but the correlation is not perfect
c. Is an inverse relationship that does not correspond to the quantity theory
d. Supports the quantity theory, and the money growth rate equals the inflation
rate in the long run
Answer: b)
Ch. 8 Mathematical Note B2
1. For a given increase in the monetary base, ___
a. the resulting increase in M1 is greater than the resulting increase in M2
b. the resulting decrease in M1 is greater than the resulting increase in M2
c. the resulting increase in M2 is greater than the resulting increase in M1
d. the resulting decrease in M2 is greater than the resulting increase in M1
Answer: c)
2. The money multiplier can be calculated as ___, where C is currency, D is
deposits, and R is banks’ reserves
a. C/D÷(C/D + R/D)
b. (C/D + R/D)÷(1 + R/D)
c. (1 + C/D)÷(R/D + C/D)
d. (C/D + R/D)÷(1 + C/D)
Answer: c)
3. The quantity of money ___. The change in the quantity of money is not equal to
the change in the monetary base because ___.
a. decreases; money includes currency but the monetary base does not include
currency
b. decreases; an increase in monetary base brings about a decrease in the
quantity of money
c. increases; the components of the monetary base are not the components of
the quantity of money
d. increases; when bank reserves increase, banks loan out their excess
reserves and a multiplier process ensues
Answer: d)
2. The money multiplier is ___
7.33
1. The currency drain ratio for M1 is ___ than for M2, and the banks’ reserve ratio
for M1 is ___ than for M2.
a. Smaller; smaller
b. Larger; larger
c. Larger; smaller
d. Smaller; larger
Answer: b)
2. The Canadian M1 multiplier is ___ the U.S. M2 multiplier
a. The same size
b. Larger than
c. Smaller than
Answer: c)
1. The currency drain ratio is 0.5 of deposits and the bank’s reserve ratio is 0.2.
What is the money multiplier?
a. The money multiplier is ___.
2.1
Quiz 4 (Ch 9 and 10)
9.1 Key Term Quiz (static)
1. Foreign currency is the money ___ regardless of whether is in the form of
notes, coins, or bank deposits
a. Of other countries
b. Of the domestic economy
c. Used in foreign direct investment
d. Used in trades
Answer: a)
2. The foreign exchange market is the market in which ___ of one country is
exchanged for ___ of another.
a. Goods and services; goods and services
b. The currency; the currency
c. Goods but not services; goods
d. Services but goods; services
Answer: b)
3. An exchange rate is the ___ at which one currency exchanges for another in
the foreign exchange market
a. Price
b. Expected inflation rate
c. Interest rate
d. Future exchange rate
Answer: a)
4. If the Canadia interest rate is 1.5 percent, the US interest rate is 1 percent, the
Canadian inflation rate is 1.2 percent, and Canada’s inflation rate is 0.70
percent, then calculate the Canadian interest rate differential.
a. 0.3 percent
b. 2.2 percent
c. 0.5 percent
d. 2.5 percent
Answer: 1.5 - 1 = 0.5%, therefore c)
9.1 Review Quiz 1 (static)
What are the influences on the demand for Canadian dollars in the foreign exchange
market?
1. The main influences on the demand for Canadian dollars in the foreign
exchange market include ___
a. The exchange rate, Canadian demand for imports, interest rates in Canada
and other countries, and the previous path of the exchange rate
b. The exchange rate, world demand for Canadian exports, interest rates in
Canada and other countries, and the expected future exchange rate
c. The price level in Canada, world demand for Canadian exports, interest rates
in Canada and other countries, and the expected future exchange rate
d. The exchange rate, world demand for Canadian exports, the previous path of
the exchange rate, and the expected future exchange rate
Answer: b)
9.1 Review Quiz 2
What are the influences on the demand for Canadian dollars in the foreign exchange
market?
1. The main influences on the supply of Canadian dollars in the foreign exchange
market include ___.
a. The exchange rate, Canadian demand for imports, interest rates in Canada
and other countries, and the expected future exchange rate
b. The exchange rate, Canadian demand for imports, the previous path of the
exchange rate, and the expected exchange rate
c. The price level in Canada, Canadian demand for imports, interest rates in
Canada and other countries, and the expected future exchange rates
d. The exchange rate, world demand for Canadian exports, interest rates in
Canada and other countries, and the previous path of the exchange rate
Answer: a)
9.1 Review Quiz 3 (static)
How is the equilibrium exchange rate determined?
1. The equilibrium exchange rate is the exchange rate at which ___.
a. The quantity of dollars demanded equals the quantity of dollars supplied
b. A shortage may exist but a surplus may not exist
c. The demand for dollars equals the supply of dollars
d. A surplus may exist but a shortage may not exist
Answer: a)
9.1 Review Quiz 5 (algo)
What makes the demand for Canadia dollars change?
1. An increase in world demand for Canadian exports ___ the demand for
Canadian dollars. A fall in the Canadian interest rate differential ___ the
demand for Canadian dollars.
a. Decreases; increases
b. Increases; decreases
c. Does not change; decreases
d. Increases; increases
Answer: b)
2. A fall in the expected future exchange rate ___ the demand for Canadian
dollars. A decrease in the Canadian demand for imports ___ the demand for
Canadian dollars.
a. Increases; decreases
b. Decreases; increases
c. Decreases; does not change
d. Increases; does not change
Answer: c)
9.1 Review Quiz 6 (algo)
What makes the supply of Canadian dollars change?
1. A decreases in Canadian demand for imports ___ the supply of Canadian
dollars. A fall in the Canadian interest rate differential ___ the supply of
Canadian dollars
a. Decreases; decreases
b. Increases; increases
c. Increases; decreases
d. Decreases; increases
Answer: d)
2. A rise in the expected future exchange rate ___ the supply of Canadian dollars.
An increase in the world demand for Canadian exports ___ the supply of
Canadian dollars
a. Decreases; does not change
b. Increases; does not change
c. Decreases; decreases
d. Increases; increases
Answer: a)
9.1 Review Quiz 7
What makes the Canadian dollar exchange rate fluctuate?
1. The Canadian dollar exchange rate fluctuates in part because a change in the
Canadian interest rate differential changes the demand for Canadian dollars
and the supply of Canadian dollars in ______ and a change in the expected
future exchange rate changes the demand for Canadian dollars and the supply
of Canadian dollars in ______.
a. The same direction; the same direction
b. The same direction; opposite directions
c. Opposite directions; the same direction
d. Opposite directions; opposite directions
Answer: d)
Worked Problem (static)
Use the information provided on the right to answer the following questions
1. Explain the effect of the Bank of Canada’s announcement on the demand for
and supply of Canadian dollars. The demand for Canadian dollars would ___
and the supply of Canadian dollars would ___ on June 2.
a. Decrease; remain unchanged
b. Increase; also increase
c. Increase; decrease
d. Decrease; increase
Answer: c)
2. Explain the effect of the Bank of Japan’s announcement on the demand for and
supply of Canadian dollars. The bank of Japan’s announcement would ___ the
demand for Canadian dollars and ___ the supply of Canadian dollars on June
2.
a. Increase; decrease
b. Decrease; increase
c. Increase; also increase
d. Decrease; also decrease
Answer:a)
3. Explain the effect of the two announcements on the Canadian dollar-yen
exchange rate: would the Canadian dollar appreciate or depreciate? The two
announcements on the Canadian dollar-yen exchange rate would ___ the
Canadian dollar.
a. Appreciate
b. Depreciate
Answer: a)
4. Could the change in the exchange rate on June 2 have resulted from the two
announcements or must some other influence have changed too? If so, what
might that influence have been? On June 2, the Canadian dollar depreciated
rather ___ decreased the demand for Canadian dollars or an increase in
Canadian ___ increased the supply of Canadian dollars.
a. Exports; exports
b. Exports; imports
c. Imports; imports
d. Imports; exports
Answer: b)
Worked Problem Part 1 (static)
Use the information provided on the right to answer the following questions.
1. Explain the effect of the Bank of Canada’s announcement on the demand for
and supply of Canadian dollars. The demand for Canadian dollars would ___
and the supply of Canadian dollars would ___ on June 2.
a. Decrease; increase
b. Decrease; remain unchanged
c. Increase; also increase
d. Increase; decrease
Answer: d)
Worked Problem Part 2 (static)
Use the information provided on the right to answer the following questions.
1. Explain the effect of the Bank of Japan’s announcement on the demand for and
supply of Canadian dollars. The Bank of Japan’s announcement would ___ the
demand for Canadian dollars and ___ the supply of Canadian dollars on June 2
a. Increase; also increase
b. Decrease; increase
c. Decrease; also decrease
d. Increase; decrease
Answer: d)
Worked Problem Parts 3 and 4 (static)
Use the information provided on the right to answer the following questions
1. Explain the effect of the two announcements on the Canadian dollar-yen
exchange rate: would the Canadian dollar appreciate or depreciate? The two
announcements on the Canadian dollar-yen exchange rate would ___ the
Canadian dollar.
a. Appreciate
b. Depreciate
Answer: a)
2. Could the change in the exchange rate on June 2 have resulted from the two
announcements or must some other influence have changed too? If so, what
might that influence have been? On June 2, the Canadian dollar depreciated
rather than appreciated because a fall in Canadian ___ decreased the demand
for Canadian dollars or an increase in Canadian ___ increased the supply of
Canadian dollars
a. Imports; imports
b. Exports; exports
c. Imports; exports
d. Exports; imports
Answer: d)
9.1 Study Plan Problem 2 (algo)
1. In June 2011, the value of the Canadian dollar was $___ U.S.
$1.04
2. In June 2012, the value of the Canadian dollar was $___ U.S.
$0.97
3. The Canadian dollar ___ against the U.S. dollar between June 2011 and June
2012.
a. Appreciated
b. Depreciated
Answer: b)
9.1 Study Plan Problem 4 (algo)
1. The events in the foreign exchange market, everything else remaining the
same that could have resulted in this change in the value of the U.S. dollar
include ___.
a. An increase in the U.S. interest rate and a fall in the expected future
exchange rate of the U.S. dollar
b. A rise in the expected future exchange rate of the U.S. dollar and an increase
in the U.K. interest rate
c. A rise in the expected future exchange rate of the U.S. dollar and an increase
in the U.S. interest rate
d. An increase in the U.K. interest rate and a fall in the expected future
exchange rate of the U.S. dollar
Answer: c)
2. These events that resulted in this change in the value of the U.S. dollar
changed ___.
a. Both the demand for dollars and the supply of dollars
b. Only the supply of dollars
c. Only the demand for dollars
Answer: a)
9.1 RTDA: Study Plan Problem 2 (algo)
1. In October, 2019, the Canadian dollar was valued at ___ U.S. dollars
1/1.32 = 0.76
2. In October, 2020, the Canadian dollar was values at ___ U.S. dollars
1/1.32 = 0.76
3. The Canadian dollar ___ against the U.S. dollar
a. Appreciated
b. Depreciated
c. Neither
Answer: b)
9.1 RTDA: Study Plan Problem 4 (algo)
1. What events in the foreign exchange market could have brought this fall in the
value of the U.S. dollar?
a. World demand for U.S. exports decreases
Yes
b. World demand for U.S. exports increases
No
c. U.S. import demand decreases
No
d. U.S. import demand increases
Yes
e. The U.S. interest rate differential falls
Yes
f. The U.S. interest rate differential rises
No
g. The expected future exchange rate falls
Yes
h. The expected future exchange rate rises
No
2. Did the events you’ve described change the demand for U.S. dollars, the
supply of U.S. dollars, or both demand and supply in the foreign exchange
market?
a. Change in world demand for U.S. exports
D
b. Change in U.S. import demand
S
c. Change in U.S. interest rate differential
B
d. Change in expected future exchange rate
B
9.1 Extra Problem 1 (algo)
1. Between April 2017 and December 2017, the Canadian dollar ___ against the
U.S. dollar. Between April 2017 and December 2017, the Canadian dollar ___
against the euro
a. Appreciated; depreciated
b. Depreciated; appreciated
c. Depreciated; depreciated
d. Appreciated; appreciated
Answer: a)
9.1 Extra Problem 3 (algo)
1. As the exchange rate rises, prices of Canadian-produced goods and services
to foreigners ___ and the volume of Canadian exports ___.
a. Rise; decreases
b. Rise; increases
c. Fall; increases
d. Fall; decreases
Answer: a)
9.1 Extra Problem 4 (algo)
1. The imports effect of the rise in the exchange rate is that the value fo Canadian
imports ___, and in the foreign exchange market, ____.
a. Decreases; the quantity of Canadian dollars supplied decreases
b. Increases; the supply of Canadian dollars increases
c. Increases; the quantity of Canadian dollars supplied decreases
d. Increases; the quantity of Canadian dollars supplied increases
Answer: d)
9.1 Extra Problem 5 (algo)
1. The events in the foreign exchange market, everything else remaining the
same that could have resulted in this change in the value of the U.S. dollar
include ___.
a. A fall in the expected future exchange rate of the U.S. dollar and a decrease
in the Japanese interest rate
b. A rise in the expected future exchange rate of the U.S. dollar and a decrease
in the Japanese interest rate
c. An increase in the Japanese interest rate and a rise in the expected future
exchange rate of the U.S. dollar
d. An increase in the Japanese interest rate and a fall in the expected future
exchange rate of the U.S. dollar
Answer: d)
2. These events that resulted in this change in the value of the U.S. dollar
changed ___.
a. Both the demand for dollars and the supply of dollars
b. Only the supply of dollars
c. Only for the demand for dollars
Answer: a)
9.1 Extra Problem 6 (static)
What is the export effect?
1. The export effect is the result that the lower the exchange rate, other things
remaining the same, the ___.
a. Higher are the prices of foreign-produced goods and services to Canadians
and the greater is the volume of Canadian imports
b. Lower are the prices of Canadian-produced goods and services to foreigners
and the greater is the volume of Canadian exports
c. Higher are the prices of Canadian-produced goods and services to foreigners
and the greater is the volume of Canadian imports
d. Lower are the prices of foreign-produced goods and services to Canadians
and the greater is the volume of Canadian imports
Answer: b)
9.1 Extra Problem 7 (static)
What is the import effect?
1. The import effect is the result that the higher the exchange rate, other things
remaining the same, the ___.
a. Higher are the prices of foreign-produced goods and services to Canadians
and the greater is the volume of Canadian exports
b. Higher are the prices of Canadian-produced goods and services to foreigners
and the greater is the volume of Canadian imports
c. Lower are the prices of Canadian-produced goods and services to foreigners
and the greater is the volume of Canadian imports
d. Lower are the prices of foreign-produced goods and services to Canadians
and the greater is the volume of Canadian exports
Answer: c)
9.1 Extra Problem 10 (algo)
1. A decrease in world demand for Canadian exports ___ the demand for
Canadian dollars. A fall in the Canadian interest rate differential ___ the
demand for Canadian dollars.
a. Decreases; increases
b. Decreases; decreases
c. Does not change; decreases
d. Increases; increases
Answer: b)
2. A rise in the expected future exchange rate ___ the demand for Canadian
dollars. An increase in the Canadian demand for imports ___ the demand for
Canadian dollars.
a. Increases; does not change
b. Increases; decreases
c. Decreases; increases
d. Decreases; does not change
Answer: a)
3. A decrease in Canadian demand for imports ___ the supply of Canadian
dollars. A fall in the Canadian interest rate differential ___ the supply of
Canadian dollars.
a. Increases; increases
b. Decreases; decreases
c. Decreases; increases
d. Increases; decreases
Answer: c)
4. A rise in the expected future exchange rate ___ the supply of Canadian dollars.
An increase in the world demand for Canadian exports ___ the supply of
Canadian dollars.
a. Decreases; decreases
b. Decreases; does not change
c. Increases; does not change
d. Increases; increases
Answer: b)
9.2 Key Term Quiz (static)
1. Arbitrage is the practice of seeking to profit by ___ in one market and ___ in
another related market
a. Selling; buying for a lower price
b. Buying; selling for a lower price
c. Buying; selling for a higher price
d. Selling; buying for a higher price
Answer: c)
2. Interest rate parity, which means ___ across currencies, means that for risk
free transactions, there is ___ gain from choosing one currency over another
a. Lower exchange rates; a
b. Higher exchange rates; a
c. Lower rates of return; no
d. Equal rates of return; no
Answer: d)
3. Purchasing power parity is equal value of ___ -a situation in which ___ buys
the same amount of foods and services in different currencies
a. Nominal GDP; nominal income
b. Real GDP; money
c. Money; money
d. Real GDP; real income
Answer: c)
4. The real exchange rate is the relative price of ___ to ___.
a. Foreign-produced goods and services; Canadian-produced goods and
services
b. Canadian-produced goods and services; foreign-produced goods and
services
c. Canadian-produced goods; foreign-produced goods
d. Canadian currency; foreign currency
Answer: b)
9.2 Review Quiz 1 (static)
What is arbitrage and what are its effects in the foreign exchange market?
1. Arbitrage is ___.
a. The practice of seeking to profit by buying in one market and selling for a
higher price in another related market
b. The difference between the real exchange rate and the nominal exchange
c. Trading on the expectation of making a profit
d. The practice of seeking to profit by exploiting the difference between the real
exchange rate and the nominal exchange rate
Answer: a)
2. Arbitrage in the foreign exchange market achieves ___.
a. The law of one price, no round-trip profit, interest rate parity, and purchasing
power parity
b. No round-trip profit, interest rate parity, purchasing power parity, and equal
real exchange rates across the major currencies
c. Interest rate parity, purchasing power parity, equal real exchange rates
across the major currencies, and maximum profit from speculation
d. Equal real exchange rates across the major currencies, zero interest rate
differential between developing and developed countries, similar prices in all
countries, and zero speculative profit
Answer: a)
9.2 Review Quiz 2 (algo)
What is interest rate parity and what happens when this condition doesn’t hold?
