Douglas College
ECON1101 The Canadian Economy
Practice Final Exam
1. Multiple choice questions.
1) In which of the following sets of circumstances can we confidently expect inflation?
A) aggregate supply and aggregate demand both increase
B) aggregate supply and aggregate demand both decrease
C) aggregate supply decreases and aggregate demand increases
D) aggregate supply increases and aggregate demand decreases
E) aggregate supply increases and aggregate demand stays constant
2) If a nation's real output is growing by 8 percent per year, its real output will double in
approximately:
A) 22 years
B) 20 years
C) 8 years
D) 5 years
E) 9 years
3) Ceteris paribus, if a full-employment economy reallocated a substantial quantity of its
resources to capital goods, we would expect:
A) present consumption to rise
B) future consumption to fall
C) a lower rate of growth of real GDP
D) labour productivity to fall
E) labour productivity to rise
4) Which of the following is a major cost of economic growth?
A) unemployment
B) inflation
C) lower living standards
D) a reduction in current savings
E) pollution
5) The effect of a contractionary fiscal policy upon the equilibrium level of real output is
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substantially the same as a(n):
A) decrease in saving
B) increase in exports
C) increase in consumption
D) increase in investment
E) increase in saving
6) An economy faces an inflationary gap. Which of the following is the appropriate government
fiscal policy?
A) an increase in the federal Goods and Services Tax (GST)
B) an increase in the size of income tax exemptions for each dependent
C) the passage of legislation providing for the construction of 8000 new post office buildings
D) an increase in soil conservation subsidies to farmers
E) a reduction in the interest rate on bonds
7) Which of the following would be the most expansionary?
A) a $20 billion reduction in taxes
B) $20 billion increases in both government purchases and taxes
C) $20 billion decreases in both government purchases and taxes
D) a $20 billion increase in government purchases
E) a $20 billion increase in taxes
8) If government purchases increase by $20 billion and aggregate demand shifts rightward by $30
billion as a result, we can conclude that:
A) the spending multiplier is 2.00
B) the MPC for this economy is 0.33
C) unemployment is rising
D) the MPW for this economy is 0.33
E) the spending multiplier is 3.00
9) The public debt:
A) refers to the debts of Canadian governments, businesses, and households
B) consists of the total debts of Canadian provincial and territorial governments
C) refers to the collective amount that Canadians owe to foreigners
D) consists of the accumulation of all past federal deficits minus any federal surpluses
E) refers to the portion of total Canadian government debt owed to foreigners
10) If a person writes a cheque on a Saskatoon bank to purchase a new car, he or she is employing
money as:
A) a means of exchange
B) a store of purchasing power
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C) a measure of value
D) an income-earning asset
E) a standard of deferred payments
11) If the quantity of money demanded exceeds the money supply, it can be expected that the:
A) money demand curve will shift leftward
B) money supply curve will shift rightward
C) interest rate will rise
D) interest rate will fall
E) bond prices will rise
12) If chartered banks lower their reserve ratio:
A) they will be prompted to reduce their lending
B) the size of the money multiplier will increase
C) the actual cash reserves of the chartered banks will increase
D) the size of the money multiplier will decrease
E) the size of the money multiplier will remain constant
13) The value of the money multiplier is found using the formula:
A) 1/MPW
B) 1/excess reserves
C) 1/MPC
D) 1/reserve ratio
E) 1/desired reserves
14) The bank rate is the interest rate at which:
A) chartered banks lend to large corporations
B) the Bank of Canada lends to large corporations
C) near banks lend to home builders
D) the Bank of Canada lends to CPA members
E) chartered banks lend to ordinary customers
15) In terms of the aggregate demand and aggregate supply model, an expansionary monetary
policy is designed to shift the aggregate:
A) demand curve rightward
B) demand curve leftward
C) supply curve rightward
D) supply curve leftward
E) demand and aggregate supply curves leftward
16) Which of the following statements best describes the cause-and-effect chain of an
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expansionary monetary policy?
A) A decrease in the money supply will lower the interest rate, increase aggregate demand, and
increase real output.
B) A decrease in the money supply will raise the interest rate, decrease aggregate demand, and
decrease real output.
