Assignment 2 ECO1102 2X Introduction to MacroeconomicsSummer 2004 Instructor: Zahedi Vafa

Studen Name___________________________________

Student Number

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) If real GDP is less than potential, then more than likely the economy is

A) in an above full-employment equilibrium.

B) in a full-employment equilibrium.

C) in long-run equilibrium.

D) in a below full-employment equilibrium.

E) not in short-run equilibrium.

1)

2) If real GDP is below potential GDP, we would expect

A) potential GDP to fall.

B) wages to rise.

C) potential GDP to rise.

D) wages to fall.

E) A and C.

2)

3) All of the following will raise the price level except:

A) Only AD shifts right.

B) Only SAS shifts left.

C) AD shifts right and SAS shifts left.

D) Only LAS shifts left.

E) AD shifts right and SAS shifts right.

3)

4) Long-run aggregate supply will increase for all of the following reasons except

A) more aggregate hours.

B) a fall in wages.

C) a rise in human capital.

D) the introduction of new technology.

E) more capital stock.

4)

5) Which one of the following newspaper quotations describes a movement along an SAS curve?

A) "The recent tornadoes destroyed many factories in Calgary and Edmonton."

B) "The increase in consumer spending is expected to lead to inflation, without any increase inreal GDP."

C) "Recent higher wage settlements are expected to cause higher inflation this year."

D) "Growth has been unusually high the last few years due to more women entering theworkforce."

E) "The decrease in consumer spending may lead to a recession."

5)

1

6) The quantity of real GDP demanded does not depend on decisions made by

A) firms.

B) suppliers.

C) governments.

D) households.

E) foreigners.

6)

7) All else constant, an increase in the expected inflation rate means that

A) the aggregate supply curve will shift to the left.

B) there will be a movement up the aggregate demand curve.

C) the aggregate demand curve will shift to the left.

D) the aggregate demand curve will shift to the right.

E) the aggregate supply curve will shift to the right.

7)

Use the figure below to answer the following question(s).

The following figure shows the aggregate demand (AD), short-run aggregate supply (SAS), and long-run aggregate supply(LAS) curves for Econoworld.

Figure 22.3

8) Refer to Figure 22.3. Consider statements (1) and (2) and select the correct answer.(1) Actual unemployment exceeds the natural rate of unemployment. (2) Short-run aggregate supply will automatically shift leftward as the economy adjusts to

long-run equilibrium.

A) (1) and (2) are true.

B) (1) is true; (2) is true if wages fall.

C) (1) is true; (2) is false.

D) (2) is true; (1) is false.

E) (1) and (2) are false.

8)

2

Use the figure below to answer the following question.

Figure 22.5

9) Which of the graphs in Figure 22.5 illustrates an above full-employment equilibrium?

A) (a) only. B) (b) only. C) (c) only. D) (d) only. E) (c) and (d).

9)

3

Use the figure below to answer the following question(s).

Figure 22.2

10) Consider Figure 22.2. Which graph illustrates what happens when the money supply decreases?

A) (a).

B) (b).

C) (c).

D) (d).

E) None of the above.

10)

11) The aggregate demand curve depicts the relationship between

A) real aggregate expenditures and real GDP.

B) the average price level and real GDP demanded.

C) real prices and real GDP.

D) the average price level and nominal GDP.

E) real income and real GDP.

11)

4

Use the table below to answer the following question.

Table 22.1

Price Level

AggregateDemand

Short-RunAggregate Supply

(billions of 1992 dollars) Long-Run

Aggregate Supply100 800 300 600110 700 400 600120 600 500 600130 500 600 600140 400 700 600

12) Consider the economy represented in Table 22.1. The economy is in a(n)

A) above full-employment equilibrium, and resource prices will rise.

B) above full-employment equilibrium, and resource prices will fall.

C) below full-employment equilibrium, and resource prices will rise.

D) below full-employment equilibrium, and resource prices will fall.

E) full employment equilibrium, and resource prices will not change.

12)

13) If prices of productive resources remain constant , an increase in aggregate demand will cause a(n)

A) decrease in the price level and an increase in real GDP.

B) decrease in the price level and a decrease in real GDP.

C) increase in the price level and a decrease in real GDP.

D) increase in the price level and an increase in real GDP.

E) increase in the price level, but no change in real GDP.

13)

14) If the price level rises, then the wealth effect will lead to

A) an increase in real wealth, an increase in current consumption expenditure, and a decrease insaving.

B) a decrease in real wealth, a decrease in current consumption expenditure, and an increase insaving.

C) an increase in real wealth, an increase in current consumption expenditure, and an increase insaving.

D) a decrease in real wealth, an increase in current consumption expenditure, and an increase insaving.