1. Interest rate parity is ___. When this condition does not hold ___.
a. Equal rates of return across currencies; trades maximize their profits and it
can take months for the exchange rate to return to its interest rate parity level
b. Round-trip profit; trades take actions within seconds that drive the exchange
rate back to its interest rate parity level
c. Equal rates of return across currencies; traders take actions within seconds
that drive the exchange rate back to its interest rate parity level
d. Equal value of money; people buy goods in the country with the lower
exchange rate and sell goods in the country with the higher exchange rate
Answer: c)
2. Choose the correct statement about interest rate parity
a. Adjusted for risk, interest rate parity always prevails
b. If a higher interest rate is available in Montreal than in Tokyo, the demand for
Japanese yen increases
c. Interest rate parity implies that $100 Canadian can buy the same quantity of
goods and services in Montreal as $100 Canadian can buy in Moscows
d. Interest rate parity means that interest rates in the world’s major economies
never change
Answer: a)
3. If a U.K. bank deposit earns 4 percent a year and a Canadian bank deposit
earns 5 percent a year, then people expect that ___.
a. Interest rate parity will not hold
b. The Canadian dollar will depreciate by 1 percent a year
c. The U.K. pound will depreciate by 1 percent a year
d. The Canadian dollar will appreciate by 1 percent a year
Answer: b)
9.2 Review Quiz 3 (static)
What makes an exchange rate hard to predict?
1. Choose the correct sentence
a. Changes in the interest rate differential, which generally change the demand
for Canadian dollars in the foreign exchange market by more than the supply,
are difficult to predict because it requires predicting changes in foreign
interest rates
b. A movement away from interest rate parity sometimes influences traders to
act and sometimes does not, and it is difficult to know when traders will react
c. Changes in the expected future exchange rate generally change the supply of
Canadian dollars in the foreign exchange market by more than the demand,
but it is impossible to know by how much
d. Influences of expectations and the constant arrival of news about the
influences on supply and demand, make day-to-day and week-to-week
changes in the exchange rate difficult to predict
Answer: d)
9.2 Review Quiz 4 (algo)
What is purchasing power parity and what happens when this condition doesn’t hold?
1. Purchasing power parity is ___.
a. Equal real GDP per person in all countries
b. Equal value of money
c. Equal rates of return
d. An easy method of determining whether a currency is overvalued or
undervalued
Answer: b)
2. Suppose that purchasing power parity does not hold. If all (or most) prices
have increased in Canada and not increased in Japan, then people will
generally expect that the foreign exchange value of the dollar will ______. The
demand for dollars ______.
a. Fall; decreases and the supply of dollar increases
b. Fall; increases and the supply of dollars decreases
c. Rise; decreases and the supply of dollars increases
d. Rise; increases and the supply of dollars decreases
Answer: a)
9.2 Review Quiz 5 (static)
What determines the real exchange rate and the nominal exchange rate in the short
run?
1. In the short run, the nominal exchange rate is determined by ___. And in the
short run ___.
a. the demand for Canadian dollars and the supply of Canadian dollars in the
foreign exchange market; a change in the nominal exchange rate brings an
equivalent change in the real exchange rate
b. the demand for Canadian dollars and the supply of Canadian dollars in the
foreign exchange market; the real exchange rate is determined by the
quantities of money in the two countries
c. the equation E = (RER×P)/P*; a change in the nominal exchange rate brings
an equivalent change in the real exchange rate
d. the equation E = (RER×P)/P*; the real exchange rate is determined by the
quantities of money in the two countries
Answer: a)
9.2 Review Quiz 6 (static)
What determines the real exchange rate and the nominal exchange rate in the long
run?
1. In the long run, the real exchange rate is determined by ___ and the nominal
exchange rate is determined by ___.
a. he demand for Canadian dollars and the supply of Canadian dollars in the
foreign exchange market; the Canadian interest rate differential
b. the demand for Canadian dollars and the supply of Canadian dollars in the
foreign exchange market; the quantities of money in two countries
c. demand and supply in the markets for goods and services; the Canadian
interest rate differential
d. demand and supply in the markets for goods and services; the quantities of
money in two countries
Answer: d)
9.2 Study Plan Problem 6 (algo)
1. The Japanese yen exchange rate is expected to ____ against the euro by ___
percent
a. Appreciate, 3.3 %
9.2 Extra Problem 2 (static)
a. The "Mexican peso is gaining on the greenback" because the demand for pesos is
increasing at a slower pace than the supply of pesos is increasing.
b. The "Mexican peso is gaining on the greenback" because currency investors expect
the future Mexican exchange rate to rise.
c. The news clip is discussing the nominal exchange rate when it implies that the
relative price of Mexican-produced goods and services is rising.
d. The news clip is discussing the real exchange rate when it gives the value of $1 U.S.
as 12.44 pesos.
Answer: b)
9.2 Extra Problem 3 (algo)
1. You can buy an identical computer in Windsor, Ontario for $___.
450/0.75 = 600
9.3 Key Term Quiz (static)
1. A flexible exchange rate is an exchange rate that is determined by ___ in the
foreign exchange market with no direct intervention by the ___
a. Demand and supply; corporations
b. The central bank intervening; government
c. The government intervening; central bank
d. Demand and supply; central bank
Answer: d)
2. A fixed exchange rate is an exchange rate that is determined by ___ and is
achieved by central bank intervention in the foreign exchange market to block
___.
a. A decision of the government or the central bank; the unregulated forces of
demand and supply
b. A decision of the government; intervention by corporations
c. Demand and supply; intervention by foreign investors
d. Demand and supply; intervention by the government
Answer: a)
3. A crawling peg is an exchange rate that ___.
a. Works like a fixed exchange rate except that the target value changes
b. Works like a flexible exchange rate because no direct intervention is involved
c. Eventually results in the country running out of foreign reserves
d. Results in large swings in the expected future exchange rate
Answer: a)
9.3 Review Quiz 1 (static)
What is a flexible exchange rate and how does it work?
1. A flexible exchange rate is one that ___. It works ___.
a. is determined by demand and supply in the foreign exchange market; with no
direct intervention by the central bank
b. is determined by demand and supply in the foreign exchange market with no
direct intervention by the central bank unless the exchange rate falls below or
rises above a target value
c. follows a path determined by a decision of the government or the central
bank; by central bank intervention in the foreign exchange market
d. sets the exchange rate by decision of the government or the central bank;by
central bank intervention in the foreign exchange market to block the
unregulated forces of demand and supply
Answer: a)
9.3 Review Quiz 2 (static)
What is a fixed exchange rate and how is its value fixed?
1. A fixed exchange rate is one that ___. A fixed exchange rate is achieved ___.
a. follows a path determined by the government or the central bank by the
central bank buying or selling domestic currency in the foreign exchange
market
b. is determined by demand and supply in the foreign exchange market; with no
direct intervention by the central bank
c. is set by the government or the central bank; by central bank intervention in
the foreign exchange market
d. is set by the government or the central bank; by the intervention of market
traders in the foreign exchange market
Answer: c)
9.3 Review Quiz 3 (static)
What is a crawling peg and how does it work?
1. A crawling peg exchange rate policy is one that ___. A crawling peg exchange
rate is achieved ____.
a. follows a path determined by a decision of the government or the central
bank; by central bank intervention in the foreign exchange market
b. is determined by demand and supply in the foreign exchange market; with no
direct intervention by the central bank
c. follows a path determined by a decision of the government or the central
bank; by the actions of market traders in the foreign exchange market
d. is determined by a decision of the government or the central bank; by the
actions of foreign central banks
Answer: a)
9.3 Study Plan Problem 9 (static)
1. Japan’s current exchange rate is ___.
a. A fixed exchange rate
b. A crawling peg
c. An export-intensive exchange rate
d. A flexible exchange rate
Answer: d)
2. The politician wants a ___ in the short run. This policy would have no effect on
the exchange rate in the long run because in the long run ___.
a. Fixed exchange rate; the price level and the nominal exchange rate are
determined together
b. Crawling peg; the price level and the nominal exchange rate are determined
together
c. Fixed exchange rate; interest rate parity prevails and all exchange rates are
constant
d. Crawling peg; interest rate parity prevails and all exchange rates are constant
Answer: b)
9.4 Key Term Quiz (static)
1. Balance of payments accounts are the accounts in which a nation records its
___.
a. Inflation rate and interest rate
b. Foreign exchange reserves
c. International trading, borrowing, and lending
d. Foreign exchange reserves, borrowing, an lending
Answer: c)
2. The current account is the record of receipt from ___ other countries, minus
___ other countries, plus the net amount of ___ received from and paid to other
countries.
a. the sale of goods and services to other countries; payments for goods and
services bought from; interest and transfers
b. payments for goods and services bought from; the sale of goods and services
to other countries; wages and transfers
c. official lending to; record of foreign investment in; interest and rents
d. record of foreign investment in; transfer payments to; capital
Answer: a)
3. The capital and financial account is the record of ___ minus Canadian
investment abroad
a. Foreign exchange reserves in Canada
b. Interests and transfers to foreign countries
c. Foreign investment in Canada
d. Official lending to foreign countries
Answer: c)
4. The official settlements account is the record of the change in Canadian ___.
a. Exchange rates
b. Official reserves
c. Interest rates
d. Capital account
Answer: b)
5. Canadian official reserves are the government’s holding of ____.
a. Net transfers
b. Foreign currency
c. The receipt of imports
d. The receipt of exports
Answer: b)
6. A net lender is a country that is lending ___ to the rest of the world ___ it is
borrowing to the rest of the world.
a. Only advanced technology; more than what
b. More; than
c. Less; than
d. An amount; that is equal to what
Answer: b)
7. A debtor nation is a country that during its entire history has ___ the rest of the
world than it has ___ the rest of the world
a. Lent more to; borrowed from
b. Borrowed more from; lent to
c. Borrowed more from; invested in
d. Borrowed less from; lent to
Answer: b)
8. A creditor nation is a country that during its entire history has ___ the rest of
the world than other countries have ___ it.
a. Invested more in; invested in
b. Borrowed more from; lent
c. Borrowed less from; lent
d. Invested less in; invested in
Answer: a)
9. Net exports is ___ of goods and services minus ___ of goods and services
a. Exports; relative price
b. Exports; total domestic production
c. Exports; imports
d. Imports; exports
Answer: c)
10. If saving is $850 billion, investment is $500 billion, government expenditure on
goods and services is $700 billion, net exports is $50 billion, and net taxes is
$800 billion, then calculate government sector balance
a. $300 billion
b. $200 billion
c. $100 billion
d. $750 billion
Answer: (800-700) = 100
11. If saving is $850 billion, investment is $500 billion, government expenditure on
goods and services is $600 billion, and net exports is $100 billion, then
calculate private sector balance
a. $500 billion
b. $350 billion
c. $1350 billion
d. $400 billion
Answer: (850 - 500) = 350
9.4 Review Quiz 1 (algo)
What are the transactions that the balance of payments accounts record?
1. The ____ account records receipts from exports of goods and services sold
abroad, payments for imports of goods and services from abroad, and ___.
a. Capital and financial; net interest income paid abroad and net transfers
b. Current; net income received from abroad and foreing investment in Canada
c. Trade; net income received from abroad and foreign investment in Canada
d. Current; net interest income paid abroad and net transfers
Answer: d)
2. The ___ account records ___ Canadian investment abroad.
a. Capital and financial; foreign investment in Canada minus
b. International financial; foreign investment in Canadian bank accounts plus
c. International financial; foreign investment in Canada plus
d. Current; foreign investment in Canada minus
Answer: a)
3. The official settlements account records the change in Canadian official
reserves, which are the government’s holdings of ____. If Canadian official
reserves increase, the official settlements account balance is ___.
a. Foreign currency; negative
b. Foreign bank deposits; positive
c. Foreign government securities; positive
d. Foreign loans; negative
Answer: a)
9.4 Review Quiz 2 (static)
Is Canada a net borrower or a net lender? Is it a debtor or a creditor nation?
1. Canada is ___.
a. A net lender and a creditor nation
b. A net borrower and a creditor nation
c. A net borrower and a debtor nation
d. A net lender and a debtor nation
Answer: c)
9.4 Review Quiz 3 (static)
How are net exports and the government sector balance linked?
1. Net exports equals ___.
a. (G - T) + (I - S)
b. (T - G) + (I - S)
c. (G - T) + (S - I)
d. (T - G) + (S - I)
Answer: d)
2. If the government sector deficit increases, with no change in the private sector
surplus, net exports ___.
a. Increase
b. Change but we cannot predict if they will increase or decrease
c. Decrease
d. Equal zero
Answer: c)
9.4 Study Plan Problem 10 (algo)
1. The current account balance is ___ billion dollars
a. 476 - 508 + 16 - 3 = -19
2. The capital and financial account balance is ___ billion dollars
a. 54 + 1 = 55
3. The official settlements account balance is ___ billion dollars
a. -55 + 19 = -36
4. Canada’s official reserves are ____
a. Increasing
5. Canada is a ___ because ____.
a. Net lender; net foreign investment in Canada is positive
b. Net borrower; net foreign investment in Canada is positive
c. Net lender; net transfers are negative
d. Net borrower; net interest income is positive
Answer: b)
9.4 Extra Problem 1 (algo)
1. The current account balance is ___ billion dollars
a. -710
2. The capital and financial account balance is ____ billion dollars
a. 721
3. The official settlements account balance is ___ billion dollars
a. -11
4. Nordland’s official reserves are ____
a. Increasing
5. The nation is a ____
a. Net borrower
9.4 Extra Problem 4 (static)
1. A current account deficit “must be financed by capital inflows” because ____.
a. to pay for the U.S. current account deficit, the United States must either
borrow more from abroad than we lend abroad or use U.S. official reserves
b. Congress will not agree to further increase the government budget deficit to
finance international trade
c. the Federal Reserve will not agree to increase the quantity of money
sufficiently to finance international trade
d. the government is not willing to use U.S. official reserves to cover the current
account deficit
Answer: a)
2. The debtor nation status of the United States would be a concern if the
borrowed funds were used to finance ___.
a. Investment in defense equipment and social projects
b. Investment in physical capital
c. Consumption
d. Investment in human capital
Answer: c)
10.1 Key Term Quiz (static)
1. Long-run aggregate supply is the relationship between the quantity of real GDP
supplied and the price level when the ___ changes in step with the price level
to maintain full employment
a. Real wage rate
b. Quantity of money
c. Interest rate
d. Money wage rate
Answer: d)
2. Short-run aggregate supply is the relationship between the quantity of ___
supplied and the ___ when the money wage rate, the prices of other resources,
and potential GDP remain the constant.
a. Real GDP; interest rate
b. Real GDP; price level
c. Potential GDP; price level
d. Nominal GDP; exchange rate
Answer: b)
10.1 Review Quiz 1 (static)
1. If the price level and the money wage rate rise by the same percentage, the
quantity of real GDP supplied ___ and there is a movement up along the ___
aggregate supply curve.
a. Does not change; short-run
b. Increases; short-run
c. Does not change; long-run
d. Decreases; long-run
Answer: c)
10.1 Review Quiz 2 (static)
1. If the price level rises and the money wage rate remains constant, the quantity
of real GDP supplied ___ and there is a movement up along the ___ aggregate
supply curve
a. Does not change; short-run
b. Increases; long-run
c. Increases; short-run
d. Does not change; long-run
Answer: c)
10.1 Review Quiz 3 (static)
If potential GDP increases, what happens to aggregate supply?
1. When potential GDP increases, ___.
a. long-run aggregate supply increases but short-run aggregate supply does not
change. The LAS curve shifts rightward and a movement occurs along the
SAS curve
b. long-run aggregate supply and short-run aggregate supply increase. A
movement upward occurs along the LAS curve and along the SAS curve
c. we don't know what the effect is on long-run aggregate supply or short-run
aggregate supply
d. long-run aggregate supply and short-run aggregate supply increase. The LAS
and the SAS curve shift rightward
Answer: d)
2.
10.1 Review Quiz 4 (static)
If the money wage rate rises and potential GDP remains the same, does the LAS curve
or the SAS curve shift or is there a movement along the LAS curve or the SAS curve?
