1. Among economists today, the most widely accepted cause ...api.ning.com/files/uzOPJmonjvCz7nRnDspGa69... · 1. Among economists today, the most widely accepted cause of the Great

1. Among economists today, the most widely accepted cause of the Great Depression is: A) poor economic policymaking. D) the inherent instability of capitalist economies. B) wild stock market speculation. E) Adolf Hitler's election as Chancellor of Germany. C) globalization.

Use the following to answer question 2:

The table provides data about the Canadian and the U.S. economies for the year 2000. All data are expressed in Canadian dollars. Use this information for the following questions.

Canada United StatesOutput per person (C$) $32,468 $42,847Average Labour Productivity(C$)$67,114 $87,278

Suppose, in addition, that in 2000, Canada's population was 30 million and the U.S. population was 276 million.

2. Total output in Canada and in the United States in 2000 were respectively: A) $974 billion and $11,825 billion D) $4,454 billion and $45,323 billion B) $2,013 billion and $24,088 billion E) $4,055 billion and $11,825 billion C) $974 billion and $30,055 billion

3. Canadian unemployment rate increased from an annual rate of ______percent at the beginning of the Great Depression in 1929 to an annual rate of ______ at its peak in 1933. A) 3; 40 B) 3; 20 C) 3; 7 D) 3; 10 E) 3:15

4. In Econland total output is $8 billion, population equals 500,000 people, and, of these, 400,000 are employed workers. Output per person in Econland equals _______ and average labour productivity equals ______. A) $16; $20 B) $16,000; $20,000 C) $16,000; $16,000 D) $20,000; $16,000 E) $20,000; $20,000

5. Economists are most likely to agree on ______ policy issues. A) positive B) normative C) monetary D) fiscal E) structural

6. "If the Minister of Finance cuts income taxes, demand for output is likely to increase" is a _______ statement about ______ policy. A) positive; fiscal D) normative; fiscal B) positive; monetary E) normative; monetary C) positive; structural

7. Which of the following would be considered an example of monetary policy? A) A broad government initiative to reduce the country's reliance on agriculture and promote high-technology

industries. B) A reduction in income tax rates. C) Provision of additional cash to the banking system. D) An attempt to reduce the government budget deficit by reducing spending. E) A decision by a developing country to reduce government control of the economy and to become more

market-oriented.

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8. A U.S. senator states: "The minimum wage should be raised to give people a decent living wage." This quote is an example of:A) a hypothesis. D) a normative economic statementB) the fallacy of composition. E) economic principle. C) a positive economic statement.

9. When jobs are hard to find, profits are low, few wage increases are given, and many companies go out of business, the economy is most likely in a(n): A) expansion. B) boom. C) recession. D) surplus. E) shortage.

10. The adding up of individual economic variables to obtain economy wide totals is called: A) average labour productivity. D) aggregation. B) normative analysis. E) inflation. C) monetary policy.

11. The value of output was $1,000 billion in Northland and $2,000 billion in Southland. The population of Northland was 50 million and the population of Southland was 120 million. There were 30 million employed workers in Northland and 75 million employed workers in Southland. Average labour productivity was higher in _________ and the standard of living was _______. A) Northland; the same in both countries D) Southland; higher in Southland B) Northland; higher in Northland E) Southland; the same in both countries C) Southland; higher in Northland

12. An decrease in the federal income tax is an example of ______ policy. A) aggregation B) fiscal C) monetary D) structural E) productivity

13. A government is running a budget surplus if: A) government revenue exceeds government spending. B) government revenue is less than government spending. C) exports exceed imports. D) imports exceed exports. E) government revenue is less than government spending and imports exceed exports.

14. Major macroeconomic questions include all of the following EXCEPT: A) Are free trade agreements beneficial? B) Can inflation be reduced without generating additional unemployment? C) What causes slowdowns in productivity growth? D) Why do economic growth rates vary across countries? E) How do monopoly firms set prices and determine quantities to produce?

15. The amount and composition of government expenditures and government revenues is determined by: A) fiscal policy. D) normative analysis. B) monetary policy. E) positive analysis. C) structural policy.

16. If average labour productivity increases while population and the number of employed workers remains constant, then total output: A) increases. D) may increase or decrease. B) decreases. E) cannot be determined.

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C) remains constant.

17. A decision by a government to sell businesses that currently are operated by the government to private investors is an example of ________ policy. A) aggregation B) fiscal C) monetary D) structural E) productivity

18. When government revenue exceeds government spending, the nation has a: A) government budget surplus. D) trade surplus. B) government budget deficit. E) trade deficit. C) trade balance.

19. The process of steady increase in the quantity and quality of goods and services the economy can produce is called: A) macroeconomics. B) globalization. C) production. D) economic growth. E) aggregation.

20. Deregulation of the airline, trucking, telephone, and electric utility industries are examples of _______ policy. A) aggregation B) fiscal C) monetary D) structural E) productivity

21. Bradley is a university graduate. He is interested in finding full-time employment in his area of specialty. After looking for several weeks Bradley is discouraged and begins to work three days a week as a lawn care worker in the neighbourhood. Bradley would be classified as: A) a discouraged worker. D) seasonally unemployed B) involuntarily unemployed E) not in the labour force C) employed.

22. Which of the following transactions would be included in the GDP of Canada? A) Honda produces cars in Ontario. B) Bank of Nova Scotia operates a branch in the Bahamas. C) Nortel Corporation produces Telecommunication equipment in the United States. D) Microsoft Corporation produces Windows XP in Redmond, Washington. E) Coca Cola produces soft drinks in England.

23. Intermediate goods and services are _____ production and _____ counted in GDP. A) the end product of; are D) used up in the process of; are not B) the end product of; are not E) the ultimate purpose of; are C) used up in the process of ; are

24. High real GDP countries tend to have ______ infant mortality rates and ______ literacy rates than low-real GDP countries. A) higher; higher B) higher; lower C) lower; higher D) lower; lower E) equivalent; lower

25. Data for an economy shows that the unemployment rate is 10%, the participation rate 80 percent, 200 million people 15 years or older are not in the labour force. How many people are in the working-age population in this economy? A) 200 million B) 800 million C) 1,000 million D) 1,600 million E) 1,800 million

26. Suppose that the total production of an economy consists of 10 billion oranges and 5 billion candy bars, each orange sells for $0.20, and each candy bar sells for $1.00. What is the market value of production in this economy?

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A) $1 billion B) $2 billion C) $5 billion D) $7 billion E) $11 billion

27. If Turkey has invested substantially less money in foreign countries than foreigners have invested in Turkey, then we might expect:A) Turkish net foreign factor income to be positive. D) Turkish GNP to exceed Turkish GDP. B) Turkish net foreign factor income to be zero. E) Turkish GNP to equal Turkish GDP.C) Turkish GDP to exceed Turkish GNP.

28. In the base year real GDP ______ nominal GDP. A) is greater than B) is less than C) is equal to D) could be greater or less than E) is one-half of

29. Labour income includes: A) wages, salaries, and earnings of the self-employed. B) payments to owners of factories, machines, and buildings. C) interest, dividends, and rent. D) profits, royalties, and rent. E) dividends, interest, and royalties.

30. Leaving the labour force or finding a job are two ways that : A) a person can become a discouraged worker. B) a person can become an involuntary part-time worker. C) an unemployment spell can begin. D) an unemployment spell can end. E) unemployment duration can be extended.

31. Data for an economy shows that the unemployment rate is 6%, the participation rate 60 percent, 200 million people 15 years or older are not in the labour force. How many people are employed in this economy? A) 6 million B) 188 million C) 282 million D) 300 million E) 500 million

32. The market value of final goods and services produced within a country during a period of time is called: A) guaranteed direct prices. D) gross domestic product. B) general domestic productivity. E) growth determined profit. C) government documented production.

33. Who of the following would be classified as employed? A) Brenda Smith, an 18 year old full-time college student. B) Mario Faubert, a NHL hockey player at home sick with the flu. C) Jack Little, a 21 year old new college graduate actively looking for his first job. D) Sarah Lopez, a retired public school teacher. E) Amanda Pie, a full-time homemaker.

34. The participation rate is the number of people: A) employed and unemployed. B) employed divided by the labour force. C) employed divided by the population aged 15 years and older. D) employed and unemployed divided by the labour force. E) employed and unemployed divided by the population aged 16 years and older.

35. While the U.S. government has a budget of roughly $1.8 trillion only about half of this budget enters the

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national income accounts. This is because:A) only the budget deficit or surplus enters the national income accounts. B) tax receipts must be subtracted from expenditures before any entry is made in the national income accounts.

. C) transfer payments do not enter the national income accounts. D) it is impossible to determine what the remaining portion of the budget is ultimately used for.E) none of the above.

36. Data for an economy shows that the unemployment rate is 6%, the participation rate 60 percent, 200 million people 15 years or older are not in the labour force. How many people are in the working-age population in this economy? A) 200 million B) 300 million C) 400 million D) 500 million E) 600 million

37. An economy produces 500,000 tables valued at $100 each. Households purchase 100,000 tables of which 50,000 are imported. Businesses purchase 200,000 domestically produced tables. The government purchases 100,000 domestically produced tables and 50,000 domestically produced tables are sold abroad. The unsold tables at the end of the year are held in inventory by the table manufacturers. What is value of GDP? A) $5 million B) $40 million C) $45 million D) $50 million E) $95 million

38. _____ is/are the market value of final goods and services produced within a country during a given period of time. A) GDP B) Consumption C) Value added D) Transfer payments E) Net exports

39. If the Citrus Growers Association grows $1 million worth of oranges, sells $500,000 worth of oranges to consumers, uses the rest to make orange juice that is sold to consumers for $3 million, Citrus Grower's contribution to GDP is: A) $500,000. B) $1,000,000. C) $3,500,000. D) $4,000,000. E) $4,500,000.