C) An increase in the money supply will raise the interest rate, decrease aggregate demand, and
decrease real output.
D) An increase in the money supply will lower the interest rate, decrease aggregate demand, and
increase real output.
E) An increase in the money supply will lower the interest rate, increase aggregate demand, and
increase real output.
17) Which of the following is not a tool of monetary policy?
A) an increase in the target overnight rate
B) an open market purchase of bonds
C) changes in tax rates
D) an open market sale of bonds
E) a decrease in the target overnight rate
18) Depreciation of the Canadian dollar will tend to:
A) decrease the prices of both Canadian imports and exports
B) increase the prices of both Canadian imports and exports
C) decrease the prices of the products that Canadians import, but increase the prices to foreigners
of the products that Canadians export
D) increase the prices of the products that Canadians import, but decrease the prices to foreigners
of the products that Canadians export
E) have no effect on the prices of Canadian imports and exports
19) Suppose interest rates fall sharply in Canada but are unchanged in Great Britain. Ceteris
paribus, under a system of flexible exchange rates, we can expect the British demand for
Canadian dollars to:
A) increase, the supply of Canadian dollars for pounds to decrease, and the dollar to appreciate
vis-a-vis the pound
B) decrease, the supply of Canadian dollars for pounds to decrease, and the dollar to either
appreciate or depreciate vis-a-vis the pound
C) decrease, the supply of Canadian dollars for pounds to increase, and the dollar to depreciate
vis-a-vis the pound
D) increase, the supply of Canadian dollars for pounds to decrease, and the dollar to depreciate
vis-a-vis the pound
E) increase, the supply of Canadian dollars for pounds to decrease, and a Canadian balance of
payments surplus to develop
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20) If Paul can mow a lawn in 1 hours and weed a vegetable garden in 3 hours and Mary can
mow a lawn in 2 hours and weed a vegetable garden in 1 hour, then:
A) on the basis of absolute advantage Mary should mow the lawn and Paul should weed the
vegetable garden
B) on the basis of absolute advantage Paul should mow the lawn and Mary should weed the
vegetable garden
C) on the basis of comparative advantage Mary should mow the lawn and Paul should weed the
vegetable garden
D) on the basis of comparative advantage Paul should mow the lawn and Mary should weed the
garden
E) Paul and Mary do not have an absolute or comparative advantage in either activity
2. Short answer questions.
1) Fill in the blanks to complete the following sentences:
a) Stabilization policy can take the form of ________________ and _______________. A fiscal
expansion involves ______________ and/or ________________. A monetary contraction
involves ______________ and _______________.
b) The Bank of Canada’s goal of monetary policy is ____________________ targeting. The
current target is to keep the inflation rate at _____% (within _________ band). The Bank of
Canada’s tool of monetary policy is _______________________ targeting.
2) Are the following statements true or false? Briefly explain. (No explanation, no credits.)
a) The Phillips curve illustrates a negative relationship between bond price and interest rate.
b) When the economy is in a recession, the government should “tighten the belt”, i.e., reduce
spending.
3) Suppose that Canadian households become pessimistic about the future health of the economy,
and so cut back on their consumption spending. What will happen to aggregate demand and to
output? What might the parliament have to do to keep output stable?
4) Calgary Finance Bank has the following balance sheet:
Assets
Reserves
Loans
$100
$1000
Liabilities
Chequable Deposits
$1000
Capital
$100
Assume there is no excess reserve. One day Jack luckily finds a bill of $20 underneath his
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mattress and he deposits it into this bank.
a) Describe how this deposit may affect Calgary Finance Bank’s balance sheet.
b) What will be the excess reserve now?
c) To keep reserve ratio at desired level, what would this bank do? How would the action
affect its balance sheet?
d) If all commercial banks have the same desired reserve ratio as this bank, and there is no
cash drain, what will be the change in total deposits for the whole banking system after the
process of money creation is completed?
5) Explain the likely effects of a U.S. recession on Canadian aggregate demand. Suppose
Canadian economy was at long-run equilibrium before the recession. Then what monetary policy
should Bank of Canada implement as a response to the U.S. recession?
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