1. A rise in the money wage rate with no change in potential GDP creates ___.
a. A movement along the SAS curve
b. A leftward shift of the LAS curve and no change in the SAS curve
c. A leftward shift of the LAS curve and a leftward shift of the SAS curve
d. A leftward shift of the SAS curve and no change in the LAS curve
Answer: d)
10.1 Study Plan Problem 2 (static)
Labour productivity is rising at a rapid rate in China and wages are rising at a similar
rate. Explain how a rise in labour productivity and wages in China will influence the
quantity of real GDP supplied and aggregate supply in China
1. A rise in labour productivity ___.
a. Increases long-run aggregate supply and short-run aggregate supply
b. Has no effect on aggregate supply or the quantity of real GDP supplied
c. Increases long-run aggregate supply and creates a movement up along the
short-run aggregate supply curve - an increase in the quantity of real GDP
supplied
d. Increases the quantity of real GDP supplied but does not change aggregate
supply
Answer: a)
2. A rise in the wage rate ___.
a. Decreases short-run aggregate supply and long-run aggregate supply
b. Increases the price level, which increases the quantity of real GDP supplied
c. Has no effect on aggregate supply or the quantity of real GDP supplied
d. Decreases short-run aggregate supply and does not change long-run
aggregate supply
Answer: d)
10.1 Extra Problem 1 (static)
1. The 2.2 percent year-over-year growth in the average weekly wage rate ___
short-run aggregate supply and ___ long-run aggregate supply
a. Does not change; does not change
b. Decreases; does not change
c. Decreases; decreases
d. Increases; increases
Answer: b)
10.1 Extra Problem 2 (static)
1. A change in the money wage rate does not change long-run aggregate supply
because ___.
a. Potential GDP is constant
b. A change in the money wage rate changes firms’ costs in the short run but
not in the long run
c. A change in the money wage rate has no effect on the real wage rate,
everything else remaining the same
d. On the LAS curve, the change in the money wage rate is accompanied by an
equal percentage change in the price level
Answer: d)
10.2 Key Term Quiz (static)
1. Aggregate demand is the relationship between the quantity of ___ demanded
and the ___ when all other influences on expenditure plans remain the same
a. Nominal GDP; quantity of output supplied
b. Nominal GDP; interest rate
c. Real GDP; exchange rate
d. Real GDP; price level
Answer: d)
2. Disposable income is aggregate income minus taxes plus ___.
a. Transfer payments minus saving and minus consumption
b. Transfer payments
c. Transfer payments minus saving
d. Transfer payments minus consumption
Answer: b)
3. Which of the following statements illustrate fiscal policy?
a. A stronger dollar has lowered Canadian exports
b. The Bank of Canada has increased its reserve requirement
c. The Government of Canada has proposed a hike in the corporate tax rate
d. A rise in the expected future profits has increased Canadian investments
Answer: c)
4. Which of the following statements illustrate monetary policy?
a. The Canadian public debt-to-GDP ratio in 2011 was about 100 percent
b. Some Canadian firms have scrapped outsourcing to China due to rising
labour costs
c. The Bank of Canada has raised the overnight loans rate by 0.3 percent
d. The Government of Canada has increased its spending to boost demand
Answer: c)
10.2 Review Quiz 1 (static)
1. The aggregate demand curve shows the relationship between the quantity of
real GDP demanded and ___ when everything else remains the same.
a. Expected future income, inflation, and profits
b. The price level
c. The quantity of real GDP supplied
d. The interest rate
Answer: b)
2. A movement along the aggregate demand curve occurs if ___.
a. Government expenditure or the interest rate change, and the price level
remains the same
b. Expectations about future inflation or future income change, and the money
wage rate remains the same
c. The price level, the exchange rate or foreign income change, and the fullemployment quantity of labour remains the same
d. The price level changes and all other factors remain unchanged
Answer: d)
10.2 Review Quiz 2 (static)
Why does the aggregate demand curve slope downward?
1. The aggregate demand curve slopes downward because ___.
a. As the price level falls, expected future profits increase
b. Of the wealth effect and the substitution effect
c. As the price level falls, expected future income increases
d. Of the wealth effect and the price level effect
Answer: b)
10.2 Review Quiz 3 (algo)
How do an increase in the exchange rate and an increase in expected future income
change aggregate demand?
1. Aggregate demand ___ when an increase in the exchange rate occurs.
Aggregate demand ____ when an increase in expected future income occurs.
a. Decreases; decreases
b. Decreases; increases
c. Increases; increases
d. Increases; decreases
Answer: b)
2.
10.2 Study Plan Problem 3 (static)
1. When the government of Canada cuts income taxes, Canada’s aggregate
demand ___. When the United States experiences strong economic growth,
Canada’s aggregate demand ___.
a. Decrease; does not change
b. Increases; does not change
c. Decreases; increases
d. Increases; increases
Answer: d)
2. When Canada sets new environmental standards that require power utilities to
upgrade their production facilities, Canada’s aggregate demand ___.
a. Decreases
b. Increases
c. Does not change
Answer: b)
10.2 Study Plan Problem 4 (algo)
1. In the short run, aggregate demand ___.
a. Decreases because long-run aggregate supply decreases
b. Decreases because interest rates rise and it is more difficult to get a loan to
buy homes and large consumer goods
c. Increases because long-run aggregate supply increases
d. Increases because interest rates fall and it is it easier to get a loan to buy
homes and large consumer goods
Answer: d)
10.2 Study Plan Problem 5 (static)
1. The increase in the personal consumption expenditures ___ aggregate
demand. The decrease in exports ___ aggregate demand
a. Decreases; decreases
b. Increases; has no effect on
c. Increases; increases
d. Increases; decreases
Answer: d)
2. The increase in investment ___ aggregate demand. The increase in imports ___
aggregate demand
a. Has no effect on; decreases
b. Increases; decreases
c. Increases; has no effect on
d. Decreases; increases
Answer: b)
10.2 Extra Problem 1 (algo)
1. When the Canadian economy goes into an expansion, ___.
a. Mexico’s imports from Canada increase and Mexico’s aggregate demand
decreases
b. Mexico’s exports to Canada increase, Mexico’s aggregate demand increases,
and Mexico’s AD curve shifts rightward
c. Mexico’s price level rises and quantity of real GDP demanded decreases, but
Mexico’s aggregate demand is unchanged
d. Mexico’s price level rises and quantity of real GDP demanded increases, but
Mexico’s aggregate demand is unchanged
Answer: b)
2. When Mexico increases the quantity of money, Mexico’s aggregate demand
___.
a. Is unchanged, but the quantity of real GDP demanded increases and there is
a movement down along the AD curve
b. Is unchanged, but the quantity of real GDP demanded decreases and there is
a movement up along the AD curve
c. Decrease and its AD curve shifts leftward
d. Increases and its AD curve shifts rightward
Answer: d)
3. When the price level in Mexico rises, ___.
a. The quantity of real GDP demanded in Mexico increases
b. The quantity of real GDP demanded in Mexico decreases
c. Mexico’s aggregate demand increases
d. Mexico’s aggregate demand decreases
Answer: b)
10.3 Key Term Quiz (static)
1. Short-run macroeconomic equilibrium occurs when the quantity of ___
demanded equals the quantity of supplied at the point of intersection of the
___ curve and the ___ curve.
a. Loanable funds; loanable funds; DLF; SLF
b. Output; output; MD; MS
c. Real GDP; real GDP; AD; SAS
d. Reserves; reserves; RD; RS
Answer: c)
2. Long-run macroeconomic equilibrium occurs when real GDP ___ potential GDP
- equivalently, when the economy is on its ___ curve.
a. Equals; LAS
b. Exceeds; LAS
c. Exceeds; SAS
d. Is less than; AD
Answer: a)
3. An above full-employment equilibrium is an equilibrium when real GDP ___.
a. Equals potential GDP
b. Equals the price level
c. Exceeds potential GDP
d. Equals the interest rate
Answer: c)
4. The gap between ___ is the output gap. When ___, the output gap is called an
inflationary gap
a. Real GDP and aggregate demand; real GDP equals potential GDP
b. The price level and the cost; real GDP equals the interest rate
c. Real GDP and potential GDP; real GDP exceeds potential GDP
d. The interest rate and the price level; real GDP exceeds potential GDP
Answer: c)
5. When ___ there is a full-employment equilibrium
a. Real GDP exceeds potential GDP
b. Real GDP equals potential GDP
c. Labour productivity exceeds the real wage rate
d. The price level equals aggregate demand
Answer: b)
6. A below full-employment equilibrium is an equilibrium in which potential GDP
___ real GDP.
a. Equals
b. Is the sum of aggregate demand and
c. Is less than
d. Exceeds
Answer: d)
7. When potential GDP ___ real GDP, the output gap is called a recessionary gap
a. Exceeds
b. Equals
c. Is less than
d. Exceeds interest rate and
Answer: a)
8. Which of the following economies is facing a stagflation?
a. The Chinese economy is facing a rising labour cost
b. Japan has announced an increase in public expenditure
c. The European economy is experiencing a decrease in real GDP for three
quarters and a rise in the price level
d. The Bank of Canada is purchasing government securities to lower the interest
rate
Answer: c)
10.3 Review Quiz 1 (algo)
1. Economic growth results from ___.
a. A growing supply of labour and increasing labour productivity, which increase
long-run aggregate supply
b. The decisions of the Bank of Canada to cut interest rates, which increase
long-run aggregate supply
c. A rising exchange rate, which increases aggregate demand
d. A decreasing inflationary gap, which increases short-run aggregate supply
Answer: a)
10.3 Review Quiz 2 (algo)
1. Inflation results from ___.
a. a persistent increase in aggregate demand at a faster pace than that of the
increase in long-run aggregate supply
b. an increase in long-run aggregate supply that exceeds the increase in
aggregate demand
c. aggregate demand and long-run aggregate supply increasing at the same
pace
d. an increase in long-run aggregate supply that exceeds the increase in shortrun aggregate supply
Answer: a)
10.3 Review Quiz 3 (algo)
Describe three types of short-run macroeconomic equilibrium
1. A macroeconomic equilibrium in which real GDP exceeds potential GDP is ___
equilibrium. And one in which real GDP is less than potential GDP is ___
equilibrium
a. A below full-employment; an inflationary
b. A below full-employment; an above full-employment
c. An above full-employment; a below full-employment
d. An above full-employment; a recessionary
Answer: c)
2.
10.3 Review Quiz 4 (static)
1. Starting from a full-employment equilibrium, an increase in aggregate demand
___, and creates ___ gap
a. Increases real GDP above potential; a recessionary
b. Decreases real GDP below potential GDP; a recessionary
c. Increases real GDP above potential GDP; an inflationary
d. Decreases real GDP below potential GDP; an inflationary
Answer: c)
2. In the long run, the money wage rate ___, short-run aggregate supply ___, and
the economy returns to a full-employment equilibrium
a. Falls; increases
b. Rises; decreases
c. Falls; decreases
d. Rises; increases
Answer: b)
3. Starting from a full-employment equilibrium, a decrease in short-run aggregate
supply ___ the price level and ___ potential GDP
a. Increases; increases real GDP above
b. Increases; decreases real GDP below
c. Decreases; increases real GDP above
d. Decreases; decreases real GDP below
Answer: b)
Worked Problem (static)
1. Calculate the short-run equilibrium real GDP and price level
a. The short-run equilibrium real GDP is $___ billion and the price level is ___.
575, 110
2. Does the country have an inflationary gap or a recessionary gap and what is its
magnitude?
a. The country has ___ gap and its magnitude is $___ billion
i.
A recessionary; 32
ii.
An inflationary; 40
iii.
A recessionary; 25
iv.
An inflationary; 25
Answer: 600-575 = 25, iii)
3. If real GDP demanded at each price level increases by $50 billion, what is the
new short-run macroeconomic equilibrium and the output gap?
a. The new short-run macroeconomic equilibrium is at a real GDP of $___ billion
and a price level of ___.
600, 120
b. The economy has a ___ output gap.
No
10.3 Study Plan Problem 6 (algo)
1. Some events that could have changed aggregate demand from AD0 to AD1 are
___.
a. A fall in the exchange rate or a decrease in government expenditure
b. A decrease in government expenditure or an increase in taxes
c. A fall in the exchange rate or an increase in the quantity of money
d. A decrease in government expenditure or an increase in the quantity of
money
Answer: c)
2. Following the change in aggregate demand, the new equilibrium is at ___.
a. Point A
b. Point B
c. Point C
d. Point D
Answer: c)
3. If potential GDP is unchanged, the economy has moved to ___ equilibrium.
a. A full-employment
b. A below full-employment
c. An above full-employment
Answer: c)
10.3 Study Plan Problem 7 (static)
1. The events which could have changed short-run aggregate supply from SAS0
to SAS1 are ___.
a. a rise in the interest rate or a decrease in the quantity of money
b. a decrease in expected future profits or an increase in expected inflation
c. a rise in the money wage rate or a rise in the money price of any other factor
of production
d. an increase in taxes or a decrease in government expenditures
Answer: c)
2. Following the change in aggregate supply, the new macroeconomic
equilibrium is at ___.
a. Point A
b. Point B
c. Point C
d. Point D
Answer: a)
3. If potential GDP is unchanged, the economy has ____ gap.
a. An inflationary
b. A recessionary
c. No output
Answer: b)
10.3 Study Plan Problem 8 (static)
1. The new macroeconomic equilibrium is at ___.
a. Point A
b. Point B
c. Point C
d. Point D
Answer: d)
10.3 Extra Problem 6 (static)
1. Resisting protectionism ___.
a. increases potential GDP
b. helps to avoid recession by allowing all countries to produce for the larger
global market rather than for just their own domestic market
c. means countries produce the goods and services in which they do not have
comparative advantage
d. means countries buy goods and services from the countries that have the
higher opportunity cost in producing these goods and services
Answer: b)
2. If "resisting protectionism" results in Canada's exports increasing by more
than Canada's imports increase, then Canada's aggregate demand ______ and
Canada's aggregate supply ______.
a. Increases; increases
b. Decreases; does not change
c. Does not change; increases
d. Increases; does not change
Answer: d)
10.4 Key Term Quiz (static)
1. A classical macroeconomist believes that the economy is self-regulating and
always ___
a. Below full employment
b. Facing a balanced budget
c. At full employment
d. Above full employment
Answer: c)
2. A new classical view is that business cycle fluctuations are the ___ responses
of a well-functioning market economy that is bombarded by shocks that arise
from the uneven pace of ___
a. Efficient; technological change
b. Inefficient; technological change
c. Efficient; labour productivity growth
d. Inefficient; economic growth
Answer: a)
3. A Keynesian macroeconomist believes that left alone, the economy would
_____ operate at full employment and that to achieve and maintain full
employment, active help from fiscal policy and monetary policy is required. A
modern version of the Keynesian view, known as the new Keynesian view,
holds not only that the money wage rate is _____ but also that prices of goods
and services are _____.
a. always; flexible; flexible
b. always;sticky; sticky
c. rarely;flexible; flexible
d. rarely; sticky; sticky
Answer: d)
5.
A monetarist is a macroeconomist who believes that the economy is selfregulating and that it will normally operate ___, provided that monetary policy
is not erratic and that the pace of ___ is kept steady.
a. Above full employment; technological growth
b. At full employment; economic growth
c. At full employment; money growth
d. Below full employment; technological growth
Answer: c)
10.4 Review Quiz 1 (static)
What are the defining features of classical microeconomics and what policies do
classical macroeconomists recommend?
1. The defining feature of the classical view of macroeconomics is that the
economy is ___
a. Driven by expectations called “animal spirits”
b. Rarely at full employment
c. Constantly bombarded by shocks that arise from the uneven pace of
technological change
d. Self-regulating and always at full employment
Answer: d)
2. Classical macroeconomists recommend ___.
a. an increase in the quantity of money to offset decreases in aggregate
demand and a decrease in the quantity of money to offset increases in
aggregate demand
b. policies that actively offset changes in aggregate demand that bring recession
c. policies that minimize the disincentive effects of taxes on employment,
investment, and technological change
d. policies that actively offset changes in long-run aggregate supply that result in
negative economic growth
Answer: c)
10.4 Review Quiz 2 (static)
1. The defining feature of the Keynesian view of macroeconomics is that the
economy is ___
a. self-regulating and always at full employment
b. rarely at full employment
c. that the quantity of money is the most significant influence on aggregate
demand
d. constantly bombarded by shocks that arise from the uneven pace of
technological change
Answer: b)
2. Keynesian macroeconomists recommend ___.
a. an increase in the quantity of money to offset decreases in aggregate
demand and a decrease in the quantity of money to offset increases in
aggregate demand
b. policies that actively offset changes in long-run aggregate supply that result in
negative economic growth
c. policies that actively offset changes in aggregate demand that bring recession
d. policies that minimize the disincentive effects of taxes on employment,
investment, and technological change
Answer: c)
10.4 Review Quiz 3 (static)
What are the defining features of monetarist macroeconomics and what policies do
monetarist macroeconomists recommend?