40. Critics have argued that many part-timers are working many fewer hours than they would like, and that this fact should be recognized in the unemployment statistics. If, accordingly, each one of the current 1095 thousand part-timers are assumed as being half unemployed (and half employed), then on this basis alone, the adjusted unemployment rate would be ______ percent higher than the official unemployment rate. A) 1.5 percent B) 2.5 percent C) 0.5 percent D) 3.3 percent E) 2.0 percent

41. Suppose the value of the CPI is 110 in year 1, 116 in year 2, and 118 in year 3. Assume also that the price of computers increases by 10% between year 1 and year 2, and by another 10% between year 2 and year 3. The price level is increasing, the inflation rate is _______, and the relative price of computers is _________. A) increasing; increasing D) decreasing; increasing B) constant; increasing E) decreasing; decreasing C) constant; decreasing

42. The price of a litre of gasoline was $0.12 in 1972 when the CPI equalled 40.1. The cost of a litre of gasoline was $0.50 in 2000 when the CPI equalled 175.1. The real cost of a litre of gasoline between 1972 and 2000: A) increased. D) may have either increased or decreased. B) decreased. E) cannot be determined. C) remained constant.

43. If, in a given period, the rate of inflation turns out to be lower than lenders and borrowers anticipated, the effect is:

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A) the real payments by the borrowers will be lower than expected. B) the nominal income of lenders will be higher than expected, but their real income will be lower than

expected. C) the nominal income of the lenders will be as expected, but their real income will be higher than expected. D) both the nominal and real income of lenders will be higher than expected. E) the real income of lenders will be higher than expected, but their nominal income will be lower than

expected.

44. Suppose the interest rate on new issues of Canada Savings Bonds is 5 percent per year and the federal income tax rate on nominal interest earnings is 40 percent. Then an investor's after-tax nominal rate of return on Canada Savings Bonds is: A) 5 percent B) 4 percent C) 3 percent D) 2 percent E) 0 percent

45. When statisticians fail to allow for the possibility that consumers switch from products with rising prices to those whose prices are stable or falling, the CPI will tend to ______ the rate of inflation. A) understate B) precisely measure C) be unrelated to D) overstate E) be indexed to

46. The consumer price index for Planet Econ consists of only two items: books and hamburgers. In 1999, the base year, the typical consumer purchased 10 books for $25 each and 25 hamburgers for $2 each. In 2000, the typical consumer purchased 15 books for $30 each and 30 hamburgers for $3 each. The consumer price index for 2000 on Planet Econ equals: A) 100 B) 108 C) 115 D) 125 E) 180

47. The substitution bias in the CPI refers to the failure of statisticians to: A) allow for the possibility that consumers switch from products whose prices are rising. B) allow for the possibility that consumers switch stores at which they shop. C) take into account improvements in goods and services. D) take into account price changes in goods and services. E) take into account new products purchased by consumers.

48. If a borrower and lender agree to an interest rate on a loan when inflation is expected to be 7% and inflation turns out to be 10% over the life of the loan, then the borrower _____ and the lender ______. A) gains; gains B) gains; loses C) is not affected; gains D) loses; gains E) loses; loses

49. If the price of airplane tickets rises by 5% while the prices of other goods and services are rising by 10 % on average, then the relative price of airplane tickets has: A) increased 5%. D) remained constant. B) increased 10%. E) may have either increased or decreased. C) decreased.

50. The real rate of return on holding cash ____ inflation is correctly anticipated. A) is higher when D) increases when B) is lower when E) decreases when C) does not depend on whether

51. When statisticians fail to take into account improvements in the quality of goods and services, the CPI will tend to ______ the rate of inflation. A) understate B) precisely measure C) be unrelated to D) overstate E) be indexed to

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52. The GDP deflator or price index equals: A) gross private domestic investment less the consumption of fixed capital. B) gross national product less net foreign factor income earned in the United States. C) nominal GDP divided by real GDP. D) real GDP divided by nominal GDP. E) nominal GDP multiplied by real GDP.

53. An inflation rate of over 500 percent per year is called a(n): A) relative inflation. B) deflation. C) inflation . D) hyperinflation. E) real inflation.

54. A situation of negative inflation is called: A) recession B) expansion C) boom D) deflation E) disinflation

55. A recent report indicated that the average annual real income of agricultural workers declined by 2% between 1990 and 2000. If the CPI equalled 130 in 1990, 169 in 2000, and the nominal income of agricultural workers was $35,000 in 2000, what was the average nominal income of agricultural workers in 1990? A) $20,710 B) $21,124 C) $26,923 D) $27,462 E) $35,700

56. Which of the following does not describe a type of price level change: A) accelerating inflation B) deflation C) disinflation D) zero inflation E) deflating

57. The consumer price index for Planet Econ consists of only two items: books and hamburgers. In 1999, the base year, the typical consumer purchased 10 books for $20 each and 200 hamburgers for $1 each. In 2000, the typical consumer purchased 12 books for $23 each and 300 hamburgers for $1.15 each. The consumer price index for 2000 on Planet Econ equals: A) 100 B) 115 C) 125 D) 135 E) 155

58. The downward nominal wage rigidity hypothesis says that: A) because people typically resist nominal wage cuts, some amount of inflation can facilitate real wage cuts in

industries where they are needed without requiring nominal wage cuts, thus making the labour market more flexible and efficient.

B) nominal wages are rigid because of union activism. C) nominal wages are rigid but real wages are flexible. D) both nominal and real wages are rigid because of union activism. E) because people typically resist nominal wage cuts, high rates of inflation are needed to facilitate deep real

wage cuts and greater economic efficiency.

59. A quantity measured in terms of constant dollar values is called a ______ quantity. A) nominal B) relative C) current D) base-year E) real

60. A nominal quantity is measured: A) in physical terms. D) by deflating. B) in terms of current dollar value. E) by indexing. C) using the consumer price index.

61. Real GDP per person in Richland is $20,000, while real GDP per person in Poorland is $10,000. However, Richland's real GDP per person is growing at 1% per year and Poorland's is growing at 2% per year. After 50 years, real GDP per person in Richland minus real GDP in Poorland is A) still $10,000 B) greater than $10,000 C) positive, but less than $10,000 D) zero E) negative

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62. The prediction that workers obtain additional training only when the rewards from the training are expected to

exceed the costs of the training (including the opportunity costs) is based on the: A) principle of comparative advantage. D) equilibrium principle. B) principle of diminishing returns to capital. E) cost-benefit principle. C) scarcity principle.

63. The rate of growth in real GDP per person in the United States, Japan, Canada, Australia and the major European economies was highest during the period of A) 1870-1998 B) 1950-1998 C) 1973-1979 D) 1979-1997 E) 1960-1973.

64. _______ start new economic enterprises or innovate new products and processes, while ______ run the enterprises on a day-to-day basis. A) entrepreneurs; managers D) workers; mangers B) mangers; entrepreneurs E) entrepreneurs; labourers C) mangers; labourers

65. Real GDP per person in the Canada was $7,377 in 1950. Over the next 48 years it grew at a compound annual rate of 2.0%. If instead real GDP per person had grown at an average compound annual rate 2.5% , then real GDP per capita in the Canada in 1998 would have been approximately ______ larger. A) $3,000 B) $5,050 C) $7,400 D) $19,100 E) $24,100

66. Real GDP per person in Richland is $20,000, while real GDP per person in Poorland is $10,000. However, Richland's real GDP per person is growing at 1% per year and Poorland's is growing at 3% per year. After 50 years, real GDP per person in Richland minus real GDP in Poorland is A) still $10,000 B) greater than $10,000 C) positive, but less than $10,000 D) zero E) negative

67. Supporters of the technological depletion hypothesis suggest that _______ account(s) for the productivity slowdown since the 1970s. A) poor measurement of productivity improvements resulting from new technologies B) the deterioration of public education C) the rise in oil prices following the Arab-Israeli war in 1973 D) the lack of technological opportunities after the catch-up period in the 1950s and 1960s E) restrictions on the use of key technological information

68. Diminishing returns to capital is a consequence of firms' incentives to use each piece of capital as productively as possible and illustrates the: A) principle of comparative advantage. D) equilibrium principle. B) principle of increasing opportunity costs. E) cost-benefit principle. C) scarcity principle.

69. In Macroland 500,000 of the 1 million people in the country are employed. Average labour productivity in Macroland is $20,000 per worker. Real GDP per person in Macroland totals: A) $1,000 B) $10,000 C) $15,000 D) $20,000 E) $30,000

70. Three workers run a house painting business and always work the same number of hours together. Each can paint 200 square feet per hour using a roller or 80 square feet per hour using a brush. As they move from using only brushes to 1, 2, 3, and 4 rollers, their average labour productivity per hour as a team: A) increases at a constant rate. D) decreases at a constant rate.