E) a decrease in real wealth, an increase in current consumption expenditure, and a decrease insaving.

14)

15) Which one of the following will cause the aggregate demand curve to shift to the right?

A) An increase in expected inflation.

B) An increase in taxes.

C) An increase in the price level.

D) A decrease in the price level.

E) An increase in interest rates (at a given price level).

15)

5

16) All else constant, which one of the following would increase equilibrium real GDP?

A) An increase in the savings function.

B) An increase in taxes.

C) A decrease in investment.

D) An increase in exports.

E) A decrease in exports.

16)

17) Which one of the following quotations is the likely signal of a coming recession?

A) "Lately, my warehouse seems to be filling up with widgets. I wonder why."

B) "I've been raising production of widgets due to higher orders."

C) "I've been lowering production of widgets due to lower orders."

D) "Lately, my warehouse seems to be emptying of widgets. I wonder why."

E) "So far this year, our dress sales just match our orders from the warehouse."

17)

Use the figure below to answer the following question(s).

Figure 23.1This figure describes the relationship between aggregate consumption expenditures and disposable income for a modeleconomy.

18) Refer to Figure 23.1. When disposable income is equal to $200 billion, saving is approximatelyequal to

A) zero.

B) $150 billion.

C) a dissaving of $60 billion.

D) $200 billion.

E) $60 billion.

18)

6

19) Suppose business confidence about future profits rises dramatically after a brilliant speech by theprime minister. As a result,

A) net export expenditures will rise, leading to a rise in real GDP.

B) autonomous consumption expenditure rises, leading to a rise in real GDP.

C) investment expenditures will rise, leading to a rise in real GDP.

D) saving will fall, leading to a rise in real GDP.

E) saving will rise, leading to a fall in real GDP.

19)

20) If real GDP is less than aggregate planned expenditure, then

A) aggregate planned expenditure will increase.

B) real GDP will increase.

C) imports must be too large.

D) the price level must fall to restore equilibrium.

E) A and B.

20)

21) The marginal propensity to consume reveals

A) how much of a given level of disposable income will be consumed.

B) how much of a change in disposable income is likely to be saved.

C) how much consumption will occur at the equilibrium income.

D) how much of a change in disposable income is likely to be consumed.

E) B and D.

21)

22) Suppose there is an increase in exports. Assuming the economy is operating on its short-runaggregate supply curve, which one of the following best describes the sequences of changes in theeconomy?

A) Induced expenditure increases, autonomous expenditure increases, real GDP increases, andconsumption increases.

B) Autonomous expenditure increases, real GDP increases, induced expenditure increases, realGDP increases more, induced expenditure increases again, etc.

C) Induced expenditure increases, real GDP increases, autonomous expenditure increases, realGDP increases more, autonomous expenditure increases again, etc.

D) Autonomous expenditure increases, real GDP increases, induced expenditure increases, realGDP increases, etc., and the price level increases, lowering autonomous expenditure, and realGDP increases by a smaller amount as a result.

E) Autonomous expenditure increases, induced expenditure increases, real GDP increases, andconsumption increases.

22)

23) The consumption function for the Canadian economy covering the period from 1978 to 1998indicates a marginal propensity to consume out of disposable income approximately equal to

A) 0.7. B) 0.9. C) 0.54. D) 0.65. E) 0.8.

23)

7

24) Which one of the following variables has an induced component?

A) Consumption.

B) Government expenditures on goods and services.

C) Investment.

D) Exports.

E) All of the above.

24)

25) If the marginal propensity to consume out of real GDP is 0.75, and the marginal propensity toimport is 0.10, then the slope of the AE function is

A) 0.50. B) 0.85. C) 0.15. D) 0.45. E) 0.65.

25)

26) Increases in autonomous consumption result in

A) a downward shift of the consumption function.

B) a movement from right to left along the consumption function.

C) a movement from left to right along the consumption function.

D) an upward shift of the consumption function.

E) a swivel counterclockwise in the consumption function.

26)

Use the table below to answer the following question(s).

Table 23.3

The following table shows the relationship between aggregate expenditures and GDP in the hypothetical economy ofEconoworld. Each variable is expressed in constant dollars.

Real GDPper Year

Aggregate Expendituresper year

0 100200 260400 420600 580800 740

27) Refer to Table 23.3. Find the new level of equilibrium real GDP if investment increases by 25.

A) 675. B) 725. C) 625. D) 600. E) 525.

27)

28) Which one of the following will lead to an increase in the slope of the AE function?

A) An increase in the marginal tax rate.

B) An increase in the marginal propensity to import.

C) A decrease in the marginal propensity to consume.

D) An increase in the marginal propensity to save.