1. The defining feature of the monetarist view of macroeconomics is that the
economy is ___.
a. constantly bombarded by shocks that arise from the uneven pace of
technological change
b. self-regulating and that it will normally operate at full employment, provided
that monetary policy is not erratic and that the pace of money growth is kept
steady
c. self-regulating and always at full employment
d. rarely at full employment
Answer: b)
2. Monetarist macroeconomists recommend ___.
a. policies that increase short-run aggregate supply to offset decreases in
aggregate demand
b. increases in the quantity of money to increase long-run aggregate supply
c. policies that actively offset changes in aggregate demand that bring recession
d. policies that keep taxes low to avoid disincentive effects that decrease
potential GDP
Answer: d)
10.4 Extra Problem 1 (static)
1. Tim Hudak and Dalton McGuinty most likely follow the ___ macroeconomic
school. Andrea Horwath most likely follows the ___ macroeconomic school
a. Classical; moetarist
b. Classical; Keynesian
c. Keynesian; classical
d. Monetarist; classical
Answer: b)
Quiz 5 (Chapter 11 and 12.2-4)
11.1 Key Term Quiz (static)
1. Aggregate planned expenditure is the sum of planned ____.
a. Consumption expenditure, investment, government expenditure, and exports
minus imports
b. Borrowing in the loanable funds market by households, firms, governments,
and the rest of the world
c. consumption expenditure, savings, net taxes, and net exports
d. Aggregate demand and aggregate supply
Answer: a)
2. Disposable income is aggregate income minus taxes plus ___.
a. Transfer payments minus consumption
b. Transfer payments
c. Transfer payments minus saving
d. Transfer payments minus saving and minus consumption
Answer: b)
3. The consumption function is the relationship between consumption
expenditure and ___, other things remaining the same
a. Aggregate demand
b. Disposable income
c. The price level
d. Saving
Answer: b)
4. The relationship between saving and ___, other things remaining the same, is
called the saving function.
a. Price level
b. Aggregate demand
c. Disposable income
d. Consumption expenditure
Answer: c)
5. If disposable income increases from $4 trillion to $7 trillion, consumption
expenditure increases from $3.5 trillion to $5.5 trillion, and nothing else
changes, the marginal propensity to consume is ___.
a. 0.79
b. 0.88
c. 0.67
d. 1.5
Answer: c)
6. If disposable income increases from $4 trillion to $7 trillion, saving increases
from $1.5 trillion to $2 trillion, and nothing else changes, the marginal
propensity to save is ___.
a. 0.17
b. 1.32
c. 0.23
d. 0.67
Answer: a)
7. If real GDP increases by $2 million and potential GDP increases by $3 million
and the marginal propensity to import is 0.2, by how much do imports change?
a. Imports decrease by $200,000
b. Imports increase by $400,000
c. Imports decrease by $400,000
d. Imports increase by $600,000
Answer: b)
11.1 Review Quiz 1 (static)
1. Which components of aggregate expenditure are influenced by real GDP?
a. Consumption expenditure, investments, and imports
b. Investment, exports, and imports
c. Consumption expenditure and imports
d. Consumption expenditure, government expenditure, investment, and imports
Answer: c)
11.1 Review Quiz 2 (static)
Define and explain how we calculate the marginal propensity to consume and the
marginal propensity to save
1. The marginal propensity to consume is ___.
a. Greater than the slope of the 45° line
b. Equal to the slope of the 45° line
c. The percentage of a household’s income that is not saved
d. The fraction of a change in disposable income that is spent on consumption
Answer: d)
2. The marginal propensity to save is ___.
a. Equal to the slope of the 45° line
b. The fraction of a change in disposable income that is saved
c. Greater than the slope of the 45° line
d. The percentage of a household’s income that is not spent on consumption
goods and services
Answer: b)
3. The marginal propensity to consume is equal to ___, and the marginal
propensity to save is equal to ___.
a. 1; 0
b. 0; 1
c. ΔC ÷ ΔY; ΔS ÷ ΔY
d. ΔC ÷ ΔYD; ΔS ÷ ΔYD
Answer: d)
11.1 Review Quiz 3 (static)
How do we calculate the effects of real GDP on consumption expenditure and imports
by using the marginal propensity to consume and the marginal propensity to import?
1. To calculate the effect of real GDP on consumption expenditure, we need to
know ___.
a. Only the marginal propensity to consume
b. Both the marginal propensity to consume and the marginal propensity to
import
c. Only the effect of real GDP on disposable income
d. Both the marginal propensity to consume and the effect of real GDP on
disposable income
Answer: d)
2. To calculate the effect of real GDP on imports, we need to know ___.
a. Both the marginal propensity to import and the marginal propensity to
consume
b. Only the effect of real GDP on disposable income
c. Both the marginal propensity to import and the effect of real GDP on
disposable income
d. Only the marginal propensity to import
Answer: d)
Worked Problem Parts 1,2,3 (static)
You are given the following data about an economy that has a fixed price level, no
imports, and no taxes.
1. Calculate the marginal propensity to consume
The marginal propensity to consume is ____
(155-88)/(200-100) = 0.75
2. Calculate autonomous consumption expenditure.
Autonomous consumption expenditure is $___ billion
Autonomous consumption expenditure is the amount of consumption expenditure that
depends on things other than disposable income
Therefore, consumption expenditure is $5 billion
3. Calculate saving at each level of disposable income and the marginal
propensity to save. Fill in the saving numbers in the table below
Disposable Income
Saving
0
-5
100
20
200
45
The marginal propensity to save is 0.25
11.1 Study Plan Problem 1 (algo)
In an economy, when disposable income increases from $400 to $500, consumption
expenditure increases from $450 billion to $525. Calculate the marginal propensity to
consume, the change in saving, and the marginal propensity to save
1. The marginal propensity to consume is ___
(525 - 450)/(500-400) = 0.75
2. When disposable income increases from $400 billion to $500 billion, saving
increases by $___ billion.
(525-450) - (500-400) = 25 billion
3. The marginal propensity to save is ___.
25/100 = 0.25
11.2 Key Term Quiz (static)
1. Consumption expenditure minus ___, which varies with real GDP is called
induced expenditure
a. Exports
b. Government expenditure
c. Aggregate demand
d. Imports
Answer: d)
2. The sum of investment, government expenditure, and exports, which ___, is
called autonomous expenditure.
a. Does not vary with imports
b. Does not vary with real GDP
c. Varies with imports
d. Varies with real GDP
Answer: b)
3. Equilibrium expenditure is the level of aggregate expenditure that occurs when
aggregate ___ equals ___.
a. Planned investment; real income
b. Demand; the price level
c. Planned expenditure; real GDP
d. Demand; real GDP
Answer: c)
11.2 Review Quiz 1 (static)
What is the relationship between aggregate planned expenditure and real GDP at
equilibrium expenditure?
1. At equilibrium expenditure, aggregate planned expenditure ____ real GDP
a. Equals
b. Might exceed or be less than but is moving toward
c. Is less than but is moving toward
d. Exceeds but is moving toward
Answer: a)
11.2 Review Quiz 3 (static)
If real GDP and aggregate expenditure are less than equilibrium expenditure, what
happens to firms? Inventories? How do firms change their production? And what
happens to real GDP?
1. Firms’ inventories ____...
a. Decrease
b. Increase
Answer: a)
2. …. So they ____ production, and real GDP ____.
a. Increase; decreases
b. Increase; increases
c. Decrease; decreases
d. Decrease; increases
Answer: b)
11.2 Review Quiz 4 (static)
If real GDP and aggregate expenditure are greater than equilibrium expenditure, what
happens to firms? Inventories? How do firms change their production? And what
happens to real GDP?
1. Firms’ inventories ____ …
a. Decrease
b. Increase
Answer: b)
2. … so they ___ production, and real GDP ____.
a. Decrease; increases
b. Increases; decreases
c. Decrease; decreases
d. Increase; increases
Answer: c)
11.2 Study Plan Problem 2 (static)
The figure illustrates the components of aggregate planned expenditure on Turtle
Island. Turtle Island has no imports or exports, no income taxes, and the price level is
fixed. Calculate autonomous expenditure and the marginal propensity to consume in
Turtle Island.
1. Autonomous expenditure is $___ billion
$2 billion
2. The marginal propensity to consume is ____.
(5.6 - 2.0) / 6 = 0.6
11.2 Study Plan Problem 3 (static)
The figure illustrates the components of aggregate planned expenditure on Turtle
Island. Turtle Island has no imports or exports, no income taxes, and the price level is
fixed.
1. What is aggregate planned expenditure when real GDP is $6 billion?
$5.6 billion
2. What is happening to inventories when real GDP is $6 billion?
Inventories are increasing
3. What is happening to inventories when real GDP is $4 billion?
Inventories are decreasing
11.2 Study Plan Problem 4 (static)
Explain the difference between induced consumption expenditure and autonomous
consumption expenditure.
1. Induced expenditure is ____. Autonomous expenditure is ____.
a. The expenditure on goods and services even when real GDP is zero; any
expenditure that increases as real GDP increases;
b. Consumption expenditure minus imports, which varies with real GDP; the
sum of investment, government expenditure, and exports, which does not
vary with real GDP
c. The sum of investment, government expenditure, and exports, which does not
vary with real GDP; consumption expenditure minus imports, which varies
with real GDP
d. Expenditure that decreases as real GDP increases; expenditure that
increases as real GDP increases
Answer: b)
2. Why isn’t all consumption expenditure induced expenditure? All consumption
is not induced expenditure because ___.
a. Some purchases are made using credit cards
b. Even a person with no income must buy life’s necessities
c. Even with no income a person enjoys some luxuries
d. Consumers save
Answer: b)
11.2 Study Plan Problem 5 (static)
Explain how an increase in business investment at a constant price level changes
equilibrium expenditure.
1. Business investment is a component of ___ aggregate expenditure. When it
increases, the AE curve ___ and equilibrium expenditure increases.
a.
b.
c.
d.
Induced; shifts upward
Autonomous; shifts upward
Autonomous; become steeper
Induced; becomes steeper
Answer: b)
11.3 Key Term Quiz (static)
1. A multiplier is the amount by which a change in any component of __ is
magnified or multiplied to determine the change in ___ and ___ that it
generates
a. Real GDP; exports; imports
b. Consumption expenditure; government expenditure; tax receipts
c. Autonomous expenditure; consumption expenditure; nominal GDP
d. Autonomous expenditure; equilibrium expenditure; real GDP
Answer: d)
2. The government expenditure multiplier equals the change in ___ that results
from a change in government expenditure divided by the change in
government expenditure.
a. Aggregate supply
b. Equilibrium expenditure and real GDP
c. Investment
d. Consumption expenditure
Answer: b)
3. If equilibrium expenditure changes by $50 billion that results from an increase
in autonomous taxes by $80 billion, find the autonomous tax multiplier.
a. 0.332
b. 0.429
c. 1.314
d. 0.625
Answer: 50/80 = 0.625
4. The balanced budget multiplier equals the change in equilibrium expenditure
and real GDP that results from equal changes in ___ divided by the change in
government expenditure
a. Exports and imports
b. Government expenditure and lump-sum taxes
c. Tax receipts and outlays
d. Aggregate demand and aggregate supply
Answer: b)
11.3 Review Quiz 1
1. What is the multiplier?
The multiplier is the amount by which the change in ___ expenditure is
magnified or multiplied to determine the change in equilibrium expenditure and
real GDP
2. What does it determine?
For every dollar increase in ___ expenditure, the multiplier determines the
increase in real GDP
a. Induced; autonomous
b. Induced; induced
c. Autonomous; induced
d. Autonomous; autonomous
Answer: d)
3. Why does it matter? The multiplier matters because we can use it to determine
by how much we should change autonomous expenditure to ___.
a. Increase real GDP by a given amount
b. Minimize taxes and maximize transfer payments
c. Maximize real GDP
d. Make inventories equal to their target levels
Answer: a)
11.3 Review Quiz 2 (static)
How do the marginal propensity to consume, the marginal propensity to import, and
the income tax rate influence the multiplier?
1. The multiplier increases when the marginal propensity to consume ___
a. Increase
b. Decrease
Answer: a)
2. The multiplier increases when the marginal propensity to import ___ or the
income tax rate ____.
a. Decreases; decreases
b. Increases; decreases
c. Decreases; increases
d. Increases; increases
Answer: a)
11.3 Review Quiz 3 (static)
How do fluctuations in autonomous expenditure influence real GDP?
1. Fluctuations in autonomous expenditure bring ___ fluctuations in real GDP?
a. Equal
b. Opposing
c. Diminished
d. Magnified
Answer: d)
Worked Problem Parts 4 and 5 (static)
You are given the following data about an economy that has a fixed price level, no
imports, and no taxes.
1. The multiplier is ___.
1 / (1 - Slope of the AE curve) = 1 / (1 - 0.75) = 4
Calculate the increase in real GDP when autonomous spending increases by $5
billion. Why does real GDP increase by more than $5 billion?
2. The increase in real GDP when autonomous spending increases by $5 billion is
$_____ billion. Real GDP increases by more than $5 billion because the
increase in real GDP increases _____ .
a. 20; autonomous expenditure
b. 20; induced consumption expenditure
c. 18; induced consumption expenditure
d. 10; income
Answer: b) Change in Real GDP = change in autonomous spending x
multiplier = 5 x 4 = 20
11.3 Study Plan Problem 6 (algo)
An economy has a fixed price level, no imports, and no income taxes. MPC is 0.5, and
real GDP is $250 billion. Businesses increase investment by $10 billion. Calculate the
multiplier and the change in real GDP
1. The multiplier is ___.
1 / (1 - 0.5) = 2
2. The increase in real GDP is $___ billion
10 x 2 = 20
11.3 Study Plan Problem 7 (algo)
An economy has a fixed price level, no imports, and no income taxes. MPC is 0.9, and
real GDP is $150 billion. Businesses increase investment by $2 billion. Calculate the
new level of real GDP and explain why real GDP increases by more than $2 billion
1. The new level of real GDP is $___ billion
150 + (2 / (1 - 0.9)) = 170
2. Real GDP increases by more than $2 billion because the increase in investment
____.
a. Increases exports
b. Induces an increase in consumption expenditure
c. Enables firms to produce more output
d. Increases the marginal propensity to consume
Answer: b)
11.3 Study Plan Problem 8 (algo)
An economy has a fixed price level, no imports, and no income taxes. An increase in
autonomous expenditure of $3 trillion increases equilibrium expenditure by $12
trillion. Calculate the multiplier and the marginal propensity to consume.
1. The multiplier is ___
12 / 3 = 4
2. The marginal propensity to consume is ___.
3 / 4 = 0.75
3. If an income tax is introduced in this economy, the multiplier ____.
a. Increases or decreases but we don’t know for sure
b. Increases
c. Does not change
d. Decreases
Answer: d)
11.4 Review Quiz 1 (static)
How does a change in the price level influence the AE curve and the AD curve? Use
the graphs to answer this question. Equilibrium expenditure is $12 trillion and the
price level is 110. Suppose the price level falls to 90 and the new equilibrium
expenditure is $13 trillion.
1. In the left graph, draw the AE curve that shows the effect of this event. Label it.
Draw a point to show the new equilibrium expenditure.
2. In the right graph, draw a point on the AD curve at the new equilibrium real
GDP and price level.
11.4 Review Quiz (algo)
If autonomous expenditure increases with no change in the price level, what happens
to the AE curve and the AD curve? Which curve shifts by an amount that is
determined by the multiplier and why?
1. The ___ curve shifts upward by an amount equal to the increases in
autonomous expenditure.
2. The ___ curve shifts rightward by an amount equal to the increases in
autonomous expenditure times the multiplier because the ___ at each price
level.
a. AD; AE; AE curve plots aggregate planned expenditure
b. AE; AD; AD curve plots aggregate planned expenditure
c. AE; AD; AD curve plots equilibrium expenditure
d. AD; AE; AE curve plots equilibrium expenditure
Answer: c)
Illustrate the effect of a change in autonomous expenditure. Investment increases by
$0.5 trillion, and the multiplier is 4.
3. Draw a new aggregate demand curve that shows the effect of the increase in
investment. Label it AD1.
4. Draw a point to indicate the quantity of real GDP demanded following the
increase in investment when the price level is 115. Label it B.
11.4 Review Quiz 3 (static)
How does an increase in autonomous expenditure change real GDP in the short run?
Does real GDP change by the same amount as the change in aggregate demand? Why
or why not?
Use the graph to answer these questions. AD0 is the aggregate demand curve when
investment is $1.0 trillion. Investment increases to $1.5 trillion, and the multiplier
when the price level is constant is 8.
1. Draw the new aggregate demand curve and label it.
2. Draw a point to indicate the quantity of real GDP demanded if the price level
remains at 115. Label it 1.
3. Draw a point at the new short-run equilibrium. Label it 2.
4. The size of the multiplier in the short run is ___.
Investment increases by $0.5 trillion, the quantity of real GDP demanded in the short
run increases from $12 trillion to $14 trillion, an increase of $2 trillion.
$2 trillion / $0.5 trillion = 4
11.4 Study Plan Problem 9 (static)
Explain the link between equilibrium expenditure and the quantity of real GDP
demanded.
1. When the price level rises, equilibrium expenditure ____.
a. Decreases and a movement occurs up along the AD curve. The quantity of
real GDP demanded decreases.
b. Increases and the AD curve shifts rightward. Aggregate demand increases
c. Increases and a movement occurs down along the AD curve. The quantity of
real GDP demanded increases
d. Decreases and the AD curve shifts leftward. Aggregate demand decreases
Answer: a)
11.4 Study Plan Problem 10 (algo)
Suppose that the economy is at full employment, the price level is 100, and the
multiplier is 3. Investment increases by $50 billion. What is the change in equilibrium
expenditure if the price level remains at 100?
1. The change in equilibrium expenditure is $___ billion.
50 x 3 = 150
11.4 Study Plan Problem 12 (static)
Suppose that the economy is at full employment, the price level is 100, and the
multiplier is 2. Investment increases by $100 billion. In the short run, does the price
level remain at 100? Explain why or why not.
1. In the short run, the price level ___ because ____.
a. Remains at 100; the aggregate demand curve shifts horizontally, which keeps
the price level constant
b. Rises; the short-run aggregate supply curve is upward sloping
c. Rises; the economy returns to full employment
d. Remains at 100; the economy initially moves to an above full-employment
equilibrium. To return to full-employment, aggregate demand decreases
Answer: b)
11.4 Study Plan Problem 13 (static)
Suppose that the economy is at full employment, the price level is 100, and the
multiplier is 2.Investment increases by $100 billion. The graph shows the effect of the
increase in investment on aggregate demand. The AD curve has shifted from AD0 to
AD1. In the long run, does real GDP increase by more than, less than, or the same
amount as the immediate increase in the quantity of real GDP demanded? Explain
how the price level changes in the long run.
1. To answer these questions, draw a curve that shows how the economy returns
to long-run equilibrium. Label it.
2. Draw a point at the new long-run equilibrium.
3. In the long run, the price level rises ____.
a. By more than it does in the short run
b. Because potential GDP increases
c. Because the money wage rate falls
d. Because short-run aggregate supply increases
Answer: a)
11.4 Study Plan Problem 14 (static)
Suppose that the economy is at full employment, the price level is 100, and the
multiplier is 2. Investment increases by $100 billion. Are the values of the multipliers
in the short run and the long run larger or smaller than 2? Use the graph to answer
this question. It shows the economy initially at the intersection of the LAS, AD0, and
SAS0 curves. After the increase in investment, the AD curve shifted to AD1. Calculate
the multipliers in the short run and in the long run.