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B) increases at an increasing rate. E) does not change. C) increases at a decreasing rate.

71. Government polices that increase the long-term economic growth rate by a small amount result in ______ in average living standards. A) large increases D) no change B) small increases E) either larger or small increases C) small decreases

72. An example of a government policy to increase human capital formation is: A) the construction of interstate highway system. D) the provision of publicly-funded education. B) government support for basic research. E) tax incentives to encourage saving. C) maintaining a well-functioning legal system.

73. Suppose the quantity of capital rises by 10 percent and output all rises by 10 percent. If the quantity of capital is doubled again, we would expect that output would: A) double again because there are constant returns to scale in this case. B) less than double because there are decreasing returns to scale in this case. C) less than double because the law of diminishing marginal productivity applies in this case. D) more than double because there are increasing returns to scale in this case. E) more than triple because there are increasing returns to scale in this case.

74. The costs of economic growth include all of the following EXCEPT consumption sacrificed for: A) physical capital formation D) additional hours of leisure B) acquiring new human capital E) training workers. C) research and development into new technologies

75. Organizing production, obtaining financing, assigning workers to jobs, and dealing with suppliers are among the ways that ______ increase average labour productivity. A) human capital B) physical capital C) technology D) entrepreneurs E) managers

76. Small differences in annual growth rates of real GDP generate large differences in real GDP over time because of the: A) importance of average labour productivity. D) increasing returns to scale. B) power of compound growth. E) limits of economic growth. C) diminishing returns to capital.

77. Countries with small amounts of capital per worker tend to have ______ levels of real GDP per person and ___ levels of average labour productivity. A) high; high B) high; low C) low; low D) low; average E) low; high


The table provides data on Canada's real GDP per person, average labour productivity and the share of population employed in 1960 and also in 2000. Use this information for the following questions.(Assume that between 1960 and 2000 there are 40 years).

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Year GDP per person(living standard) Average labour productivity Share of population employed

1960 $12,059 $35,997 33.4%2000 $29,967 $61,804 48.5%

78. The information provided in the table suggests that: A) only increases in average labour productivity have contributed significantly to today's living standards of

Canadians. B) increases in average labour productivity have contributed little to today's living standards of Canadians. C) only increases in the share of population with paid jobs have contributed significantly to today's living

standards of Canadians. D) increases in the share of population with paid jobs have contributed little to today's living standards of

Canadians. E) both increases in average labour productivity and the share of population with paid jobs have contributed

significantly to today's living standards of Canadians.

79. People who run businesses on a day-to-day basis are called: A) entrepreneurs. B) managers. C) labourers. D) workers. E) participants.

80. High rates of investing in the private sector promote economic growth by A) increasing human capital. D) improving the social and legal environment. B) increasing physical capital. E) increasing the availability of natural resources. C) improving technology.

81. The leftward shift in the total labour demand curve shown below may be caused by:

A) a decrease in the demand for workers' output. B) a decrease in the relative price of workers' output. C) a decrease in workers' marginal productivity. D) a decrease in the value of workers' marginal product. E) all of the above.

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82. The rightward shift in the total labour demand curve shown in the figure may be caused by:

A) an increase in the relative price of workers' output. B) a decrease in the relative price of workers' output. C) a decrease in workers' marginal productivity. D) a decrease in demand for workers' output. E) a decrease in the value of workers' marginal productivity.

83. John lost his job when the typewriter factory closed down five years ago and has been unemployed ever since. Mary lost her job at the day care center when the economy turned down, but thinks they will rehire her when the economy picks up again. John is _____ unemployed and Mary is _____ unemployed. A) frictionally; frictionally D) structurally; cyclically B) structurally; frictionally E) frictionally; cyclically C) cyclically; structurally

84. The decision whether to work at any given wage is an application of the A) scarcity principle. D) principle of comparative advantage. B) equilibrium principle. E) cost-benefit principle. C) principle of increasing opportunity cost.

85. In deciding how much labour to supply (how many hours to work), different individuals respond differently as the wage rate rises above their reservation wages. Some people view the increase in their incomes associated with a rise in their wage rate mainly as an opportunity to consume more hours of leisure. This income effect on the consumption of leisure means that such individuals will: A) increase hours of work. D) increase the speed of work. B) decrease hours of work. E) decrease the speed of work. C) leave hours of work unchanged.

86. The economic downturn of the early _______ was especially severe on unemployed workers in Canada. A) 1980s B) 1990s C) 1970s D) 1960s E) 1930s

Use the following to answer questions 87-88:

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High Tech, Inc. produces plastic chairs that sell for $10 each. The following table provides information about how many plastic chairs can be produced per hour. For simplicity assume that labour is the only input

Number of Chairs ProducedWorkers per Hour

0 01 102 183 244 285 30

87. How many workers will be hired, if the hourly wage for workers is $30? A) 1 B) 2 C) 3 D) 4 E) 5

88. How many workers will be hired, if the hourly wage for workers is $70? A) 1 B) 2 C) 3 D) 4 E) 5

89. Production data for Joe's Pizza Parlor are as follows. For simplicity assume that labour is the only input. Each pizza sells for $5.

Number of Pizzas bakedWorkers per day

0 01 102 183 244 305 32

How many workers will Joe hire if he must pay each one $15 a day? A) 1 B) 2 C) 3 D) 4 E) 5

90. By 2000, the percentage of the working-age population with jobs in Canada had grown to about: A) 32 percent B) 82 percent C) 72 percent D) 62 percent E) 22 percent

91. As a result of a war in the country of Omega refugees flee to the country of Alpha to seek employment. Holding other factors constant, the influx of refugees will _____ the real wage in Alpha and ____ employment in Alpha. A) increase; increase D) decrease; increase B) increase; decrease E) decrease; not change C) decrease; decrease

92. Over the last century, two important labour market trends in Canada include substantial increase in _________ and _________. A) average real wages; employment as a proportion of working age population. B) average real wages; the unemployment rate. C) fluctuations in average real wages; the unemployment rate D) fluctuations in employment; the unemployment rate E) average nominal wages; the unemployment rate

93. Which of the following is an example of structural unemployment? A) Dora lost her job when the textile mill closed. She does not have skills to work in another industry and has

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been unemployed for over a year. B) Marsha was laid off from her job with the airline because the recession has reduced the demand for airline

travel. She expects to get her job back when the economy picks up. C) Alan, a software engineer, lost his job when the internet startup he worked for went bankrupt. He

interviewed with five companies in the area before taking a job with another firm in the industry. D) Jim had a job as an engineer, but quit when his wife was transferred to another state. He looked for a month

before finding a new job that he liked. E) Hector looked for a job for five weeks after finishing college. He turned down several jobs that didn't use

his skills, but now has a job requiring the expertise he gained in college.

94. If the price of tables sold by All-Oak Table Co. increases from $400 to $500, then the: A) supply of labour to All-Oak Table Co. increases. B) supply of labour to All-Oak Table Co. decreases. C) demand for labour by All-Oak Table Co. decreases. D) demand for labour by All-Oak Table Co. increases. E) marginal product of labour employed by the All-Oak Table Co. decreases.

95. The history of the Canadian unemployment rate poses all of the following puzzles EXCEPT: A) Why has the number of people in paid jobs (as a proportion of people of working age) increased over time,

despite the steady replacement of workers by technology in many industries? B) Why is the average real wage rate of Canadians substantially higher today than that of their grandparents? C) Why are there always some people who are unemployed? D) Why does the unemployment rate fluctuate? E) What causes technological progress in Canada?

96. The demand for a resource will increase if the: A) price of the resource increases. B) quantity of the resource decreases. C) price of the product the firm is producing increases. D) price of the product the firm is producing decreases. E) price of another perfectly substitutable resource decreases.


97. At a wage rate higher than w = $20 an hour, (say, w = $24 an hour) all of the following is true EXCEPT: A) fewer new firms enter. B) more of the old firms go bankrupt. C) number of existing jobs lost exceeds the number of new jobs created. D) net change in employment due to entry and exit is negative. E) the demand side of the labour market is in long-run equilibrium

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98. The table shows that net change in employment due to entry and exit _______ when the wage rate falls and

_________ when the wage rate rises. A) increases; decreases D) decreases; decreases B) decreases; increases E) stays the same; stays the same C) increases; increases

99. At the wage rate w = $20 per hour all of the following are true EXCEPT: A) number of new firms entering equals number of old firms closing. B) net entry of firms is zero. C) net change in employment due to entry and exit is zero. D) the demand side of the labour market is in long-run equilibrium. E) the demand side of the labour market is out of long-run equilibrium.

100. The extra unemployment that occurs during periods of recession is called _____ unemployment. A) cyclical B) structural C) global D) seasonal E) frictional

101. Life-cycle saving is saving: A) to meet long-term objectives, such as retirement, college attendance, or the purchase of a home. B) for protection against unexpected setbacks, such as the loss of a job or a medical emergency. C) for the purpose of leaving an inheritance. D) to pay life-insurance premiums. E) by older people to induce younger people to care for them.

102. Bequest saving is saving: A) to meet long-term objectives, such as retirement, college attendance, or the purchase of a home. B) for protection against unexpected setbacks, such as the loss of a job or a medical emergency. C) for the purpose of leaving an inheritance. D) to smooth income over one's lifetime. E) done in anticipation of sales or bargain in the future.