E) A decrease in the marginal propensity to save.

28)

8

29) If real GDP is greater than aggregate planned expenditure, then

A) the price level must fall to restore equilibrium.

B) real GDP will increase.

C) aggregate planned expenditure will increase.

D) imports must be too large.

E) none of the above.

29)

30) All else constant, as interest rates rise,

A) both consumption and saving decrease.

B) both consumption and saving remain unchanged.

C) both consumption and saving increase.

D) consumption decreases and saving increases.

E) consumption increases and saving decreases.

30)

31) Which of the following quotations correctly refers to the effects of fiscal policy in the long run?

A) "A change in the budget has no impact on real GDP unless it changes aggregate supply."

B) "A change in the budget has no impact on real GDP."

C) "The increase in taxes will raise prices only."

D) "The increase in taxes will lower real GDP."

E) All of the above.

31)

32) During the 1980s and 1990s in Canada,

A) investment income as a percentage of GDP increased.

B) indirect taxes as a percentage of GDP increased.

C) indirect taxes as a percentage of GDP increased steadily.

D) income taxes as a percentage of GDP decreased.

E) none of the above.

32)

9

Use the table below to answer the following question.

Table 24.1 The following table shows the relationship between aggregate expenditures and GDP in the hypotheticaleconomy of Econoworld. Each variable is expressed in constant dollars.

Real GDPper Year

Aggregate Expendituresper Year

0 100200 260400 420600 580800 740

33) Refer to Table 24.1. The autonomous tax multiplier for this economy

A) cannot be determined without more information.

B) is -5.

C) is -2.5.

D) is -1.8.

E) is -4.

33)

34) The autonomous transfers multiplier is

A) MPC/(1 - slope of the AE function).

B) -MPC/(1 - slope of the AE function).

C) -(slope of the AE function)/(1 - slope of the AE function).

D) (slope of the AE function)/(1 - slope of the AE function).

E) 1/(1 - slope of the AE function).

34)

35) Which of the following statements about expansionary fiscal policy is false?

A) It may have no long-run impact on real GDP.

B) It usually raises the price level.

C) It never has an impact on aggregate supply.

D) It can offset fluctuations in aggregate expenditure and aggregate demand.

E) The AD curve shifts rightward by an amount = multiplier/policy change.

35)

36) Complete the following sentence. Induced taxes

A) depend on the price level.

B) do not depend on the level of income earned.

C) are not important in multiplier analysis.

D) depend on the level of income.

E) do not affect the level of real GDP.

36)

10

37) If the marginal propensity to spend is 0.75, and the marginal propensity to consume is 0.5, what isthe autonomous tax multiplier?

A) -4.00

B) -0.57

C) -1.50

D) -2.00

E) impossible to calculate without further information

37)

38) Which of the following is the formula for the autonomous transfer payments multiplier?

A) 1/1 - [b(1 - t) + m].

B) -b/1 - [b(1 - t) + m].

C) b/1 - [b(1 - t) + m].

D) 1.

E) None of the above.

38)

39) A tax cut in interest income

A) increases potential GDP, because the supply of capital increases.

B) does not affect potential GDP, because the interest rate affects aggregate expenditure only.

C) increases potential GDP, because households have more disposable income to spend.

D) does not affect potential GDP, because it has no impact on the supply of labour.

E) increases potential GDP, because workers have higher incentives to work.

39)

40) The relationship between the autonomous tax multiplier and the autonomous transfer paymentsmultiplier is

A) the tax multiplier is twice the value of the transfer payments multiplier.

B) they add up to 1.

C) the transfer payments multiplier is twice the value of the tax multiplier.

D) they have the same value.

E) they add up to zero.

40)

41) The structural deficit is the deficit

A) that would occur at potential GDP.

B) that would occur at the bottom of the business cycle.

C) in a recovery.

D) in a recession.

E) caused by the business cycle.

41)

42) Provincial fiscal policy multipliers tend to be small because of a

A) low marginal propensity to import.

B) low marginal propensity to consume.

C) high marginal propensity to consume.

D) high marginal propensity to import.

E) low marginal tax rate.

42)

11

43) The interest payments on the government's debt

A) have been rising steadily throughout this century.

B) have been rising since 1975.

C) do not have to be paid since the Monetary Control Act of 1980 was passed.

D) have no impact on the size of the debt.

E) have been forgiven continuously by the Bank of Canada.

43)

44) Suppose that the slope of the aggregate expenditure function is 0.6, and the MPC is 0.9. Theautonomous transfers multiplier is

A) 2.25. B) -2.5. C) 2.5. D) -2.25. E) 1.67.