1. In the short run, the multiplier is ___ and in the long run, the multiplier is ___.
The multiplier is equal to the change in equilibrium expenditure divided by the change in
autonomous expenditure.In the short run when investment increases by $100 billion, the
aggregate demand curve shifts rightward and equilibrium real GDP increases from $1,000
billion to $1,100 billion, an increase of $100 billion.The change in investment is a change in
autonomous expenditure, so the multiplier is equal to $100 billion÷$100 billion, which is
1.0.The economy is in an above full-employment equilibrium.In the long run, the money
wage rate rises, and the short-run aggregate supply curve shifts leftward from SAS0 to
SAS1. Real GDP returns to its full-employment level of $1,000 billion. So in the long run,
there is no change in equilibrium expenditure.So the multiplier is equal to $0 billion ÷$100
billion, which is 0. Therefore 1; 0
11.4 Extra Problem 3 (static)
Potential GDP is $1,200 billion. Suppose the cut in corporate taxes returns the
economy to a full-employment equilibrium.
1. In the left graph, draw the new AE curve. Label it.
2. In the right graph, draw the curve that returns the economy to a fullemployment equilibrium. Label it.
11.4 Extra Problem 4 (static)
Suppose the Canadian Centre for Policy Alternatives is correct and the cut in
corporate taxes decreases equilibrium real GDP to $1,180 billion in the short run.
1. In the left graph, draw a curve to show the new short-run macroeconomic
equilibrium. Label the curve.
2. In the right graph, draw a curve to show the short-run macroeconomic
equilibrium. Label the curve.
11. MN Study Plan Problem 15 (algo)
You are given the following data about an economy that has a fixed price level, no
imports, and no taxes
Calculate the change in equilibrium expenditure when investment decreases by $20
billion.
1. The change in equilibrium expenditure is ____ of $___ billion
A decrease; 50
11. MN Extra Problem 1 (static)
In the Canadian economy, autonomous consumption expenditure is $50 billion,
investment is $200 billion, and government expenditure is $250 billion. The marginal
propensity to consume is 0.7 and net taxes are $250 billion. Exports are $500 billion
and imports are $450 billion. Assume that net taxes and imports are autonomous and
the price level is fixed.
1. The consumption function in billions of dollars is _____
a. C = 0.7 (Y - 250)
b. C = 50 + 0.7 (YD - 250)
c. C = 50 + 0.7 (Y - 250)
d. C = 50 + 0.7Y
Answer: c)
2. The equation of the AE curve in billions of dollars is ___.
a. AE = 0.7 + 375Y
b. AE = 0.7Y + 1275
c. AE = 0.7Y + 300
d. AE = 0.7Y + 375
Answer: d)
3. Equilibrium expenditure is $___ billion.
1250
4. The multiplier is ____.
3.33
5. If investment decreases to $150 billion, the change in equilibrium expenditure
is ___ billion dollars.
-166.7
6. When investment decreases, aggregate planned expenditure is ___ than real
GDP. Inventories ____, so firms _____ production.
a. Less; increase above target; decrease
b. Greater; increase above target; decrease
c. Less; decrease below target; increase
d. Greater; decrease below target; increase
Answer: a)
7. When firms decrease production, the ___ in real GDP ___ disposable income.
Consumption expenditure ___, which leads to a further ___ in aggregate
planned expenditure. This process continues until the economy arrives at its
new equilibrium expenditure.
a. Increase; increases; increases; increase
b. Decrease; decreases; decreases; decrease
c. Increase; decreases; decreases; decreases
d. Decrease; decreases; increases; decrease
Answer: b)
12.2 Key Term Quiz (static)
1. An inflation that starts because ___ is called demand-pull inflation
a. Interest rate rises
b. Aggregate supply increases
c. Aggregate demand increases
d. Cost of production increases
Answer: c)
2. An inflation that is kicked off by an increase in ___ is called cost-push inflation.
a. Cost
b. Aggregate supply
c. Productivity
d. Aggregate demand
Answer: a)
3. The combination of a rising ___ and decreasing ___ is called stagflation
a. Price level; real GDP
b. Price level; consumption expenditure
c. Interest rate; productivity
d. Unemployment rate; productivity
Answer: a)
4. A rational expectation is a forecast that results from the use of all the relevant
data and ___.
a. Economic news
b. Economic intuition
c. Economic science
d. A logical conclusion
Answer: c)
12.2 Review Quiz 1 (static)
How does demand-pull inflation begin?
1. A demand-pull inflation begins with ___.
a. An increase in the money wage rate
b. An increase in aggregate demand that is greater than the corresponding
decrease in short-run aggregate supply
c. An increase in aggregate demand
d. A decrease in aggregate demand
Answer: c)
12.2 Review Quiz 2 (static)
1. What must happen to create a demand-pull inflation spiral?
a. The quantity of money must persistently increase
b. The federal funds rate must be lowered
c. The government must run a budget deficit
d. Labour unions must push up wage rates
Answer: a)
2. The graph shows three AD curves and three SAS curves for an economy that
begins at point A. Draw a point to show the new equilibrium when the Fed
increases the quantity of money. Label it B. Draw a point to show the new
equilibrium when the money wage rate rises. Label it C. Draw a point to show
the new equilibrium when the Fed increases the quantity of money again. Label
it D. Draw a point to show the new equilibrium when the money wage rate rises
again. Label it E.
3. In a demand-pull inflation spiral, the economy moves from ___ to ___.
a. An above full-employment equilibrium; a below full-employment equilibrium
b. An above full-employment equilibrium; a full-employment equilibrium
c. A below full-employment equilibrium; a full-employment equilibrium
d. A period of low inflation; a period of higher inflation
Answer: b)
12.2 Review Quiz 3 (static)
How does cost-push inflation begin?
1. A cost-push inflation begins with ___ as the result of an increase in the money
wage rate or an increase in the money prices of raw materials.
a. A decrease in short-run aggregate supply
b. An increase in short-run aggregate supply
c. An increase in aggregate demand
d. A decrease in aggregate demand
Answer: a)
12.2 Review Quiz 5 (static)
What is stagflation and why does cost-push inflation cause stagflation?
1. Stagflation is a combination of a ___ in the price level and ___ in real GDP.
a. Fall; a decrease
b. Rise; a decrease
c. Rise; an increase
d. Fall; an increase
Answer: b)
2. Stagflation occurs when ___.
a. Costs increase
b. The quantity of money increases
c. The quantity of money decreases
d. Costs decreases
Answer: a)
12.2 Review Quiz 7 (algo)
How do real GDP and the price level change if the forecast of inflation is incorrect?
1. When the inflation rate exceeds the expected rate, the economy behaves like it
does in a ___ inflation: The price level is higher than expected and real GDP
___ potential GDP.
a. Demand-pull; rises above
b. Cost-push; rises above
c. Demand-pull; falls below
d. Cost-push; falls below
Answer: a)
Worked Problem Part 1 (static)
The table shows the aggregate demand and short-run aggregate supply schedules of
Shell Island in which potential GDP is $600 billion. The economy is at fullemployment.
1. An unexpected increase in exports increase aggregate demand by $50 billion.
What happens to the price level and real GDP? Has Shell Island experienced
inflation or deflation and what type of output gap does it now have?
The price level ___ and real GDP ___ billion. Shell Island has experienced ___.
a. Falls to 120; increases to $425; a one-time change in the price level and has
an inflationary gap
b. Falls to 130; decreases to $500; deflation and has a recessionary gap
c. Rises to 130; increases to $625; a one-time change in the price level and has
an inflationary gap
d. Rises to 120; increases to $625; inflation and has a recessionary gap
Answer: c)
Worked Problem Part 2 (static)
The table shows the aggregate demand and short-run aggregate supply schedules of
Shell Island in which potential GDP is $600 billion. The economy is at fullemployment.
1. The price of oil falls unexpectedly and aggregate supply increases by $50
billion. What type of output gap appears? If the central bank responds to close
the output gap, does Shell Island experience inflation or deflation?
___
a. A recessionary; increases; demand-pull inflation
b. An inflationary; decreases; cost-push deflation
c. An inflationary; decreases; cost-push inflation
d. A recessionary; increases; demand-pull deflation
Answer: b)
Worked Problem Part 3 (static)
The table shows the aggregate demand and short-run aggregate supply schedules of
Shell Island in which potential GDP is $600 billion. The economy is at fullemployment.
The government of Shell Island announces an increase in spending of $50 billion a
year and the central bank will increase the quantity of money to pay for the spending.
Does the economy go into a boom? Will there be inflation?
1. The economy ___ into a boom, real GDP ___ billion, and ___ arises.
a. Goes; remains at $600; inflation
b. Goes; increases to $600; inflation
c. Does not go; decreases to $600; deflation
d. Does not go; remains at $600; inflation
Answer: d)
12.2 Study Plan Problem 2 (static)
1. The new clip is describing ___ inflation.
a. Demand-pull
b. Cost-push
c. Demand-push
d. Cost-push
Answer: a)
2. Draw a curve that shows the effect of the actions described in the newsclip.
Label it. Draw a point at the new equilibrium in the economy.
12.2 Study Plan Problem 3 (static)
The economy starts out on the curves AD0 and SAS0. Some events then occur that
generate a demand-pull inflation. What might those events have been? Describe their
initial effects and explain how a demand-pull inflation spiral results.
1. All of the following events except an increase in ___ might cause a demandpull inflation
a. Exports
b. Government expenditure
c. The quantity of money
d. The money wage rate
Answer: d)
2. Starting at point A, the initial effect of a demand-pull inflation is a move to
point ___. As a demand-pull inflation spiral proceeds, it follows the path ___.
a. E; I
b. C; B, H, G, I
c. C; E, H, I
d. B; E, G, I
Answer: c)
12.2 Study Plan Problem 4 (static)
The economy starts out on the curves AD0 and SAS0. Some events then occur that
generate a cost-push inflation. What might those events have been? Describe their
initial effects and explain how a cost-push inflation spiral develops.
1. Which of the following events might cause a cost-push inflation?
a. A decrease in exports
b. An increase in the money wage rate or an increase in the money prices of
raw materials
c. A decrease in government expenditure
d. An increase in the quantity of money
Answer: b)
2. Starting at point A, the initial effect of a cost-push inflation is a move to point
___. As a cost-push inflation spiral proceeds, it follows the path ___.
a. E; I
b. B; E, G, I
c. C; B, H, G, I
d. C; E, H, I
Answer: b)
12.2 Study Plan Problem 5 (static)
The economy starts out on the curves AD0 and SAS0. some events then occur that
generate an expected inflation. What might those events have been? Describe their
initial effects and what happens as an expected inflation proceeds.
1. Which of the following events would not cause an expected inflation?
a. An expected increase in taxes
b. An expected increase in government expenditure
c. An expected increase in exports
d. An expected increase in the quantity of money
Answer: a)
2. Starting at point A, the initial effects of an expected inflation is a movement to
point ____. As an expected inflation proceeds, it follows the path ___.
a. C; E, H, I
b. E; I
c. C; B, H, G, I
d. B; E, G, I
Answer: b)
12.2 Extra Problem 1 (static)
Read the news clip, then answer the following question.
1. Pakistan is experiencing ___ inflation
a. Cost-push
b. Cost-pull
c. Demand-push
d. Demand-pull
Answer: a)
12.2 Extra Problem 2 (static)
Read the news clip, then answer the following question.
1. China is experiencing a ___ inflation caused by increases in ___.
a. Demand-pull; wage rates
b. Cost-push; government expenditure and the quantity of money
c. Cost-push; commodity prices
d. Cost-push; wage rates
Answer: c)
1
2.2 Extra Problem 3 (static)
12.2 Extra Problem 4 (static)
The graph shows China’s aggregate demand curve, short-run aggregate supply curve,
and the long-run aggregate supply curve. Draw a curve that shows the effect of a rise
in commodity prices. Label it C1. Draw a curve that shows the response from the
central bank that returns the economy to potential GDP. Label it C2. Draw a curve that
shows the effect of another rise in commodity prices. Label it C3. Draw a curve that
shows the money wage rate response that returns the economy to potential GDP.
Label it C4. Draw a point at the new price level and real GDP.
12.2 Extra Problem 5 (static)
Read the news clip, then answer the following questions.
1. The news clip refers to ____ inflation when it discusses rising production
costs. “Rising labour productivity” can neutralize the effect on the inflation
rate of “higher input costs” because ___.
a. Demand-pull; it increases short-run aggregate supply
b. Cost-push; it increases short-run aggregate supply and long-run aggregate
supply with no slowdown in aggregate demand growth
c. Demand-pull; it increases aggregate demand
d. Cost-push; it increases aggregate demand by more.
Answer: b)
12.3 Review Quiz 1 (static)
1. What is deflation?
a. A one-time fall in the price level
b. A persistently falling price level
c. A fall in profit expectations
d. A decrease in a country’s exports
Answer: b)
12.3 Review Quiz 2 (static)
1. What is the distinction between deflation and a one-time fall in the price level?
Answer by choosing the statement that is incorrect
a. A one-time fall in the price level occurs either because aggregate demand
decreases or because short-run aggregate supply increases.
b. In a deflation, the price level persistently falls
c. In a deflation, the inflation rate is positive but decreasing in subsequent years.
d. A one-time fall in the price level occurs when there is an increase in capital
that increases potential GDP.
Answer: c)
12.3 Review Quiz 3 (static)
1. What causes deflation?
a. A slowdown in the growth rate of the quantity of money
b. A slowdown in the growth rate of potential GDP
c. Aggregate demand increasing at a persistently slower rate than aggregate
supply.
d. Aggregate demand increasing at a persistently faster rate than aggregate
supply.
Answer: c)
12.3 Review Quiz 4 (static)
How does the quantity theory of money help us to understand the process of
deflation?
1. The quantity theory of money tells us that ___.
a. The inflation rate cannot be negative if the real GDP growth rate is positive
b. A change in the money growth rate brings an equal and opposite change in
the inflation rate
c. The inflation rate will be negative if the money growth rate is lower than the
real GDP growth rate
d. There is no relationship between the inflation rate and the money growth rate
Answer: c)
12.3 Review Quiz 5 (static)
What are the consequences of deflation?
1. Deflations are usually unanticipated, and among other things, unanticipated
deflation brings all of the following except ___.
a. Falling real wage rates for workers with long-term wage contracts
b. A decrease in real GDP
c. A decrease in employment
d. A redistribution of income and wealth
Answer: a)
12.3 Review Quiz 6 (static)
1. How can deflation be ended?
a. By increasing the growth rate of the quantity of money
b. By increasing the velocity of circulation
c. By increasing the growth rate of potential GDP
d. By increasing the quantity of money
Answer: a)
12.3 Study Plan Problem 6 (static)
Suppose that the velocity of circulation of money is constant and real GDP is growing
at a constant 2% a year.
1. To achieve an inflation target of 2% a year, at what rate would the central bank
grow the quantity of money? The central bank would have to grow the quantity
of money at ___ percent a year.
Money growth rate = inflation rate + real GDP growth rate = 2 + 2 = 4%
2. At what growth rate of the quantity of money would deflation be created?
Deflation would be created at a growth rate of the quantity of money ___.
a. Less than 4% a year
b. Less than 2% a year
c. Greater than 6% a year
d. Greater than 2% a year
Answer: b)
12.2 Extra Problem 6 (static)
Read the news clip, then answer the following question.
1. Choose the correct statement.
a. “Slowing growth” cannot reduce inflationary pressure because slow growth is
always accompanied by inflationary expectations
b. “Slowing growth” can reduce inflationary pressure if aggregate demand
growth slows
c. “Slowing growth” cannot reduce inflationary pressure because inflation is just
a way of life in the 21st century
d. “Slowing growth” can reduce inflationary pressure if short-run aggregate
supply growth slows.
Answer: b)
12.2 Extra Problem 7 (static)
The graph shows the economy's long-run aggregate supply, short-run aggregate
supply, and aggregate demand curves.
Draw an AD curve that shows the effect of an increase in the expected inflation rate.
Label it.
Draw an SAS curve that shows the effect of an increase in the money wage rate when
the economy experiences expected inflation and returns to an full-employment
equilibrium. Label it.
Draw a point at the new long-run equilibrium.
12.4 Key Term Quiz (static)
1. The short-run Phillips curve is a curve that shows the relationship between the
___ rate and ___ when ___ and the ___ remain constant.
a. Inflation; the interest rate; the interest rate; supply of loanable funds
b. Unemployment; real GDP; real GDP; cyclical unemployment rate
c. Inflation; the unemployment rate; the natural unemployment rate; expected
inflation rate
d. Interest; real GDP; potential GDP; expected inflation rate
Answer: c)
2. The long-run Phillips curve is the relationship between ___ and ___ when the
economy is at full employment. The long-run Phillips curve is a ___ line at the
___ unemployment rate.
a. Inflation; nominal GDP; horizontal; frictional
b. Inflation; unemployment; vertical; natural
c. Real GDP; the real interest rate; horizontal; natural
d. Real GDP; potential GDP; vertical; cyclical
Answer: b)
12.4 Review Quiz 1 (static)
1. The graph shows a short-run Phillips curve. Draw an arrow along the curve
that shows the effect of an unexpected increase in inflation. Label it 1. Draw an
arrow along the curve that shows the effect of an unexpected decrease in
inflation. Label it 2.
2. An unexpected increase in aggregate demand ___ rate, which is shown by ___
the short-run Phillips curve.
a. Increases unemployment and decreases the expected inflation; a downward
shift of
b. Decreases unemployment and increases the expected inflation; a movement
up along
c. Decreases unemployment and increases the inflation; a movement up along
d. Increases unemployment and decreases the inflation; a movement down
along
Answer: c)
12.4 Review Quiz 2 (static)
1. Draw a short-run Phillips curve. Label it SRPC1. Draw a point at the expected
inflation rate and the natural unemployment rate. Label it 1. Draw the short-run
Phillps curve if the expected inflation rate rises by 10% a year. Label it SRPC2.