103. A measure defined per unit of time is called a ____ variable. A) real B) nominal C) aggregate D) flow E) stock

104. Precautionary saving is saving: A) to meet long-term objectives, such as retirement, college attendance, or the purchase of a home. B) for protection against unexpected setbacks, such as the loss of a job or a medical emergency. C) for the purpose of leaving an inheritance. D) to smooth income over one's lifetime. E) done in anticipation of sales or bargain in the future.

105. The demonstration effect suggests that people will save less when they A) base their spending decisions (and consequently their saving decisions) on spending decisions of others who

spend more than they do. B) want to save, but lack the discipline to refrain from consuming. C) recognize that the real interest rate has increased. D) control their spending in order to save more when the real interest rate increases. E) base their saving decisions on their projections of income and spending needs over their lifetime.

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106. Private saving is done by: A) households. D) the entire economy. B) businesses and households. E) businesses. C) the government.

107. Saving done for the purpose of leaving an inheritance is called _____ saving. A) public B) national C) precautionary D) life-cycle E) bequest

108. If Alexandra uses $800 from her chequing account to pay her credit card balance, her wealth: A) increases by $800. D) decreases by $1,600. B) decreases by $800. E) does not change. C) increases by $1,600.

109. Firms will invest in new equipment whenever: A) the expect cost of the equipment exceeds the expected benefit. B) the expected cost of the equipment is less than the expected benefit. C) the expected cost of the equipment is greater than the value of the marginal product of the equipment. D) public saving is greater than private saving. E) public saving is less than private saving.

110. Canada's ________, which determines the total amount of investment funds available to Canada during a year, includes ________. A) gross saving; personal saving B) national saving; personal saving + corporate saving C) national saving; personal saving + corporate saving + government saving D) gross saving; personal saving + corporate saving + government saving + non-resident saving E) national saving; personal saving + government saving

111. Holding other factors constant, a technological improvement that increases the marginal product of capital will: A) increase national saving. D) decrease investment. B) decrease national saving. E) increase private saving. C) increase investment.

112. Saving is a(n) _____ and wealth is a(n) ______. A) flow; flow B) flow; stock C) asset; liability D) liability; asset E) stock; flow

113. In the closed economy loanable funds model, a decrease in the government's budget deficit ____ the real interest rate and ____ the equilibrium quantity of national saving. A) increases; increases D) decreases; increases B) increases; decreases E) decreases; decreases C) increases; does not change

114. The expected benefit of investment equals: A) private saving. D) the price of the capital good. B) public saving. E) the value of the marginal product of capital. C) the real interest rate.

115. Holding other factors constant, a higher relative price of a firm's output will : A) increase national saving. D) decrease investment.

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B) decrease national saving. E) increase private saving. C) increase investment.

116. Rafael's current income is $100 more per month than his current consumption needs. He decides to use the $100 to reduce his credit card debt. As a result, his: A) liabilities will decrease and his wealth will increase. B) liabilities and his wealth will decrease. C) assets will decrease and his wealth will increase. D) assets and his wealth will decrease. E) assets and his wealth will increase.

117. A businessman is considering how many limousines to purchase when he starts up a limousine service. Below are his estimate of the number of limousine rentals the service will make during a year, depending on the number of limousines available.

Number of Total numberlimousines of rentals

1 3502 6503 9004 1,1005 1,250

After paying all non-interest expenses, the owner expects to net $10 per rental. Each limousine costs $50,000. How many limousines should he purchase if the real interest rate is 5.5%? A) 0 B) 1 C) 2 D) 3 E) 4

118. The closed economy loanable funds model is a theory of: A) nominal interest rate, assuming non-resident saving must be zero. B) real interest rate, assuming non-resident saving must be zero. C) real interest rate, assuming non-resident saving must be positive. D) real interest rate, assuming non-resident saving must be negative. E) nominal interest rate, assuming non-resident saving must be positive.

119. Capital gains are: A) increases in the flow of investment. D) increases in the value of existing assets. B) increases in the flow of saving. E) decreases in the value of existing assets. C) additions to plant and equipment.

120. Private plus public saving equals national _____. A) wealth B) bequests C) income D) saving E) transfers

121. The bank of Canada announces a target for the overnight market rate, which is its key official policy rate. The bank is able to maintain the overnight market rate close to the target by standing ready to lend to participants in the overnight market at a ______ set somewhat _____ the target for the overnight market rate, and to borrow from the participants at a ______ set somewhat _____ the target for the overnight market rate. A) bank rate; below; bankers deposit rate; above D) bankers deposit rate; below ; bank rate; above B) bank rate; above; bankers deposit rate; below E) none of the above C) bankers deposit rate; above; bank rate; below

122. Which of the following is false?

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A) The Bank of Canada has an explicit inflation-control target. B) The federal government has no say in the setting of the Bank of Canada's inflation-control target. C) The federal government has a say in the setting of the Bank of Canada's inflation-control target. D) Bank of Canada's inflation control target is jointly announced by the Bank and the federal government. E) Bank of Canada's inflation control target make the Bank accountable to an explicit standard of performance.

123. After the central bank increases reserves in the banking system through open-market purchases, banks create new deposits through multiple rounds of lending and accepting deposits until the: A) central bank requires them to stop. B) reserve/deposit ratio reaches one-half. C) actual reserve/deposit ratio is greater than the desired reserve/deposit ratio. D) actual reserve/deposit ratio is equal to the desired reserve/deposit ratio. E) actual reserve/deposit ratio is less than the desired reserve/deposit ratio.

124. Although the Bank Act of 1934 specify a very broad mandate for the Bank of Canada, the Bank now focuses monetary policy on a rather narrow objective, which is to: A) maintain full employment. B) ensure rapid growth of GDP. C) keep inflation low and stable. D) mitigate business cycle fluctuations. E) to control and protect the external value of the Canadian dollar.

125. A banking panic is an episode in which: A) depositors, spurred by news or rumours of possible bankruptcy of one bank, rush to withdraw deposits from

the banking system. B) commercial banks, fearing Bank of Canada sanctions, unwillingly participate in open-market operations. C) commercial banks, concerned about high interest rates, rush to borrow from the overnight market. D) depositors, afraid of increasing interest rates, attempt to engage in borrowing from the Bank of Canada. E) the Bank of Canada, concerned about unusually rapid increases in the money supply, refuses to make loans

to commercial banks.

126. Money serves as a medium of exchange when: A) it is used to purchase goods and services. D) it is a means of holding wealth. B) there is direct trade of goods and services. E) there is a double coincidence of wants. C) it is a basic measure of economic value.

127. Coupon payments are the: A) amount originally lent divided by the number of years until a bond matures. B) amount originally lent adjusted for the rate of inflation. C) regular interest payments made to bondholders. D) additional interest payments made to bond holders to compensate for credit risk. E) discounts bondholders receive when using coupons to make purchases.

128. The most important tool of monetary policy is: A) reserve to deposit ratios. D) the key policy rate B) the bank rate. E) market interest rates. C) open market operations.

129. You own shares in a start-up internet company. If the company announces that it will not pay dividends next

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year as it has in the past, then the price of your shares will _____, holding other factors constant. A) increase B) decrease C) not change D) either increase or decrease E) be indeterminate

130. When the Bank of Canada actions cause interest rates on newly issued bonds to decrease from 6% to 5%, the prices of existing bonds: A) increase. B) decrease. C) remain unchanged. D) decrease only if the coupon rate is less than 5%. E) increase only if the coupon rate is greater than 6%.

131. A three-year bond with a principal amount of $5,000, a 3% coupon rate paid annually, one year from maturity will sell for what price (rounded to the nearest dollar) in the bond market if interest rates are 5%? A) $4,762 B) $4,905 C) $5,000 D) $5,150 E) $5,408

132. If the principal amount of a bond is $10,000,000, the coupon rate is 7%, and the inflation rate is 4%, then the annual coupon payment made to the holder of the bond is: A) $70,000. B) $300,000. C) $400,000. D) $700,000. E) $1,100,000.

133. Holding money as a store of wealth has the advantage of being useful as a medium of exchange and being anonymous. The disadvantages of holding your wealth in the form of money are that it: A) may be stolen or lost, and people may think you're a smuggler or drug dealer. B) is difficult to trace and may be lost or stolen. C) may be lost or stolen, and usually pays no interest. D) pays no interest, and it is difficult to trace. E) pays no interest and people may think you're a smuggler or drug dealer.

134. The Federal Reserve System, the central bank of the United States, was created in: A) 1776. B) 1789. C) 1865. D) 1913. E) 1945.

135. Based on the following information, compute the value of the M1 measure of the money supply.

Assets Billions of Dollars Currency 20 Personal chequing deposits 30 Money market mutual funds 80 Savings deposits 400 Chequing deposits of businesses 100

A) $20 billion B) $50 billion C) $150 billion D) $550 billion E) $630 billion

136. When bank reserves exactly equal bank deposits, the bank is said to engage in A) fractional reserve banking. D) credit allocation. B) diversification. E) open-market operations. C) 100% reserve banking.

137. If the actual reserve/deposit ratio equals 8% and the desired reserve/deposit ratio for this bank is 10%, the bank should: A) do nothing because this is a profitable situation. B) stop making loans.

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C) send the extra reserves to the central bank. D) request that customers withdraw deposits from the bank. E) make more loans in order to earn interest.