Draw a point at the expected inflation rate and the natural unemployment rate.
Label it 2.
2. A change in the actual inflation rate brings a movement along the ___. A
change in the expected inflation rate brings ___.
a. SRPC; no change in the SRPC
b. SRPC; a shift of the LRPC
c. LRPC; a shift of the LRPC
d. SRPC; a shift of the SRPC
Answer: d)
12.4 Review Quiz 3 (static)
If the natural unemployment rate increases, what happens to the short-run Phillips
curve and the long-run Phillips curve?
1. The long-run Phillips curve ___ and the short-run Phillips curve ___.
a. Does not shift; does not shift
b. Shifts rightward; curve does not shift
c. Does not shift; shifts rightward
d. Shifts rightward; shifts rightward
Answer: d)
2. The expected inflation rate ___
a. Does not change
b. Falls
c. Rises
Answer: a)
12.4 Review Quiz 4 (static)
Does Canada have a stable short-run Phillips curve? Explain why or why not.
1. Canada ___ have a stable short-run Phillips curve because ___.
a. Does not; it shifts when the expected inflation rate and natural unemployment
rate change
b. Does; expected inflation and natural unemployment don’t change much
c. Does; a fall in unemployment always brings a rise in inflation
d. Does not; it shifts when the output gap changes
Answer: a)
12.4 Study Plan Problem 7 (static)
What does the Phillips curve model say about the relationship between the
unemployment rate and the inflation rate?
1. The Phillips curve model says the short-run relationship is negative (inverse)
and shifts ___.
a. When the expected inflation rate changes and when the natural
unemployment rate changes
b. When there is an output gap
c. Only when the natural unemployment rate changes
d. Only when the expected inflation rate changes
Answer: a)
2. Explain the event in the news clip in terms of what is happening to the shortrun and long-run Phillips curves.
a. The long-run Phillips curve has disappeared
b. The long-run Phillips curve has shifted leftward but the short-run Phillips
curve has not changed
c. The short-run Phillips curve has disappeared
d. A low expected inflation rate has shifted the short-run Phillips curve
downward
Answer: d)
12.4 Extra Problem 2 (static)
1. The inflation and unemployment trends during the Great Depression can be
explained by a movement along the ___ Phillips curve that ___.
a. Long-run; increases the unemployment rate and leaves the expected inflation
rate unchanged
b. Long-run; lowers the inflation rate and increases the unemployment rate
c. Short-run; lowers the inflation rate and increases the unemployment rate
d. Short-run; lowers the expected inflation rate and increases the actual
unemployment rate
Answer: c)
2. During 2008, the inflation rate increased and the unemployment rate increased.
These events ___.
a. Can be explained by a movement along the SRPC because along this curve
the inflation rate and unemployment rate move in the same direction
b. Cannot be explained by a movement along the SRPC because along this
curve the inflation rate and unemployment rate move in opposite directions
c. Could not have occurred because according to the SRPC, inflation and
unemployment always move in opposite directions
d. Can be explained by a movement along the LRPC because along this curve
the inflation rate and unemployment rate move in the same direction
Answer: b)
Quiz 6 (Chapter 13 and 14)
13.1 Key Term Quiz (static)
1. The federal budget is an annual statement of the ___ of the government of
Canada together with the laws and regulations that approve and support them.
a. Budget surplus and subsidies
b. Revenue generation
c. Budget deficit and transfer payments
d. Outlays and revenues
Answer: d)
2. Which of the following statements illustrates fiscal policy?
a. A rise in the expected future profits has increased Canadian investments
b. A stronger dollar has lowered Canadian exports
c. The government of Canada has proposed a hike in the corporate tax rate
d. The Bank of Canada has increased its reserve requirement
Answer: c)
3. If revenues are $3650 billion and outlays are $3400 billion, the budget surplus
is ___. If revenues are $4000 billion and outlays are $4800 billion, the budget
deficit is ___.
a. $250 billion; $800 billion
b. $3400 billion; $1200 billion
c. $830 billion; $450 billion
d. $800 billion; $250 billion
Answer: a)
4. If revenues are $3,500 billion and the government has a balanced budget, what
is government outlays
a. Cannot be determined from the above information
b. $7,500 billion
c. $3,500 billion
d. Zero billion
Answer: c)
5. Government debt is the total amount that government ___.
a. Has lent
b. Has borrowed
c. Pays as interest on debt
d. Pays as unemployment benefits
Answer: b)
13.1 Review Quiz 1 (algo)
What are the main items of government revenues and outlays?
1. All of the following are government revenues except ____.
a. Corporate income taxes
b. Indirect and other taxes
c. Transfer payments
d. Investment income
Answer: c)
2. All of the following are government outlays except ____.
a. Debt interest
b. Expenditure on goods and services
c. The federal government debt
d. Transfer payments
Answer: c)
13.1 Review Quiz 2 (static)
Under what circumstances does the government have a budget surplus?
1. The government has a budget surplus when ____.
a. Canadaian corporations pay more in corporate income taxes than they
receive in transfer payments
b. Revenues exceed outlays
c. Debt interest is zero
d. Canadians pay more in person
Answer: b)
13.1 Review Quiz 3 (algo)
1. Explain the connection between a government budget deficit and a
government debt
Choose the correct statements.
1. There is no connection between the government budget deficit and
government debt
2. When the government budget is in surplus, government debt decreases
3. Government debt is the sum of past deficit minus the sum of past
surpluses.
4. Canada’s government debt-to-GDP ratio has increased every year since
1974.
a. Statements 2 and 3 are correct
b. Statements 1 and 4 are correct
c. Statements 3 and 4 are correct
d. Statements 1 and 3 are correct
Answer: a)
13.1 Study Plan Problem 1 (algo)
1. At the end of 2017, the government of France’s debt was €2,211 billion. (€, the
euro, is the currency of France.) In 2018, the government spent €1,283 billion
and ended the year with a debt of €2280 billion. How much did the government
receive in tax revenue in 2018?
a. The government received €___ billion in tax revenue in 2018.
1283 - (2280 - 2211) = 1214
13.1 Extra Problem 3 (static)
Read the news clip, then answer the following question. A persistent budget deficit
can feed itself because ____.
a.
b.
c.
d.
Once a country has a government deficit, it is almost impossible to eliminate
The deficit increases the government debt, which increases the debt interest
A budget deficit results in a recession
The government must pay higher interest rates the greater the budget deficit
Answer: b)
13.1 Extra Problem 4 (static)
At the end of 2011, the debt of the government of Greece was 375 billion euros and
Greek GDP was 225 billion euros. The interest rate on Greek government debt was
25% a year. How much interest did Greece pay on its debt in 2011? What percentage
of Greek GDP did the interest represent?
1. Greece paid €___ billion euros of interest on its debt in 2011.
0.25 x 375 = €93.75 billion
2. The interest represented ___ percent of the deficit.
(93.75 / 225) x 100 = 41.7 % of GDP
13.2 Key Term Quiz (static)
1. The tax wedge is the gap created by a tax between what ____ and what ____.
a. An employee pays; an employee receives
b. A buyer pays; a seller receives
c. A buyer pays; a buyer spends
d. The government receives; the government spends
Answer: b)
2. The relationship between the ____ is called the Laffer Curve.
a. Tax rate and economic growth rate
b. Tax rate and the amount of tax revenue collected
c. The amount of tax revenue collected and the exchange rate
d. Interest rate and the inflation rate
Answer: b)
13.2 Review Quiz 1 (static)
1. How does a tax on labour income influence the equilibrium quantity of
employment?
A tax on labour income ____.
The equilibrium quantity of labour ____.
a. Decreases the supply of labour and increases the demand for labour;
decreases
b. Decreases the supply of labour; decreases
c. Decreases the supply of labour and increases the demand for labour;
increases
d. Decreases the demand for labour; decreases
Answer: b)
2. At the new equilibrium quantity of labour, the before-tax wage rate ____ and
the after-tax wage rate ____.
a. Rises; rises
b. Falls; rises
c. Falls; falls
d. Rises; falls
Answer: d)
13.2 Review Quiz 2 (static)
1. How does the tax wedge influence potential GDP? The graph shows a
production function. Initially the full-employment quantity of labour is 25 billion
hours and potential GDP is $1,300 billion. The government decides to tax
labour income and a tax wedge is created.
Draw an arrow along the PF that shows the change in potential GDP.
13.2 Review Quiz 3 (static)
1. Why are consumption taxes relevant for measuring the tax wedge?
A tax on consumption ____.
a. Decreases the tax wedge in the labour market because it raises the
prices paid for consumption goods and services and people have less
incentive to buy more expensive goods, so they work fewer hours.
b. Has no effect on the tax wedge in the labour market.
c. Adds to the tax wedge in the labour market because it raises the prices
paid for consumption goods and services and is equivalent to a cut in
the real wage rate.
d. Increases the demand for labour because people work more hours so
they can afford more expensive goods.
Answer: c)
13.2 Review Quiz 5 (static)
1. What is the Laffer curve and why is it unlikely that Canada is on the "wrong"
side of it? The Laffer curve is the relationship between the ______ and the
______ .
a. Tax wedge; amount of tax revenue collected
b. Tax rate; government budget balance
c. Tax wedge; government budget balance
d. Tax rate; amount of tax revenue collected
Answer: d)
2. It is unlikely that Canada is on the "wrong" side of this curve because, if it
were, a decrease in the tax rate would ______ .
a. Increase tax revenue
b. Bring a budget surplus
c. Decrease tax revenue
d. Bring a budget deficit
Answer: a)
13.2 Study Plan Problem 2 (static)
1. The government is considering raising the tax rate on labour income. Explain
the supply-side effects of such an action and use appropriate graphs to show
the directions of change, not exact magnitudes. What will happen to the supply
of labour and the demand for labour and why?
The supply of labour will ______ and the demand for labour will ______.
a. Decrease because the tax weakens the incentive to work; not change
because labour productivity doesn't change
b. Decrease because the tax weakens the incentive to work; decrease
because the tax increases the cost of labour
c. Not change because workers still need a job; not change because
labour productivity doesn't change
d. Not change because workers still need a job; decrease because the tax
increases the cost of labour
Answer: a)
2. What will happen to equilibrium employment and the equilibrium before-tax
and after-tax wage rates and why? Because the tax ______ , the equilibrium
level of employment will ______ , the before-tax wage rate will ______, and the
after-tax wage rate will ______.
a. Drives a wedge between the take-home wage and the cost of labour;
decrease; rise; fall
b. Pays for government expenditure; increase; fall; rise
c. Pays for government expenditure; decrease; rise; fall
d. Decreases the government budget deficit; increase; fall; rise
Answer: a)
3. What will happen to potential GDP, and why?
Potential GDP will ____ because ____.
a. Decrease; employment decreases
b. Decrease; the tax lowers productivity
c. Increase; the tax finances more government spending
d. Increase; the tax strengthens the incentive to product
Answer: a)
4. Use appropriate graphs to show the directions of change. The graph shows the
Canadian labour market. Draw the LS + tax curve when a tax rate on labour
income is imposed. Label it. Draw a point at the new before-tax wage rate at the
new equilibrium employment level. Label it 1. Draw a point at the new after-tax
wage rate at the new equilibrium employment level. Label it point 2.
5. The graph shows the Canadian production function. Draw a point that
indicates potential GDP when the equilibrium quantity of labour is 25 billion
hours. Show the effect of a tax on labour income. Draw either an arrow along
the PF showing the direction of change, or a new production function. Draw
only the one of these objects that correctly shows the effect of the tax.
13.2 Study Plan Problem 3 (static)
1. What fiscal policy action might increase investment and speed economic
growth? Explain how the policy action would work.
A fiscal policy action that might increase investment and speed economic
growth is ______ , which works by ______ the real interest rate paid by
borrowers and ______ the real interest rate earned by savers and suppliers of
loanable funds.
a. Government borrowing; raising; lowering
b. A decrease in the tax on interest income; lowering; raising
c. A decrease in the tax on interest income; raising; lowering
d. Government borrowing; lowering; raising
Answer: b)
13.2 Extra Problem 2 (static)
1. Do Tax Cuts Ever Pay for Themselves?
Since even before Arthur Laffer drew his famous curve on a napkin, the
political left and right has been having the same fight about taxes and growth.
There are but a few cases where tax cuts did pay for themselves.
Source: Slate, June 24, 2011
A tax cut pays for itself if the economy lies to the ______ of the maximum point
on the Laffer curve. This statement implies that the absolute value of the tax
multiplier is ______.
a. Left; less than 1.
b. Right; greater than 1.
c. Left; greater than.
d. Right; less than 1.
Answer: b)
2. Tax cuts will not pay for themselves if ______.
a. The government has a structural deficit
b. The economy is in a recession
c. The economy lies to the left of the maximum point on the Laffer curve
d. The economy is in an expansion
Answer: c)
13.3 Key Term Quiz (static)
1. Fiscal stimulus is the use of the fiscal policy to increase ___.
a. Investment
2.
3.
4.
5.
6.
b. The inflation rate
c. Production and employment
d. The interest rate
Answer: c)
An automatic fiscal policy is a fiscal policy action that is triggered by ___. A
discretionary fiscal policy is a fiscal policy action that is initiated by ___.
a. The state of the economy; the Bank of Canada
b. The state of the economy; an act of Parliament
c. An act of Parliament; the state of the economy
d. The Department of Finance; Industry Canada
Answer: b)
The structural surplus or deficit is the budget balance that would occur if the
economy were ___.
a. At trade balance
b. Below full employment
c. At full employment
d. Above full employment
Answer: c)
The cyclical surplus or deficit is the budget balance that arises because ___
and ___ are ___ their full-employment levels.
a. Revenues; outlays; not at
b. Real GDP; potential GDP; not at
c. Real GDP; nominal GDP; at
d. Revenues; outlays; at
Answer: a)
The government expenditure multiplier is the effect of a change in government
expenditure on goods and services on ___.
a. Aggregate supply
b. Consumption
c. Real GDP
d. Aggregate demand
Answer: d)
The tax multiplier is the effect of a change in taxes on ___.
a. Aggregate demand
b. Aggregate supply
c. Real GDP
d. Wage rates
Answer: a)
13.3 Review Quiz 1 (algo)
1. What is the distinction between automatic and discretionary fiscal policy?
Choose the correct statements.
a. Fiscal stimulus is the use of fiscal policy to increase production and
employment
b. The increase in total unemployment benefits triggered by the rise in the
unemployment rate through 2009 is an example of discretionary fiscal policy
c. The fiscal stimulus act passed by the U.S. government in 2008 is an example
of automatic fiscal policy
d. A fiscal policy action that is triggered by the state of the economy with no
action of government is called automatic fiscal policy
Answer: c)
13.3 Review Quiz 2 (static)
How do taxes and transfer payments programs work as automatic fiscal policy to
dampen the business cycle?
1. Taxes and transfer payments programs work as automatic fiscal policy to
dampen the business cycle because taxes ___ during an expansion, and
transfer payments ___ during a recession.
a. Increase; decrease
b. Decrease; increase
c. Decrease; decrease
d. Increase; increase
Answer: d)
13.3 Review Quiz 3 (static)
How do we tell whether a budget deficit needs discretionary action to remove it?
1. A budget deficit needs government discretionary action to remove it is a ___
deficit.
a. Cyclical
b. Structural
Answer: b)
2. A ___ deficit will disappear when the economy moves back to full employment.
a. Cyclical
b. Structural
Answer: a)
3. The Canadian budget deficit in 2016 was ___ deficit.
a. A structural only
b. Both a structural and cyclical
c. A cyclical only
Answer: b)
13.3 Review Quiz 4 (static)
How can the federal government use discretionary fiscal policy to stimulate the
economy?
1. An economy is experiencing a recessionary gap. The government can ___.
a. Increase expenditure or cut taxes to increase short-run aggregate supply
b. Raise taxes to decrease long-run aggregate supply
c. Increase expenditure or cut taxes to increase aggregate demand
d. Raise taxes or decrease the quantity of money to decrease long-run
aggregate supply
Answer: c)
13.3 Review Quiz 5 (static)
Why might fiscal stimulus crowd out investment?