138. The amount originally lent by a bondholder is called the: A) coupon payment. B) dividend. C) principal amount. D) risk premium. E) reserve.

139. A legal promise to repay a debt is called: A) equity. B) stock. C) a bond. D) a dividend. E) the principal amount.

140. Ralph purchases a newly-issued, two-year government bond with a principal amount of $10,000 and a coupon rate of 7% paid annually. One year before the bonds matures (and after receiving the coupon payment for the first year), Ralph sells the bond in the bond market. What price (rounded to the nearest dollar) will Ralph receive for his bond if the prevailing interest rate is 8%? A) $9,259 B) $9,907 C) $10,000 D) $10,700 E) $11,556

141. According to IMF data, the Japanese slump of the 1990s was the result of A) a slowdown in the growth of potential output B) a recessionary gap. C) an expansionary gap. D) both a slowdown in the growth of potential output and a recessionary gap. E) both a slowdown in the growth of potential output and an expansionary gap.

142. According to Okun's Law, when cyclical unemployment increases from 2 to 3 percent, the recessionary gap increases from ___ percent. A) -4 to -6 B) -2 to -3 C) 0 to 1 D) 2 to 3 E) 4 to 6

143. The cyclical unemployment rate is negative when: A) there is a recessionary gap. B) there is an expansionary gap. C) the output gap equals zero. D) frictional unemployment equals structural unemployment. E) the sum of frictional and structural unemployment equals zero.

144. The following data give the dates of successive turning points in Canadian economic activity and the corresponding levels of real GDP at the time:

Turning Point Date Real GDP (1992 $ billions)

(A) Jun 1980 131.8 (B) Jul 1981 145.6 (C) Oct 1982 133.1 (D) Apr 1990 174.0 (E) Apr 1992 172.1

Which of the following periods is a recession? A) Jun 1980 through July 1981 D) Oct 1982 through Apr 1990 B) Jun 1980 through Oct 1982 E) April 1990 through April 1992

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C) July 1981 through April 1990

145. When firms preset prices in the short-term, economywide spending changes are the primary cause of: A) frictional unemployment. D) the growth of potential output. B) output gaps. E) structural unemployment. C) inflation.

146. The unemployment rate for younger workers is usually ____ the unemployment rate for older workers. A) less than B) approximately equal to C) greater than D) more predictable than E) more stable than

147. Over short periods of time, producers typically vary production at preset prices to meet changes in demand. This means that when economywide demand decreases, actual output ________ potential output and creating a ________; and when economywide demand increases actual output ________ potential output and creating a _________. A) falls below; recessionary gap; rises above; expansionary gap B) falls below; expansionary gap; rises above; recessionary gap C) rises above; expansionary gap; falls below; recessionary gap D) rises above; recessionary gap; falls below; expansionary gap E) falls below; expansionary gap; falls below; recessionary gap

148. In Macroland potential output equals $100 billion and the natural rate of unemployment is 5 percent. If the actual unemployment rate is 3 percent, then the output gap equals: A) -$4 billion. B) -$2 billion. C) -$1 billion. D) $2 billion. E) $4 billion.

149. The natural rate of unemployment includes: A) only frictional unemployment D) frictional + structural + seasonal unemployment B) frictional + structural unemployment E) frictional + seasonal unemployment C) frictional + structural + cyclical unemployment

150. In Macroland potential GDP equals $8 trillion and real GDP equals $7.52 trillion. Macroland has a(n) _________ gap equal to _____ percent of potential GDP. A) expansionary; -6 B) expansionary; 6 C) recessionary; -6 D) recessionary; 6 E) recessionary; 48

151. Economic activity moves from a period of recession to a _______ and then moves into a period of _______until it reaches a _____ . A) peak; expansion; trough D) trough; recession; peak B) peak, recession; trough E) peak; recession; peak C) trough; expansion; peak

152. The central banks of the world's major economies, including Canada's, typically ______the official interest rate when inflation _______. A) cut; increases B) cut; decreases C) raise; decreases D) raise; increases E) none of the above

153. According to Okun's Law, when cyclical unemployment decreases by one percentage point, the recessionary gap ______ by ____ percentage point(s), measured in relation to potential output. A) increases; one B) increases; two C) decreases; one D) decreases; two E) decreases; three

154. A high unemployment rate most likely means that there is a: A) high rate of inflation in the economy. D) small GDP gap in the economy.

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B) low rate of interest in the economy. E) large trade deficit in the economy. C) large GDP gap in the economy.

155. Coca Cola's "smart" vending machine is designed to provide: A) more flexible pricing of products. B) a less expensive vending machine. C) higher levels of output. D) greater sensitivity to consumer complaints and concerns. E) output at preset prices.

156. If potential output equals $8 billion and actual output equals $7 billion, then this economy has a(n): A) budget deficit. B) trade deficit. C) expansionary gap. D) recessionary gap. E) value-added gap.

157. The natural rate of unemployment is the unemployment rate when there is only: A) structural unemployment. D) structural and cyclical unemployment. B) frictional unemployment. E) structural, frictional and seasonal unemployment. C) cyclical unemployment.

158. The following data give the dates of successive turning points in Canadian economic activity and the corresponding levels of real GDP at the time:

Turning Point Date Real GDP (1992 $ billions)

(A) Jun 1980 131.8 (B) Jul 1981 145.6 (C) Oct 1982 133.1 (D) Apr 1990 174.0 (E) Apr 1992 172.1

Which of the turning points are troughs? A) (A), (B), and (C) B) (C), (D), and (E) C) (A), (C), and (E) D) (B) and (D) E) (A) and (E)

159. All of the following are characteristics of short-term economic fluctuations EXCEPT: A) expansions and recessions are felt throughout the economy. B) recessions occur at regular and predictable intervals. C) unemployment rises during recessions. D) durable-goods industries are more sensitive to short-term fluctuations than service and non-durable

industries. E) recessions tend to be followed by a decline in inflation.

160. Short-term economic fluctuations are _____ in length and severity and ____ to predict. A) regular; difficult B) regular; easy C) constant; easy D) irregular; difficult E) irregular; easy

161. In Macroland autonomous consumption equals 100, the marginal propensity to consume equals .75, net taxes are fixed at 40, planned private-sector investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Induced aggregate demand equals: A) .25Y B) 320 + .25Y C) .75Y D) 290 + .75Y E) .75 (Y-T)

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162. If aggregate demand (AD) in an economy equals 2,000 + .6Y and potential output (Y*) equals 4,900, taxes must be increased by ________ (rounded to the nearest whole number) to eliminate any output gap. A) 67 B) 200 C) 225 D) 250 E) 1000

163. Government policies that are used to affect aggregate demand, with the objective of eliminating output gaps, are called _____ policies. A) structural B) cyclical C) productivity D) autonomous E) stabilization

164. The expenditure line in the Keynesian cross diagram represents the: A) equilibrium condition that Y=AD. B) relationship between aggregate demand and output. C) relationship between consumption and after-tax disposable income. D) equilibrium condition that Y = Y*. E) equilibrium condition that u = u*.

165. If aggregate demand (AD) in an economy equals 4,000 + .6Y and potential output (Y*) equals 9,800, transfer payments must be decreased by ________ (rounded to the nearest whole number) to eliminate any output gap. A) 10 B) 100 C) 1111 D) 33 E) 133

166. If aggregate demand (AD) in an economy equals 2,000 + .6Y and potential output (Y*) equals 4,900, transfer payments must be decreased by ________ (rounded to the nearest whole number) to eliminate any output gap. A) 67 B) 200 C) 225 D) 250 E) 1000

167. The two key assumptions of the basic Keynesian model are that aggregate demand _____ and that in the short run firms ______. A) is constant; meet demand at preset prices B) fluctuates; adjust prices to bring sales in line with capacity C) increases with the general level of prices; meet demand at preset prices D) is constant; adjust prices to bring sales in line with capacity E) fluctuates; meet demand at preset prices

168. Menu costs are the costs of: A) running a restaurant. D) changing production. B) changing prices. E) obtaining computer software. C) increasing aggregate demand.

169. If aggregate demand in an economy can be written as: AD = 1000 + .5 Y, what is the short-run equilibrium level of output in this economy? A) 1,000 B) 2,000 C) 9,000 D) 10,000 E) 10,900

170. If aggregate demand (AD) in an economy equals 2,000 + .48Y and potential output (Y*) equals 4,000, then this economy has: A) an expansionary gap. D) an income-expenditure multiplier equal to 5. B) a recessionary gap. E) an income-expenditure multiplier equal to 9. C) no output gap.

171. In the basic Keynesian model, to close a recessionary gap of $5 billion dollars government purchases must be: A) increased by $5 billion. D) increased by less than $5 billion. B) decreased by $5 billion. E) decreased by less than $5 billion.

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C) increased by more than $5 billion.

172. In the basic Keynesian model where the marginal propensity to consume is 0.5, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, taxes must be: A) increased by $1 billion. D) decreased by $2 billion. B) decreased by $1 billion. E) increased by $.5 billion. C) increased by $2 billion.

173. If the marginal propensity to consume equals 0.65, then a $100 increase in disposable income leads to a _____ increase in consumption. A) $0.35 B) $0.65 C) $35 D) $65 E) $100

174. In the basic Keynesian model a decrease in government purchases: A) reduces short-run equilibrium output. B) increases short-run equilibrium output. C) reduces potential output. D) increases potential output. E) moves short-run equilibrium output to potential output.