1. Fiscal stimulus that increases an existing government budget deficit ___
loanable funds, which ___ investment.
a. Decreases the demand for; decreases the real interest rate and increases
b. Increases the demand for; decreases the real interest rate and increases
c. Increases the demand for; increases the real interest rate and decreases
d. Decreases the supply of; increases the real interest rate and decreases
Answer: c)
Worked Problem (static)
Look at the information provided:
1. What would be the short-run effects of new government infrastructure
expenditure? In the short run, new infrastructure expenditure will increase the
government budget deficit, which will ___ the real interest rate and ___ private
investment.
a. Lower; increase
b. Lower; crowd out some
c. Increase; decrease som
d. Increase; increase
Answer: c)
2. What would be the short-run effects of new infrastructure expenditure? In the
short run, new infrastructure expenditure will ___ aggregate demand and with
no change in aggregate supply will create ___ gap.
a. Decrease; inflationary
b. Decrease; no output
c. Increase; an inflationary
d. Increase; a recessionary
Answer: c)
3. What would be the long-run effects of new government infrastructure
expenditure are a ___ rate and ___ in potential GDP.
a. Fall in the inflation; a decrease
b. Rise in the interest; an increase
c. Fall in the money wage; a decrease
d. Rise in the money wage; an increase
Answer: d)
4. How would lower income taxes change the macroeconomic variables? Lower
income taxes ___ equilibrium employment and ___ potential GDP.
a. Increases; increases
b. Increases; decreases
c. Decreases; increases
d. Decreases; decreases
Answer: a)
5. Which policy would increase the economic growth rate? A ___ will increase
investment income, which will increase the rate of capital accumulation and
increase the economic growth rate.
a. Lower tax rate on interest income
b. Higher real interest rate
c. Lower real interest rate
d. Higher tax rate on interest income
Answer: a)
Worked Problem Part 1 (static)
Look at the information provided:
1. What would be the short-run effects of new government infrastructure
expenditure? In the short run, new infrastructure expenditure will increase the
government budget deficit, which will ___ the real interest rate and ___ private
investment.
a. Increase; decrease some
b. Lower; crowd out some
c. Lower; increase
d. Increase; increase
Answer: a)
2. What would be the short-run effects of new infrastructure expenditure? In the
short run, new infrastructure expenditure will ___ aggregate demand and with
no change in aggregate supply will create ___ gap.
a. Decrease; inflationary
b. Increase; a recessionary
c. Increase; an inflationary
d. Decrease; no output
Answer: c)
Worked Problem Part 2 (static)
Look at the information provided:
1. What would be the long-run effects of new government infrastructure
expenditure? The long-run effects of new infrastructure expenditure are a ___
rate and ___ in potential GDP.
a. Fall in the inflation; a decrease
b. Fall in the money wage; a decrease
c. Rise in the interest; an increase
d. Rise in the money wage; an increase
Answer: d)
Worked Problem Part 3 (static)
Look at the information provided:
1. How would lower income taxes change the macroeconomic variables? Lower
income taxes ___ equilibrium employment and ___ potential GDP
a. Increases; decreases
b. Decreases; increases
c. Decreases; decreases
d. Increases; increases
Answer: d)
Worked Problem Part 4 (static)
Look at the information provided:
1. Which policy would increase the economic growth rate? A ___ will increase
investment income, which will increase the rate of capital accumulation and
increase the economic growth rate.
a. Lower tax rate on interest income
b. Lower real interest rate
c. Higher tax rate on interest income
d. Higher real interest rate
Answer: a)
13.3 Study Plan Problem 5 (static)
The economy is in a recession and the recessionary gap is large. Describe the
discretionary and automatic fiscal policy actions that might occur.
1. Discretionary fiscal policy that might occur is ___. Automatic fiscal policy that
might occur is ___.
a. An increase in government expenditure and a cut in taxes by a decision of
Parliament; an increase in transfer payments and a fall in taxes
b. A decrease in government expenditure and an increase in taxes by a decision
of Parliament; a decrease in transfer payments and an increase in taxes with
no interference by Parliament.
c. An increase in transfer payments and a fall in taxes with no interference by
Parliament; an increase in government expenditure and a cut in taxes by a
decision of Parliament
d. A decrease in transfer payments and an increase in taxes with no
interference by Parliament; a decrease in government expenditure and an
increase in taxes by a decision of Parliament.
Answer: a)
2. Describe a discretionary fiscal stimulus package that could be used that would
not bring an increase in the budget deficit. A discretionary fiscal stimulation
package that would avoid a budget deficit is a simultaneous and equal ___.
a. Increase in transfer payments and a decrease in taxes
b. Increase in government expenditure and an increase in taxes
c. Decrease in transfer payments and increase in the quantity of money
d. Decrease in government expenditure and taxes
Answer: b)
3. Explain the risks of discretionary fiscal policy in this situation. Discretionary
fiscal policy is risky because it is hampered by all of the following lags except
___.
a. Law-making lag
b. Impact lag
c. Business cycle lag
d. Recognition lag
Answer: c)
13.3 Study Plan Problem 6 (static)
The economy is in a recession, the recessionary gap is large, and there is a budget
deficit.
1. Do we know whether the budget deficit is structural or cyclical? Explain your
answer and use a graph to illustrate it. We know that the budget deficit is ___
because revenues are ___ and outlays are ___ than their full-employment level.
a. Entirely structural; higher; lower
b. At least partly structural; higher; lower
c. At least partly cyclical; lower; higher
d. Entirely cyclical; lower; higher
Answer: c)
2. The graph shows how government outlays and revenues change when real
GDP changes. Draw a double arrow to indicate the structural deficit and label it
1. Draw a double arrow to indicate the actual deficit if real GDP is $1700 billion
and label it 2.
3. Do we know whether automatic fiscal policy is increasing or decreasing the
output gap? Explain your answer. We know that automatic fiscal policy is ___
the output gap because revenues are ___ than their full-employment levels.
a. Increasing; lower and outlays are higher
b. Decreasing; higher and outlays are lower
c. Decreasing; lower and outlays are higher
d. Increasing; higher and outlays are lower
Answer: c)
4. If a discretionary increase in government expenditure occurs, what happens to
the structural deficit or surplus? The structural deficit ___ or the structural
surplus ___.
a. Increases; increases
b. Decreases; decreases
c. Increases; decreases
d. Decreases; increases
Answer: c)
5. If a discretionary increase in government expenditure occurs, what happens to
the structural deficit or surplus? The structural deficit ___ or the structural
surplus ___.
a. Increases; increases
b. Decreases; decreases
c. Increases; decreases
d. Decreases; increases
Answer: c)
13.3 Study Plan Problem 9 (static)
Was the NDP’s proposed infrastructure spending a fiscal stimulus?
1. This infrastructure spending is a fiscal stimulus.
a. True
b. False
Answer: a)
Would such spending be a discretionary or an automatic fiscal policy?
2. Such spending is ___ fiscal policy
a. Discretionary
b. Automatic
c. Structural
d. Cyclical
Answer: a)
13.3 Study Plan Problem 11 (static)
What would have a larger effect on aggregate demand: corporate tax cuts or an
equivalent scale increase in government expenditure on infrastructure and green
energy projects?
1. Government spending on infrastructure and green energy projects would have
a ___ effect on aggregate demand than corporate tax cuts because ___.
a. Smaller; corporate tax cuts increase aggregate demand and government
spending decreases aggregate demand
b. Larger; all of government spending is added to potential GDP but not all of
the corporate tax cuts are used to finance investment
c. Smaller; corporate tax cuts increases aggregate demand and government
spending decreases aggregate supply
d. Larger; all of government spending is added to aggregate demand but not all
of the corporate tax cuts are used to finance investment
Answer: d)
13.3 Extra Problem 1 (static)
Read the news clip, then answer the following question.
1. A budget deficit in 2011 does all of the following except ___.
a. Increases investment
b. Raises the real interest rate
c. Increase the demand for loanable funds
d. Decreases real GDP and decreases the number of jobs
Answer: a)
13.3 Extra Problem 4 (static)
1. A cut in corporate income taxes results in all of the following except ___.
a. A decrease in the tax rate
b. It has an effect spread out over several years because it encourages
businesses to invest in new capital, and new capital will take years to become
productive
c. It creates jobs because it increases corporate income
d. A significant decrease in tax revenue
Answer: d)
2. The graph shows the Canadian economy. Draw an aggregate demand to show
the effect of a cut in corporate income taxes if the result returns the economy
to full employment. Label it. Draw a point at the new macroeconomic
equilibrium.
14.1 Key Term Quiz (static)
1. Inflation rate targeting is a ___ policy strategy in which the ___ makes a public
commitment to achieving an explicit ___ target and to explaining how its policy
actions will achieve that target.
a. Monetary; central bank; inflation
b. Monetary; central bank; interest
c. Fiscal; government; expenditure
d. Fiscal; government; export
Answer: a)
14.1 Review Quiz 1 (static)
What is the Bank of Canada’s monetary policy objective?
1. The objective of the Bank of Canada’s monetary policy is to ___.
a. Control the quantity of money and interest rates to avoid inflation and when
possible prevent excessive swings in real GDP growth and unemployment
b. Keep the unemployment rate below 5 percent, the inflation rate between 1
and 3 percent a year, and long-term real GDP growth above 4 percent a year
c. Keep the unemployment rate below 5 percent, the inflation rate between 1
and 3 percent a year, and long-term interest rates below 4 percent a year
d. Keep the labour force participation rate above 80 percent, the inflation rate
below 2 percent a year, and the exchange rate fluctuating by less than 3
percent a year
Answer: a)
14.1 Review Quiz 2 (static)
What are the two parts of the inflation-control target?
1. The two parts of the inflation-control target are that the target will be defined in
terms of the 12-month change in the ___, and the target will be ___.
a. Total CPI; the 2 percent midpoint of a 1 to 3 percent range
b. Core CPI; the 2 percent midpoint of a 1 to 3 percent range
c. Core CPI; a stable core price level
d. Total CPI; a stable price level
Answer: a)
14.1 Review Quiz 3 (static)
How does the core inflation rate differ from the overall CPI inflation rate?
1. The core inflation rate is ___ volatile than the overall CPI inflation rate ___.
a. Less; and the trend in core inflation is lower than the total CPI inflation trend
b. More; but the trends in core inflation and the total CPI inflation are similar
c. Less; but the trends in core inflation and the total CPI inflation are similar
d. More; and the trend in core inflation is higher than the total CPI inflation trend
Answer: c)
14.1 Review Quiz 4 (static)
What is the Bank of Canada’s record in achieving its inflation-control target?
1. The Bank of Canada has ___ missed its 1 to 3 percent target range and the
average inflation rate has been ___ 2 percent.
a. Occasionally; above
b. Never; exactly
c. Often; above
d. Rarely; close to
Answer: d)
14.1 Study Plan Problem 1 (static)
1. The statement, “Unemployment is a more serious economic problem than
inflation and it should be the focus of the Bank of Canada’s monetary policy,”
is ____
a. A testable possibly correct fact
b. An unclearly expressed opinion
c. A policy rule
d. A clearly stated fact
Answer: b)
2. The Bank of Canada’s primary goal is a target inflation rate because ____.
a. Attaining this goal makes the Canadian dollar the highest-valued currency on
the foreign exchange market
b. The Bank of Canada Act mandates price stability as the Bank of Canada’s
only goal
c. Monetary policy can’t influence unemployment, even in the short run
d. Hitting the inflation target helps to avoid excessive swings in real GDP growth
and unemployment
Answer: d)
14.1 Study Plan Problem 2 (static)
“Monetary policy is too important to be left to the Bank of Canada. The government
should be responsible for it.” How is responsibility for monetary policy allocated
between the Bank of Canada and the government?
1. The Bank of Canada economists provide the Governing Council with extensive
briefings that guide monetary policy
a. True
b. False
Answer: a)
2. The Bank of Canada Act requires regular consultations on monetary policy
between the Governor and the Minister of Finance.
a. True
b. False
Answer: a)
3. In the event of profound disagreement between the Governor and the Minister
of Finance, the Minister would direct the Bank in writing to follow a specified
course and the Bank would be obliged to accept the directive.
a. True
b. False
Answer: a)
14.1 Study Plan Problem 3 (static)
What does the inflation control agreement say about the Bank’s control of the
quantity of money?
1. The agreement says ___.
a. Nothing about the quantity of money: it is an agreement about setting the
overnight interest rate
b. Nothing about the quantity of money: it is an agreement about the objective,
not the means of achieving it
c. The quantity of money must grow at the same rate as potential GDP
d. The quantity of monetary base must grow at the same rate as potential GDP
Answer: b)
2. Why is it important that the agreement be renewed again in 2021, and what
might be some obstacles to its renewal? Choose the statement that is
INCORRECT.
a. It is important to renew the agreement because with the agreement the
inflation rate always remains between 1 and 3 percent a year.
b. Obstacles to the renewal of the agreement may occur because some critics
argue that by focusing on inflation, the Bank sometimes permits real GDP
growth to suffer.
c. It is important to renew the agreement because the target provides an anchor
for low inflation expectations, which make the short-run output-inflation
tradeoff as favourable as possible.
d. Obstacles to the renewal of the agreement may occur because some critics
argue that by focusing on inflation, the Bank sometimes permits the
unemployment rate to rise.
Answer: a)
14.1 Extra Problem 1 (static)
1. The Bank of Canada has been concerned with long-term trends because ___.
a. The joint statement of the government of Canada and the Bank of Canada
requires the Bank to respond to long-term trends and not to short-term trends
b. In the long run, inflation is high, and when inflation is high the unemployment
rate is low
c. Expectations about long-term trends help consumers and firms make better
economic decisions, which leads to a more efficient allocation of resources
and more stable economic growth
d. In the long run, inflation is unpredictable
Answer: c)
14.2 Key Term Quiz (static)
1. The overnight loans rate is the interest rate on overnight loans that the ___.
Bank of Canada charges the big banks
a. Big banks charge the Bank of Canada
b. Big banks make to each other
c. Bank of Canada charges the big banks
d. Chartered banks make to their best customers
Answer: b)
2. The operating band is the target overnight loans rate plus or minus ___
percentage points
a. 0.025
b. 2.5
c. 0.25
d. 25
Answer: c)
3. Bank rate is the interest rate that ___.
a. The Bank of Canada pays banks on their reserves held at the Bank of
Canada
b. Big banks charge on loans to each other
c. The Bank of Canada charges big banks on loans
d. Chartered banks charge their best customers
Answer: c)
4. The settlement balances rate is the interest rate that ___.
a. Chartered banks charge their best customers
b. The Bank of Canada pays banks on their reserves held at the Bank of
Canada
c. Big banks charge on loans to each other
d. The Bank of Canada charges big banks on loans
Answer: b)
14.2 Review Quiz 1 (static)
What is the Bank of Canada’s monetary policy instrument?
1. The Bank of Canada’s monetary policy instrument is ___.
a. The quantity of money
b. The Treasury bill rate
c. The overnight loans rate
d. The exchange rate
Answer: c)
14.2 Review Quiz 2 (static)
Summarize the Bank of Canada’s monetary policy decision-making process
1. The Bank of Canada’s monetary policy decision-making process begins with
the Bank gathering a large amount of data about the economy, the way it
responds to shocks, and the way it responds to policy. This data is processed
and a judgement is made about the best level for the overnight loans rate.
a. True
b. False
Answer: a)
2. To aid in the deliberative process that ends with the Governing Council finding
a consensus on the interest rate level to set, the Bank uses ___. ___ a year, the
Bank publishes the Inflation Report, which describes the forces operating on
the economy and the reasons for the Bank’s interest rate decision
a. Canadian regional and national data on macroeconomic performance only;
Twice
b. Canadian regional and national data and international data on
macroeconomic performance, financial markets, and inflation expectations;
Twice
c. Canadian regional and national data on macroeconomic performance only;
Once
d. Canadian regional and national data and international data on
macroeconomic performance, financial markets, and inflation expectations;
Once
Answer: b)
14.2 Review Quiz 3 (static)
What is the operating band?
1. The operating band is the target overnight rate plus or minus ___ percentage
points
0.25
2. The Bank of Canada creates the operating band by setting two more rates, ___.
a. The Treasury Bill rate and the settlements balances rate
b. Bank rate and the settlements balances rate
c. The mortgage rate and the Treasury Bill rate
d. Bank rate and the Treasury Bill rate
Answer: b)
3. Bank rate is the interest rate that the Bank of Canada ___. The settlements
balance rate is the interest rate that the Bank of Canada ___.
a. Pays banks on their reserves at the Bank of Canada; charges consumers on
loans
b. Charges big banks on loans; pays banks on their reserves at the Bank of
Canada
c. Charges consumers on loans; pays banks on their reserves at the Bank of
Canada
d. Pays banks on their reserves at the Bank of Canada; charges big banks on
loans
Answer: b)
4. The operating band keeps the overnight rate to within ___ percentage points of
its target.
0.25
14.2 Review Quiz 4 (static)
What happens when the Bank of Canada buys securities in the open market?
1. When the Bank of Canada buys securities, reserves ___. The Bank of Canada’s
assets and liabilities.
a. Decrease; increase
b. Decrease; decrease
c. Increase; decrease
d. Increase; increase
Answer: d)
2. When the Bank of Canada sells securities, the interest rate ___. The Bank of
Canada’s assets and liabilities ___.
a. Rises; increase
b. Falls; increase
c. Rises; decreases
d. Falls; decrease
Answer: c)
14.2 Review Quiz 5 (static)
How is the overnight loans rate determined in the market for bank reserves?
1. The overnight loans rate is determined by ___ in the market for bank reserves.
The overnight loans rate ___.
a. Inflation forces; equals the nominal interest rate minus the inflation rate
b. Inflation forces; equals the real interest rate plus the inflation rate
c. Equilibrium; equals the real interest rate
d. Equilibrium; is the rate that sets the quantity of reserves demanded equal to
the quantity of reserves supplied
Answer: d)
14.2 Study Plan Problem 4 (static)
What are the possible monetary policy instruments and which one does the Bank of
Canada use?
1. The possible monetary policy instruments are ___, and the Bank of Canada
uses ___.
a. Foreign exchange reserves and the exchange rate; the exchange rate
b. The monetary base, the exchange rate, and the overnight interest rate; the
exchange rate
c. The monetary base, the exchange rate, and the overnight interest rate; the
overnight interest rate
d. The federal government budget balance and the real interest rate; the real
interest rate
Answer: c)
How has the value of the overnight rate behaved since 1997?
2. The value of the overnight rate has ___, and since 2009 it has been ___.
a. Trended downward; historically low
b. Fluctuated; around 4 percent
c. Trended upward; historically high
d. Been constant; constant
Answer: a)
14.2 Study Plan Problem 5 (static)
How does the Bank of Canada hit its overnight loans rate target?
1. The Bank of Canada hits its overnight loans rate target by ___.
a. Encouraging the government to change taxes
b. Intervening in the foreign exchange market
c. Setting mortgage rates
d. Setting the operating band and using an open market operation
Answer: d)
14.2 Study Plan Problem 6 (static)
What does the Bank of Canada do to determine whether the overnight loans rate
should be raised, lowered, or left unchanged?