AD

50004750400032503000

1000

3000 4000 5000Y*

ExpenditureLineAD=1,000+.75Y

Y

Y*

45o

175. Based on the Keynesian cross diagram, at short-run equilibrium output autonomous aggregate demand equals _____ and induced aggregate demand equals ______. A) 1000, 3000 B) 1000, 4000 C) 3000, 4000 D) 1000, 3250 E) 3000, 3250

176. Consumption, planned investment, government purchases, and net exports are four components of: A) value added. D) aggregate supply. B) potential output. E) economic productivity. C) aggregate demand.

177. If aggregate demand (AD) in an economy equals 5,000 + .48Y and potential output (Y*) equals 9,000, then this economy has: A) an expansionary gap. D) an income-expenditure multiplier equal to 8. B) a recessionary gap. E) an income-expenditure multiplier equal to 9. C) no output gap.

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178. An increase in disposable income:

A) increases consumption because it shifts the consumption schedule upward. B) decreases consumption because it shifts the consumption schedule downward. C) increases consumption by moving upward along a specific consumption schedule. D) decreases consumption by moving downward along a specific consumption schedule. E) none of the above.

179. In the short-run Keynesian model, to close a recessionary gap of $5 billion dollars taxes must be: A) increased by $5 billion. D) increased by less than $5 billion. B) decreased by $5 billion. E) decreased by less than $5 billion. C) increased by more than $5 billion.

180. In the short-run Keynesian model, to close a recessionary gap of $10 billion dollars taxes must be: A) increased by $10 billion. D) increased by less than $10 billion. B) decreased by $10 billion. E) decreased by less than $10 billion. C) increased by more than $10 billion.

181. If money demand in millions of dollars equals P(Y- 50,000 i ), where the price level (P) equals one, real income (Y) equals 8,000 and the nominal interest rate ( i ) is expressed as a decimal (for example, 5 percent is 0.05), and if the central bank wants to set the equilibrium nominal interest rate at 0.03, then, according to the vertical money supply theory, the central bank must make available the money supply equal to: A) 6,500 B) 7,000 C) 7,500 D) 8,000 E) 8,500

182. In an economy where aggregate demand is given by AD = 3,000 + .75Y - 10,000 r, the central bank is currently setting the interest rate at 0.05 (5 percent). If potential output equals 10,800, the central bank must ____ the interest rate to _____percent to restore full employment. A) lower; 0.03 B) lower; 0.04 C) raise; 0.06 D) raise; 0.07 E) raise; 0.08

183. The amount of wealth an individual chooses to hold in the form of money is called: A) the money reaction function. D) expansionary monetary policy. B) the demand for money. E) contractionary monetary policy. C) the supply of money.

184. Under its current operating procedure, the Bank of Canada implements monetary policy by announcing a target for the ________ (the official interest rate), and then intervenes (if necessary) in the _______ in order to maintain this rate within a _______ percentage points operating band. A) overnight market rate; overnight loan market; ? 0.50 B) prime rate; money markets; ? 0.25 C) overnight market rate; money markets; ? 0.25 D) overnight market rate; overnight loan market; ? 0.25 E) overnight market rate; money markets; ? 0.50

185. Jim has the following assets and liabilities:

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Credit card balance $ 2,000 Cash $ 500 Government bonds $ 2,000 Chequing $ 750 Car loan balance $ 5,000 Car $15,000

Which of the following actions would increase Jim's money demand by $200? A) Jim writes a cheque for $200 to pay down his credit card balance. B) Jim writes a cheque for $200 to pay down her car loan balance. C) Jim pays $200 cash for a new lamp. D) Jim pays $200 cash for another government bond. E) Jim gets a $200 cash advance on his credit card and puts the proceeds in his chequing account.

186. In a certain economy the components of aggregate demand are given by:C = 60 + .6 (Y- T) - 1000 rI = 200 - 1000 rG = 200NX =50

If net taxes equal 100 and the central bank sets the interest rate equal to 0.06 (6 percent), short-run equilibrium output equals: A) 825 B) 875 C) 925 D) 975 E) 1,025

187. The conduct of monetary policy in Canada is a real world application of the ________. Thus, the Bank of Canada's main monetary policy tool is ________. A) vertical money supply theory; the money supply B) modern central banking theory; the money supply C) modern central banking theory; its key policy rate (also called the official interest rate) D) vertical money supply theory; its key policy rate (also called the official interest rate) E) modern central banking theory; the prime interest rate

188. If in the money market the quantity of money demanded exceeds the money supply, we would expect the interest rate to: A) fall, causing households and businesses to hold less money. B) rise, causing households and businesses to hold less money. C) rise, causing households and businesses to hold more money. D) fall, causing households and businesses to hold more money. E) be the same, causing households and businesses to hold more money.

189. The episode of nine successive cuts in the official interest in 2001, illustrates that despite its stated goal of ensuring low and stable inflation, the Bank of Canada is also prepared to act preemptively to: A) avoid future recessions. D) avoid future expansionary gaps. B) avoid future inflation. E) avoid future budget deficits. C) avoid future structural unemployment

190. A policy reaction function describes how the action a policymaker takes depends on: A) the state of the economy. D) the reaction of special interest groups. B) public approval ratings. E) the political affiliation of the policymaker. C) whether or not it is an election year.

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191. If potential output equals 10,000 and short-run equilibrium output equals 8,500, there is a ______ gap and the Bank of Canada must _____ real interest rates in order to close the gap. A) recessionary; raise D) expansionary; raise B) recessionary; lower E) expansionary; lower C) recessionary; not change

192. The curve relating the aggregate quantity of money demanded to the nominal interest rate is called the _____ curve. A) aggregate demand B) 45-degree C) expenditure D) consumption E) money demand

193. According to the modern central banking theory, central banks set the nominal interest rate, and any value of the nominal interest rate chosen by the central bank implies a specific value for ______. A) potential output D) the budget deficit B) net exports E) the money supply C) government purchases

194. How much money to hold is an application of the: A) scarcity principle. D) cost-benefit principle. B) principle of comparative advantage. E) principle of increasing opportunity cost. C) equilibrium principle.

195. When the Bank of Canada wants to raise the real interest rate in Canada, it announces a ________ overnight rate target (and the entire ? 0.25 percentage point operating band around the overnight rate target shifts ______ ). In response, the commercial banks ________ the market interest rates, particularly, the short term rates, by a similar amount. A) higher; down; raise D) higher; up; raise B) lower; up; lower E) lower; down; up C) higher; up; lower

196. The decision about the forms in which to hold one's wealth is called the ________ decision. A) Taylor B) portfolio allocation C) Fisher effect D) life-cycle E) reaction function

197. The following table shows Jay's estimated annual benefits of holding different amounts of money.

Average money holdings ($) Total benefit ($) 100 20 200 29 300 36 400 41 500 44

How much money will Jay hold if the nominal interest rate is 8 percent? (Assume he wants his money holdings to be in multiples of $100.) A) 100 B) 200 C) 300 D) 400 E) 500

198. Although the preamble of the Bank of Canada Act lists multiple goals for the Bank, in recent years the Bank has emphasized one overriding goal: A) maintaining low unemployment. B) maintaining low and stable inflation. C) maintaining the external value of the Canadian dollar.

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D) maintaining full-employment. E) maintaining high output.

199. In the short run, if the Bank of Canada decreases interest rates, then consumption and investment ______, aggregate demand ______, and short-run equilibrium output _______. A) increase; increases; increases D) decrease; decreases; increases B) increase; increases decreases E) decrease; decreases; decreases C) increase; decreases; decreases

200. The money demand curve will shift to the left if : A) the nominal interest rate increases. D) real income decreases. B) the nominal interest rate decreases. E) real income increases. C) price level increases.

201. Suppose in an economy AD=5,000 + .75 Y - 10,000 r and the central bank acts according to the following policy reaction function:

Rate of inflation ( )? Real interest rate set by central bank ( r )0.00 (=0%) 0.01 (=1%)

0.01 0.020.02 0.030.03 0.040.04 0.05

If inflation is 0%, the central bank will set a real interest rate of ____ percent and short-run equilibrium output will equal _____. A) 0; 20,000 B) 1; 20,000 C) 1; 19,600 D) 1; 15,000 E) 2; 19,200

202. Starting from long-run equilibrium, a large increase in government purchases will result in a(n) _____ gap in the short-run and ____ inflation and ____ output in the long-run. A) expansionary; higher; potential D) recessionary; higher; potential B) expansionary; lower; potential E) recessionary; lower; lower C) expansionary; higher; higher

203. The tendency for inflation to change relatively slowly from year to year in industrial countries is called: A) the inflation gap D) potential inflation. B) inflation expectations. E) autonomous inflation. C) inflation inertia.

204. Which of the following will shift the aggregate demand curve to the right? A) Income taxes are raised. B) The government reduces purchases to balance the budget. C) Consumers become pessimistic about the future. D) A new technology is developed that will increase profits. E) Foreign economies fall into recession, reducing their demand for domestic exports.

205. Suppose in an economy AD=800 + .9 Y - 20,000 r and the central bank acts according to the following policy reaction function:

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Rate of inflation ( )? Real interest rate set by central bank ( r )0.00 (=0%) 0.01 (=1%)

0.01 0.0150.02 0.020.03 0.0250.04 0.03

If inflation is 2%, the central bank will set a real interest rate of ____ percent and short-run equilibrium output will equal _____. A) 0; 8,000 B) 2; 4,000 C) 2; 6,000 D) 2.5; 3,000 E) 2.5; 8,000

206. Suppose the aggregate demand curve in an economy is Y = 20,000 - 20,000 ?, current inflation (?) equals 0.06 (6 %), and potential output (Y*) equals 18,800. If starting from long-run equilibrium, an aggregate supply shock reduces potential output to 18,400, in the short run there will be a(n) _______ gap and in the long run inflation will equal _____ percent. A) expansionary; 6 B) expansionary; 7 C) expansionary; 8 D) recessionary; 6 E) recessionary; 8

207. The aggregate demand curve shows the relationship between aggregate demand and the ______ rate. A) nominal interest B) real interest C) unemployment D) inflation E) exchange

208. Unlike an adverse inflation shock, an adverse shock to potential output causes: A) lower output and higher inflation. D) only temporary output losses. B) higher output and lower inflation. E) permanent reduction in potential output. C) no output losses.

209. All else equal, a decrease in the rate of inflation ____ aggregate demand and ____ short-run equilibrium output. A) increases; increases D) decreases; increases B) increases; decreases E) decreases; decreases C) does not change; does not change

210. All else equal, an increase in the rate of inflation ____ aggregate demand and ____ short-run equilibrium output. A) increases; increases D) decreases; increases B) increases; decreases E) decreases; decreases C) does not change; does not change

211. Suppose the aggregate demand curve in an economy is Y = 10,000 - 10,000 ?, current inflation (?) equals 0.03 (3 %), and potential output (Y*) equals 9,700. If starting from long-run equilibrium, an aggregate supply shock reduces potential output to 9,500, in the short run there will be a(n) _______ gap and in the long run inflation will equal _____ percent. A) expansionary; 3 B) expansionary; 5 C) expansionary; 7 D) recessionary; 3 E) recessionary; 5

212. The short-run aggregate supply line is: A) downward sloping. D) vertical at the economy's potential output. B) upward sloping. E) vertical at the economy's actual output. C) horizontal at the current rate of inflation.

213. Favourable aggregate demand shocks and unfavourable aggregate supply shocks are: A) reasons for the downward slope of the aggregate demand curve. B) types of autonomous expenditures. C) necessary to avoid inflation inertia.

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D) ways to control inflation. E) sources of inflation.

214. A short-run equilibrium with an recessionary gap implies that: A) firms will raise the prices of their goods and services more than needed to fully cover their increases in

costs. B) firms will raise the prices of their goods and services as much as needed to fully cover their increases in

costs. C) negative inflation. D) firms have incentives to lower the relative prices of their goods and services.. E) firms have incentives to raise the relative prices of their goods and services.

215. The output losses from an adverse inflation shock are ____ and the output losses from a fall in potential output are ______. A) small; large B) large; small C) permanent; temporary D) temporary; permanent E) real; nominal

216. If the central bank moves to reduce the inflation rate in an economy that initially is at a long-run equilibrium, then in the short run the inflation rate _____ and in the long run the inflation rate ______. A) increases; increases D) shows little change; declines B) decreases; declines E) increases; decreases C) shows little change; increases

217. Some critics of the AD-AS model have noted that the economy's potential output could occur at any point over a range of possible outputs, rather than at a single level of output. If the critics are right, then A) accelerating inflation would be compatible with many output levels. B) decelerating inflation would be compatible with many output levels. C) inflation stability would be compatible with many output levels. D) inflation stability would be compatible with only a single output level. E) inflation stability would be compatible with two separate output levels.

218. An inflation shock is: A) the level of inflation consistent with output in a recessionary gap. B) the level of inflation consistent with output in an expansionary gap. C) a sudden change in the normal behaviour of inflation, unrelated to the nation's output gap. D) a change in the inflation rate generated by excessive aggregate demand. E) a change in inflation brought about by changes in inflation expectations and pricing decisions.

219. Starting from long-term equilibrium, decreases in the rate of inflation may be the result of any of the following EXCEPT: A) a favourable inflation shock. D) monetary tightening. B) monetary easing. E) a tax increase. C) a decrease in government purchases.

220. Because increases in inflation reduce aggregate demand and short-run equilibrium output: A) the short-run aggregate supply line is downward sloping. B) the short-run aggregate supply line is upward sloping. C) the aggregate demand curve is horizontal. D) the aggregate demand curve is downward sloping. E) the aggregate demand curve is upward sloping.

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$ Priceof Oil

30

2520

Millions of barrels18161297

S

D

221. If the economy in the figure is open to trade, the world price of oil is $20 per barrel and the government places a $5 per barrel tariff on oil imports, then the government will collect $ ____ million in oil tariff revenues. A) 35 B) 45 C) 50 D) 60 E) 80

222. In the open economy represented in the figure, when the world price of oil is $20 per barrel, domestic production of oil equals ____ million barrels and domestic consumption of oil equals ____ barrels. A) 7;12 B) 12; 12 C) 12; 18 D) 18; 7 E) 7; 18


Suppose the world economy is composed of just two countries: A and B. Each can produce steel or chemicals, but at different levels of economic efficiency. The domestic productive possibilities curves are shown in the graphs below.

223. Refer to the above graphs and information. The assumption made about the domestic opportunity costs in countries A and B is that they are: A) constant. B) variable. C) increasing. D) decreasing. E) none of the above.

224. Refer to the above graphs and information. The opportunity costs of producing steel and chemicals in the two countries are:

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A) increasing in each nation. D) different in each nation. B) decreasing in each nation. E) undetermined. C) the same in each nation.

225. If a small open economy is equally productive in producing corn and wheat and the world price of wheat is twice the world price of corn, then to maximize consumption possibilities, this economy will produce ______ and trade. A) only wheat. D) twice as much corn as wheat. B) only corn. E) twice as much wheat as corn. C) equal quantities of corn and wheat.

226. If a small open economy can produce twice as much wheat as corn using the same resources and the world price of corn equals the world price of wheat, then to maximize consumption possibilities, this economy will produce ______ and trade. A) only wheat. D) twice as much corn as wheat. B) only corn. E) half as much wheat as corn. C) equal quantities of corn and wheat.


227. Refer to the above graph, where Sd and Dd are the domestic supply and demand for a product. The world price of the product is $6. What would be the difference in the total revenue received by foreign producers after a quota of 20 units is imposed compared with the total revenue received by foreign producers when a $4 per unit tariff is paid? A) $0 revenue difference D) $120 more revenue with a tariff than with a quota B) $80 more revenue with a quota than with a tariff E) $220 more revenue with a tariff than with a quota C) $200 more revenue with a quota than with a tariff

228. Refer to the above graph, where Sd and Dd are the domestic supply and demand curves for a product. The world price of the product is $6. If an import quota of 40 units were imposed on the product, then the equilibrium price would be: A) $6 and the equilibrium quantity 80 units. D) $12 and the equilibrium quantity 50 units. B) $8 and the equilibrium quantity 70 units. E) $17 and the equilibrium quantity 90 units. C) $10 and the equilibrium quantity 60 units.

229. Refer to the above graph, where Sd and Dd are the domestic supply and demand curves for a product. The world price of the product is $6. If the market is open to international trade but there is a tariff of $2 per unit imposed,

Page 31


the total revenue generated by the tariff would be: A) $40. B) $60. C) $80. D) $100. E) $120.

230. Net capital outflows equal: A) capital inflows minus capital outflows. D) domestic production. B) capital outflows minus capital inflows. E) average world prices. C) international production.

231. A situation in which a country is economically self-sufficient is called: A) inertial. B) inefficient. C) autarky. D) protectionist. E) scarcity.

232. The view that free trade is injurious and should be restricted is called: A) Keynesian economics. B) protectionism. C) structural positivism. D) restrictionism. E) autarky.

233. A country that does not trade with other countries is called a(n) _____ economy. A) structural B) nominal C) centrally planned D) open E) closed

234. If a quota is placed on a good, domestic producers of the good are ____ and domestic consumers of the good are _____ A) winners; winners B) winners; not affected C) winners; losers D) losers; losers E) losers; winners

235. The demand for laser printers in a country is given by: D = 10,000 - 2 P, where P is the price of a laser printer. Supply by domestic producers is given by: S = 2,000 + 8P. If the world price of a laser printer equals 800 and this economy is open to trade, then this country will: A) export 2,000 laser printers. D) import 2,000 laser printers. B) export 3,000 laser printers E) import 3,000 laser printers C) neither import nor export laser printers.


$ Priceof Oil

30

2520

Millions of barrels18161297

S

D

236. In the open economy represented in the figure, when the world price of oil is $30 per barrel, domestic production of oil equals ____ million barrels and domestic consumption of oil equals ____ barrels. A) 6;11 B) 11; 11 C) 11; 16 D) 16; 6 E) 6; 16


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237. Refer to the above graph showing the domestic demand and supply curves for a specific product in a hypothetical nation called Zancuzi. When the world price for this product is $.50, Zancuzi will have: A) a domestic shortage of 200 units. D) neither a domestic surplus nor a shortage. B) a domestic surplus of 200 units. E) a domestic surplus of 300 units. C) a domestic shortage of 400 units.