1. To determine whether the overnight loans rate should be raised, lowered, or
left unchanged, the Bank of Canada does all of the following except ___.
a. Studies how the economy responds to shocks
b. Consults with and takes direction from the Department of Finance
c. Studies how the economy responds to policy
d. Gathers regional, national, international data
Answer: b)
14.2 Study Plan Problem 7 (static)
Explain the situation faced by the Bank of Canada in 2017
1. In 2017, the Bank of Canada faced an economy ___, with ___ inflation, and with
uncertainty about the strength of external expansionary forces
a. At full employment; low
b. At full employment; high
c. With low unemployment; high
d. With high unemployment; low
Answer: a)
14.2 Study Plan Problem 8 (static)
1. Why might the Bank of Canada take “a more cautious approach to any future
increases” in interest rate?
2. Why might the Bank of Canada decide to lower the interest rate in the future?
The Bank of Canada might take “a more cautious approach to any future increases” if
it thought the current level would ___.
The Bank of Canada might decide to lower the interest rate in the future if it thought
the current level would ___.
a. Bring a widening inflationary gap with rising inflation; raise the inflation rate to
more than 3 percent
b. Keep inflation on target and maintain full employment; put inflation above
target and decrease unemployment
c. Put inflation above target and decrease unemployment; raise the inflation rate
to more than 3 percent
d. Keep inflation on target and maintain full employment; put inflation below
target and increase unemployment
Answer: d)
14.2 Extra Problem 1 (static)
Read the news clip, then answer the following question.
1. To boost bank reserves, the Fed (the U.S. central bank) ___.
a. Raised interest rates
b. Made an open market purchase
c. Made an open market sale
d. Raised the foreign exchange rate of the U.S. dollar
Answer: b)
14.3 Review Quiz 1 (algo)
Describe the channels by which monetary policy ripples through the economy and
explain how each channel operates. Suppose the Bank of Canada lowers the
overnight loans rate.
1. When the Bank of Canada lowers the overnight loans rate, it makes an open
market ___.
a. Purchase
b. Sales
Answer: a)
2. Other short-term interest rates and the exchange rate ___.
a. Fall
b. Rise
Answer: a)
3. The quantity of money and the supply of loanable funds ___.
a. Increase
b. Decrease
Answer: a)
4. The long-term real interest rate ___.
a. Rises
b. Falls
Answer: b)
5. The ___ real interest rate ___ consumption expenditure and investment.
a. Lower; increases
b. Higher; decreases
c. Lower; decreases
d. Higher; increases
Answer: a)
6. The lower exchange rate makes Canadian exports cheaper and imports more
costly. So net exports increase. Lower interest rates increase aggregate
expenditure.
7. Aggregate demand increases,which increases real GDP and the price level,
relative to what they would have been. Real GDP growth and inflation speed up.
14.2 Review Quiz 2 (static)
Do interest rates fluctuate in response to the Bank of Canada’s actions?
1. Interest rates ___ fluctuate in response to the Bank of Canada’s actions. The
short-term interest rates - the overnight loans rate and the 3-month Treasury
bill rate - move ___.
a. Do not; in opposite directions
b. Do not; closely together
c. Do; closely together
d. Do; in opposite directions
Answer: c)
2. The long-term bond rate is higher than the short-term rates, and it fluctuates
less than the short-term rates
14.3 Review Quiz 3 (algo)
How do the Bank of Canada’s actions change the exchange rate?
1. When the Bank of Canada raises the overnight loans rate, the Canadian
interest rate differential ___, and other things remaining the same, the
Canadian dollar ___.
a. Falls; appreciates
b. Rises; depreciates
c. Rises; appreciates
d. Falls; depreciates
Answer: c)
14.3 Review Quiz 4 (algo)
How do the Bank’s actions influence real GDP and how long does it take for real GDP
to respond to the Bank’s policy changes? The Bank of Canada’s actions influence
real GDP by changing expenditure plans.
1. Other things remaining the same, the higher the real interest rate, the ___ is the
amount of consumption expenditure and the ___ is the amount of saving.
a. Greater; smaller
b. Greater; greater
c. Smaller; greater
d. Smaller; smaller
Answer: c)
2. Other things remaining the same, the higher the real interest rate, the ___ is the
amount of investment and the ___ are net exports.
a. Greater; smaller
b. Smaller; greater
c. Smaller; smaller
d. Greater; greater
Answer: c)
3. The monetary policy transmission process is almost immediate and its results
are relatively easy to predict.
a. True
b. False
Answer: b)
14.3 Review Quiz 5 (algo)
How do the Bank’s actions influence the inflation rate and how long does it take for
inflation to respond to the Bank’s policy changes? The Bank of Canada’s actions
influence the inflation rate by changing expenditure plans
1. When the Bank of Canada wants to raise the overnight loans rate target, the
Bank makes an open market ___. Other short-term interest rates and the
exchange rate ___.
a. Sale; fall
b. Sale; rise
c. Purchase; rise
d. Purchase; fall
Answer: b)
2. The quantity of money and the supply of loanable funds ___. The long-term
real interest rate ___.
a. Increase; falls
b. Increase; rises
c. Decreases; falls
d. Decrease; rises
Answer: d)
3. Consumption expenditure, investment, and net exports ___. Aggregate
demand ___.
a. Increase; increase
b. Decrease; decreases
c. Increase; decreases
d. Decrease; increases
Answer: b)
4. The inflation rate ___ after the change in the overnight loans rate.
a. Rises one month
b. Falls one month
c. Rises more than a year
d. Falls more than a year
Answer: d)
Worked Problem (static)
Look at the information provided:
When the Fed lowers the interest rate, which macroeconomic variables change
immediately and in which direction?
1. The Fed lowers the federal funds rate target by ___ securities in the open
market. As the interest rate falls, the U.S. dollar ___ in the foreign exchange
market.
a. Buying; appreciate
b. Selling; appreciates
c. Buying; depreciates
d. Selling; depreciate
Answer: c)
Which macroeconomic variables change over the next few weeks or months and in
which direction?
2. Over the next few weeks or months, as banks make new loans, the real interest
rate ___. Investment ___ and net exports ___.
a. Raises; increases; increase
b. Lowers; increases; decrease
c. Raises; decreases; decrease
d. Lowers; increases; increase
Answer: d)
Which macroeconomic variables change over the next year or two and in which
direction?
3. The change in real interest rate influences ___ aggregate expenditure over the
next year. If aggregate supply is slow to change, then after about two years
___.
a. Decreases; the inflation rate slows
b. Increases; employment decreases
c. Increases; the inflation rate rises
d. Decreases; unemployment rises
Answer: c)
Does the economic growth rate increase?
4. The decision to lower the interest rate ___ increase the economic growth rate
___.
a. Will because the lower real interest rate increase all components of aggregate
demand in the long run
b. Will not; because in the long run the money wage rate rises which increases
inflation
c. Will not; unless the pace of productivity growth also increases
d. Will; because the lower interest rate increases real GDP in the long run
Answer: c)
14.3 Study Plan Problem 9 (static)
Explain the effects of the Bank of Canada’s interest rate rise on household saving and
consumption and business investment.
1. When the Bank of Canada raises the ___, eventually the ___ rises, which
decreases ___ and increases ___.
a. Overnight interest rate; real interest rate; household saving; household
consumption and business investment
b. Real interest rate; overnight interest rate; household consumption and
business investment; household saving
c. Overnight interest rate; real interest rate; household consumption and
business investment; household saving
d. Real interest rate; overnight interest rate; household saving; household
consumption and business investment
Answer: c)
2.
14.3 Study Plan Problem 10 (static)
Explain the effects of the changes in household saving and consumption and
business investment on aggregate demand. Would you expect a multiplier effect?
Why or why not?
1. A decrease in business investment ___.
a. Decreases aggregate planned expenditure, which decreases income and
induces a decrease in government expenditure
b. May increase or decrease aggregate demand depending on the effect on
government expenditure
c. Decreases aggregate planned expenditure, which decreases income and
induces a decrease in consumption expenditure
d. Decreases aggregate planned expenditure only if the economy has a
recessionary gap
Answer: c)
14.3 Study Plan Problem 11 (static)
How would the predicted rise in mortgage rates change aggregate demand?
1. A rise in mortgage rates would ___ expenditure on new houses and ___
aggregate demand
a. Increase; increase
b. Decrease; increase
c. Decrease; decrease
d. Increase; decrease
Answer: c)
14.3 Study Plan Problem 12a (static)
Read the news clip, then answer the following question. If the IMF forecasts turn out
to be correct, what would most likely happen to the output gap and unemployment in
2018?
a. The recessionary gap would shrink and might become an inflationary gap, and the
unemployment rate would decrease.
b. The inflationary gap would shrink and might become a recessionary gap, and the
unemployment rate would increase.
c. The inflationary gap would widen, and the unemployment rate would decrease
d. The recessionary gap would widen, and the unemployment rate would increase
Answer: a)
14.3 Study Plan Problem 12b (static)
1. What actions taken by the Bank of Canada in 2015 and 2016 would you expect
to have influenced real GDP growth in 2018? Explain how those policy actions
would transmit to real GDP. In 2015 and 2016, the Bank of Canada kept the
overnight rate low. This policy would transmit to real GDP by all of the
following except ___.
a. An increase in investment
b. An increase in net exports
c. An increase in short-run aggregate supply
d. An increase in consumption expenditure
Answer: c)
2.
14.3 Extra Problem 1 (static)
1. If the Bank of Canada started to raise the overnight loans rate in 2015, all of the
following would occur except ___.
a. A decrease in consumption expenditure
b. A decrease in exports
c. A decrease in imports
d. A decrease in investment
Answer: c)
2.
14.3 Extra Problem 2 (static)
Read the news clip, then answer the following question.
1. In the transmission of monetary policy, the lower the long-term real interest
rate, the ___ consumption expenditure and investment, and the ___ net
exports.
a. Greater; greater
b. Smaller; smaller
c. Smaller; greater
d. Greater; smaller
Answer: a)
14.3 Extra Problem 4 (static)
1. The long-term ___ interest rate influences spending decisions because this is
the interest rate that ___.
a. Real; consumers pay the bank when they take out a loan
b. Nominal; consumers pay on their credit cards
c. Real; tells consumers the cost of borrowing in terms of goods and services
forgone.
d. Nominal; tells consumers the cost of borrowing in terms of goods and
services forgone
Answer: c)
2. The long-term nominal interest rate is ___.
a. The interest rate paid on U.S. Treasury bills
b. Close to the expected average of future short-term interest rates (plus a
premium for the extra risk associated with long-term loans)
c. Equal to the real long-term interest rate minus the expected inflation rate
d. An interest rate that has an upward trend
Answer: b)
3. The long-term nominal interest rate does not fluctuate as much as the shortterm interest rates because it is influenced by expectations about future shortterm interest rates as well as by current short-term interest rates
a. True
b. False
Answer: a)
14.3 Extra Problem 4 (static)
Read the news clip then answer the following questions.
1. A lower Canadian dollar exchange rate ___ net exports. Aggregate demand
___.
a. Decreases; increases
b. Increases; increases
c. Increases; decreases
d. Decreases; decreases
Answer: b)
14.3 Extra Problem 5 (static)
Read the news clip, then answer the following question.
1. A fall in the exchange rate ___ unemployment and ___ the inflation rate.
a. Increases; increases
b. Decreases; increases
c. Decreases; decreases
d. Increases; decreases
Answer: b)
14.3 Extra Problem 6 (static)
Read the news clip, then answer the following question.
1. What further actions might the Bank of Canada take in 2012 to influence the
real GDP growth rate in 2012?
a. The Bank of Canada can lower the interest rate to zero percent to increase
investment
b. The monetary policy is long and drawn out so most likely any actions the
Bank of Canada takes in 2012 will have no effect on real GDP growth in
2012.
c. The Bank of Canada can lower the interest rate to zero percent to increase
exports
d. The Bank of Canada can lower the interest rate to zero percent to increase
consumption expenditure
Answer: b)
14.4 Key Term Quiz (static)
1. Macroprudential regulation is a regulation to ___.
a. Make the stock market shock proof
b. Protect transactions in financial markets
c. Lower the risk that the financial system will crash
d. Help commercial banks avoid failure
Answer: c)
14.4 Review Quiz 1 (static)
What are the three ingredients of a financial and banking crisis?
1. The three ingredients of a financial crisis include all of the following except ___
a. A fall in the foreign exchange rate
b. A run on the bank
c. A large currency drain
d. A widespread fall in asset prices
Answer: a)
14.4 Review Quiz 2 (static)
What are the policy actions taken by central banks in response to the financial crisis?
1. In response to the financial crisis, the central bank took all of the following
policy actions except ___.
a. Swapping government securities for toxic assets
b. Open market operations
c. Lowering tax rates on chartered bank profits
d. The extension of deposit insurance
Answer: c)
14.4 Review Quiz 3 (static)
What are the institutions that conduct Canada’s macroprudential policies?
1. The ___ has overall responsibility for ensuring Canada’s financial stability, but
the front line of Canada’s macroprudential policy is performed by three
agencies; the ___, the Office of the Superintendent of Financial Institutions,
and the ___.
a. Bank of Canada; Minister of Finance; Canada Deposit Insurance Corporation
b. Bank of Canada; Minister of Finance; Canada Revenue Agency
c. Minister of Finance; Bank of Canada; Canada Deposit Insurance Corporation
d. Minister of Finance; Bank of Canada; Canada Revenue Agency
Answer: c)
14.4 Review Quiz 4 (static)
How might inflation targeting improve U.S. monetary policy?
1. Inflation targeting might improve U.S. monetary policy by ___
a. Maintaining full employment in the short run
b. Lowering the natural unemployment rate
c. Increasing potential GDP
d. Providing better management of inflation expectations
Answer: d)
14.4 Review Quiz 5 (static)
1. How might using the Taylor rule improve the Fed’s monetary policy? Choose
the statement that is incorrect.
a. Markets work best when plans are based on correctly anticipated inflation
b. A well-understood monetary policy helps to create an environment in which
inflation is easier to forecast and manage
c. By using the Taylor rule, monetary policy contributes toward lessening
uncertainty.
d. The Taylor rule could not improve the Fed’s monetary policy.
Answer: d)
14.4 Study Plan Problem 13 (static)
What is the role of the Bank of Canada in macroprudential policy and how does
inflation targeting contribute to financial stability?
1. The Bank of Canada plays all of the following roles in macroprudential policy,
except ___.
a. Conducting financial system stress tests
b. Insuring the deposits of banks and other financial institutions
c. Providing last resort loans
d. Managing the payment system
Answer: b)
2. Inflation targeting contributes to financial stability by ___ and ___.
a. Anchoring inflation expectations; responding to financial market expectations
about interest rate changes
b. Ensuring a 2-percent inflation rate; responding to financial market
expectations about interest rate changes
c. Ensuring a 2-percent inflation rate; keeping financial markets well informed
about likely policy actions
d. Anchoring inflation expectations; keeping financial markets well informed
about likely policy actions
Answer: d)
14.4 Extra Problem 1 (static)
1. Mr Dudley is discussing ___.
a. Exchange rate targeting
b. Monetary base targeting
c. Targeting the quantity of money
d. Inflation rate targeting
Answer: d)
2. Choose the statement that is incorrect.
a. An explicit inflation target that is taken seriously and toward which policy
actions are aimed and explained is a sensible way to manage inflation
expectations
b. Inflation targeting focuses the public debate on what monetary policy can
achieve and the best contribution it can make to attaining full employment and
sustained growth
c. The central challenge of monetary policy is to manage inflation expectations
d. The Fed uses inflation targeting
Answer: d)
14.4 Extra Problem 2 (static)
Read the news clip then answer the following question.
1. When the United States has an unemployment rate that is persistently greater
than the natural unemployment rate ___.
a. The Fed can undertake expansionary monetary policy to increase real GDP
b. The Fed reacts only if the high unemployment rate is accompanied by a high
inflation rate
c. The Fed does not react because it is concerned only about the inflation rate
d. The Fed reacts if instructed to do so by the federal government
Answer: a)
14.4 Extra Problem 3 (static)
Read the news clip then answer the following question.
1. The phrase “U.S. the dollar under pressure means ___”
a. The U.S. dollar is appreciating
b. Other countries such as China are selling too many U.S. dollars and the Fef
will need to take some dollars out of the foreign exchange market
c. The U.S. dollar is depreciating
d. Other countries such as China are buying too many U.S. dollars and the Fed
will need to supply more dollars in the foreing exchange market
Answer: c)
14.4 Extra Problem 4 (static)
Read the news clip then answer the following question.
1. The argument for the Fed contemplating QE2 was ___. Arguments against QE2
include ___.
a. The lack of currency in the U.S. economy; rising interest rates that would slow
real GDP growth
b. Concern that the U.S. economy was heading back into recession; the effects
on the U.S. dollar and exports
c. Concern that the U.S. economy was heading into recessional inflationary
concerns
d. Concern that the U.S. economy was headed toward an inflationary gap; the
negative impact on unemployment
Answer: c)
14.4 Extra Problem 5 (static)
Suppose that the Bank of England decides to follow the Taylor rule. In 2005, the
United Kingdom has an inflation rate of 2.1 percent a year and its output gap is -0.3
percent. At what level does the Bank of England set the repo rate (the U.K equivalent
of the overnight loans rate)?
1. The Bank of England sets the repo rate at ___ percent
R = 2 + INF + 0.5(INF-2) + 0.5GAP
= 2 + 2.1 + 0.5 (2.1 - 2) + 0.5(-0.3)
=4