238. The world price is the price at which: A) the supply of local goods and services equals the demand for goods and services on the international market. B) the demand for local goods and services equals the supply of goods and services on the international market. C) consumption goods and services trade relative to production goods and services on world markets. D) a good or service is traded on international markets. E) a good or service is traded on domestic markets.

239. An economy has two workers, Amy and Brian. Per day of work Amy can produce 100 bushels of peaches or 50 glasses, and Brian can produce 20 bushels of peaches or 80 glasses. Amy and Brian work 200 days per year. Amy's opportunity cost of producing a bushel of peaches is ______ glasses , while Brian's opportunity cost of producing a bushel of peaches is ______ glasses. A) 2; 4 B) 0.5; 0.25 C) 0.5; 4 D) 2; 0.25 E) 4; 0.5

240. The demand for jeans in a country is given by: D = 100 - 0.6 P, where P is the price of a pair jeans. Supply by domestic producers is given by: S = 20 + 0.4P. The world price of a pair of jeans equals 30 and this economy is open to trade. If a quota of 40 pairs is placed on jeans imports, the quantity of jeans demanded domestically will change from ____ pairs with trade, but no quota, to ____ pairs with trade and a quota. A) 52; 82 B) 52; 76 C) 82; 76 D) 82; 52 E) 82; 36

241. An exchange rate that is set by official government policy is called a(n) _____ exchange rate. A) overvalued B) undervalued C) fixed D) flexible E) fundamental

242. Holding all else constant, an increase in the real interest rate on U.S. assets will ____ the supply of Canadian dollars in the foreign exchange market and ____ the equilibrium U.S. dollar/Canadian dollar exchange rate. A) increase; increase D) decrease; increase B) increase; decrease E) decrease; decrease C) not change; not change

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243. A flexible exchange rate is an exchange rate whose value: A) is determined by the law of one price. B) varies according to the supply and demand for the currency in the foreign exchange market. C) is set by official government policy. D) reflects the comparative advantage of the home country versus other foreign countries. E) is established annually by the International Monetary Fund.

244. An overvalued exchange rate is an exchange rate: A) that equals the number of units of a foreign currency over the number of units of domestic currency. B) equals number of units of the domestic currency over the number of units of a foreign currency. C) at which the quantities of currencies demanded and supplied in the foreign exchange market are equal. D) that has an officially fixed value greater than its fundamental value. E) that has an officially fixed value less than its fundamental value.

245. The Canadian dollar exchange rate, e, where e is the nominal exchange rate expressed as Japanese yen per Canadian dollar, will depreciate when: A) real GDP in Canada increases. B) real GDP in Japan increases. C) the Bank of Canada tightens monetary policy. D) Canadian consumers decrease their preference for Japanese cars. E) the Bank of Japan eases monetary policy.


246. Based on the figure, if the krone exchange rate is fixed at $0.14 dollars per krone, the krone is ______. A) devalued B) revalued C) overvalued D) undervalued E) valued at par

247. The following table provides the nominal exchange rates for the Canadian dollar.

Based on these data, the nominal exchange rate equals ____ pesos per Canadian dollar or approximately _____ Canadian dollars per peso.

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A) 6.662; 0.145 B) 0.621; 1.611 C) 1.611; 0.621 D) 0.177; 5.639 E) 5.639; 0.177

248. Suppose that the demand for euros in the foreign exchange market equals 8,000 - 2,000 e and the supply of euros in the foreign exchange market equals 4,500 + 3,000 e, where e is the nominal exchange rate expressed in Canadian dollars per euro. The fundamental value of the Euro is ____ Euros per Canadian dollar or ___ Canadian dollars per Euro. A) 2; .8 B) .5; 2 C) 1.428; 0.7 D) 2.2; 45 E) 45; 2.2

249. The demand for the Franconian franc in the foreign exchange market equals 14,000 - 3,000e and the supply of francs in the foreign exchange market equals 2,000 + 2,000e, where e is the nominal exchange rate expressed in Canadian dollars per franc. The fundamental value of franc is ____ francs per Canadian dollar or ____ Canadian dollars per franc. A) .417; 2.4 B) 2.4; .417 C) 12; .083 D) .083; 12 E) 7; .143

250. If the nominal exchange rate is 1.61 Canadian dollars per U.S. dollar, and 5.638 Mexican pesos per Canadian dollars, then there are ____ Mexican pesos per U.S. dollar. A) 3.472 B) 4.945 C) 7.025 D) 8.618 E) 9.077

251. For a given domestic and foreign price level, an increase in the nominal exchange rate _____ the real exchange rate. A) increases D) does not change B) decreases E) offsets any change in C) may either increase or decrease

252. The following table provides nominal exchange rates for the Canadian dollar.

Based on these data, the nominal exchange rate equals ____ British pounds per French franc or equivalently _____ French francs per British pound. A) 0.199; 6.554 B) 0.213; 7.974 C) 0.123; 8.022 D) 0.093; 10.754 E) 0.331; 6.712

253. An increase in the real exchange rate will tend to ____ exports and to ______ imports. A) increase; decrease D) decrease; increase B) increase; increase E) decrease; decrease C) not change; not change

254. An exchange rate that has an officially fixed value greater than its fundamental value is called a(n) _______ exchange rate. A) devalued B) revalued C) depreciated D) overvalued E) undervalued

255. The demand for euros in the foreign exchange market equals 8,000 - 2,000 e and the supply of euros in the foreign exchange market equals 4,500 + 3,000 e, where e is the nominal exchange rate expressed in Canadian dollars per euro. If the euro is fixed at .50 Canadian dollars per euro, then the euro is _____ and Euroland has a balance-of-payments ______. A) overvalued; surplus of 750 euros D) undervalued; surplus of 1000 euros B) overvalued; deficit of 750 euros E) undervalued; deficit of 1000 euros C) overvalued; deficit of 750 dollars

Page 35


256. The demand for the Franconian franc in the foreign exchange market equals 14,000 - 3,000e and the supply of

francs in the foreign exchange market equals 2,000 + 2,000e, where e is the nominal exchange rate expressed in Canadian dollars per franc. If the franc is fixed at 2 Canadian dollars per franc, then to maintain this fixed rate Franconia's international reserves must _______ dollars per period. A) decrease by 2,000 D) increase by 2,000 B) decrease by 4,000 E) increase by 4,000 C) increase by 1,000

257. A balance-of payments surplus is: A) the amount by which exports exceed imports over a year. B) the amount by which imports exceed exports over a year. C) the net increase in a country's stock of international reserves over a year. D) the net decrease in a country's stock of international reserves over a year. E) the difference between capital inflows and capital outflows.

258. For a given nominal exchange rate and foreign price level, a decrease in the domestic price level _____ the real exchange rate. A) increases D) does not change B) decreases E) offsets any change in C) may either increase or decrease

259. When the nominal exchange increases from 0.714 euros Canadian per dollar to 0.724 euros per Canadian dollar, the Canadian dollar has: A) appreciated B) depreciated C) become overvalued D) become undervalued E) been devalued

260. When the nominal exchange increases from 5.6 pesos per Canadian dollar to 5.9 pesos per Canadian dollar, the dollar has: A) appreciated B) depreciated C) become overvalued D) become undervalued E) been devalued

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Answer Key

1. A2. A3. B4. B5. A6. A7. C8. D9. C

10. D11. B12. B13. A14. E15. A16. A17. D18. A19. D20. D21. C22. A23. D24. C25. C26. D27. C28. C29. A30. D31. C32. D33. B34. E35. C36. D37. D38. A39. C40. D41. D42. B43. C44. C45. D46. D47. A

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48. B49. C50. C51. D52. C53. D54. D55. D56. E57. B58. A59. E60. B61. C62. E63. E64. A65. B66. E67. D68. B69. B70. C71. A72. D73. C74. D75. E76. B77. C78. E79. B80. B81. E82. A83. D84. E85. B86. E87. D88. B89. D90. D91. D92. A93. A94. D95. E96. C

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97. E98. A99. E

100. A101. A102. C103. D104. B105. A106. B107. E108. E109. B110. D111. C112. B113. D114. E115. C116. A117. C118. B119. D120. D121. B122. B123. D124. C125. A126. A127. C128. C129. B130. A131. B132. D133. C134. D135. C136. C137. B138. C139. C140. B141. D142. E143. B144. E145. B

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146. C147. A148. A149. D150. D151. C152. D153. D154. C155. A156. D157. E158. C159. B160. D161. C162. A163. E164. B165. E166. A167. E168. B169. B170. B171. D172. D173. D174. A175. A176. C177. A178. C179. E180. E181. A182. A183. B184. D185. E186. A187. C188. B189. A190. A191. B192. E193. E194. D

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195. D196. B197. B198. B199. A200. D201. C202. A203. C204. D205. B206. C207. D208. E209. A210. E211. B212. C213. E214. D215. D216. D217. C218. C219. B220. D221. A222. E223. A224. D225. A226. A227. B228. B229. C230. B231. C232. B233. E234. C235. C236. D237. C238. D239. C240. C241. C242. B243. B

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244. D245. A246. D247. E248. C249. A250. E251. A252. D253. D254. D255. D256. E257. C258. B259. A260. A

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