44)

45) Suppose that the marginal propensity to consume is 0.8, the marginal tax rate is 0.25, and themarginal propensity to import is 0.2. Suppose that the government wants to raise real GDP by $100million, then it should raise government expenditures by about

A) $167 million.

B) $60 million.

C) $100 million.

D) $40 million.

E) none of the above.

45)

46) Consider the following data on the economy of Adanac:œ Currency reserves of private banks $5 billionœ Currency in circulation 15 billionœ Demand deposits of banks 40 billionœ Demand deposits of other financial institutions 50 billionœ Personal savings deposits/other financial institutions 125 billionœ Nonpersonal notice deposits/other financial institutions 200 billionWhat is the value of M1 and the value of M2+ in this economy in billions of dollars?

A) 55; 230. B) 60; 430. C) 110; 235. D) 105; 230. E) 55; 430.

46)

47) The currency circulated in Canada today is

A) backed by eurodollars.

B) fractionally backed by gold.

C) backed by silver certificates.

D) fractionally backed by cash held in bank vaults.

E) backed by faith in the Canadian government.

47)

48) The best term to describe a firm that takes deposits from households and firms and makes loans toother households and firms is a(n)

A) usurer.

B) stockbroker.

C) depository institution.

D) credit union.

E) credit company.

48)

12

49) A bank can destroy money by

A) lending its excess reserves.

B) destroying some cheques.

C) increasing its desired reserves.

D) buying some securities.

E) decreasing its reserves.

49)

50) The higher and more unpredictable the changes in the monetary unit, the

A) lower the opportunity cost of using it as a standard of deferred payment.

B) lower the opportunity cost of using it as a medium of exchange.

C) higher the opportunity cost of using it as a store of value.

D) less likely barter exchange will replace it.

E) lower the opportunity cost of using it as a store of value.

50)

51) All else constant, an increase in the interest rate in Canada brings

A) a decrease in the Canadian dollar exchange rate because of more funds moving into Canada.

B) a decrease in the Canadian dollar exchange rate because of more funds moving out of Canada.

C) an increase in the Canadian dollar exchange rate because of more funds moving out ofCanada.

D) an increase in the Canadian dollar exchange rate because of more funds moving into Canada.

E) none of the above.

51)

52) If the price of a bond is $5,000 and the fixed income on the bond is $400, then the rate of interest onthe bond is

A) 400 percent.

B) 10 percent.

C) 12.5 percent.

D) 8 percent.

E) none of the above.

52)

53) If the rate of interest is below the equilibrium rate of interest, which one of the following describesthe process by which equilibrium is achieved in the money market?

A) People sell bonds to try and raise more money, lowering the price of bonds and raising therate of interest.

B) People buy bonds to get rid of their excess money, raising the price of bonds and raising therate of interest.

C) People sell goods to get rid of their excess money, lowering the price of goods and raising therate of interest.

D) People buy goods to get rid of their excess money, lowering the price of goods and raising therate of interest.

E) People sell bonds to get rid of their excess money, lowering the price of bonds and raising therate of interest.

53)

13

54) Using a credit card can best be likened to

A) taking out a loan.

B) a barter exchange.

C) using any other form of money, since you can immediately take the goods home.

D) withdrawing money from a savings account.

E) writing a cheque on your demand deposit account.

54)

55) A bank can slow down the creation of money by

A) printing more cheques.

B) selling some of its investment securities.

C) increasing its reserves.

D) lending its excess reserves.

E) shifting some of its reserves from cash to deposits held at the Bank of Canada.

55)

56) Suppose that your cash holdings will buy 4 pizzas. All else being the same, if the price of pizzasdoubles, you will

A) double your money holdings to keep your real cash balance constant.

B) want to buy fewer pizzas and double your money holdings.

C) reduce your money holdings because pizzas are more expensive.

D) want to buy more pizzas and halve your money holdings.

E) send out for fried chicken instead.

56)

57) Which one of the following is most liquid?

A) Cheques.

B) Demand deposits.

C) Savings deposits.

D) Real estate.

E) Government bonds.

57)

58) Which one of the following will cause the demand curve for real money to shift to the left?

A) An increase in the price level.

B) An increase in real GDP.

C) The expanded use of debit cards.

D) A decrease in interest rates.

E) An increase in the quantity of money supplied.

58)

59) The opportunity cost of holding money relative to other assets such as bonds is

A) liquidity given up.

B) the price level.

C) the rate of interest.

D) the transactions saved.

E) consumption given up.

59)

14

60) If households and firms find their holdings of real money are more than desired, they will

A) sell goods, which will cause the price level to fall.

B) buy financial assets, which will cause interest rates to fall.

C) sell financial assets, which will cause interest rates to fall.

D) buy financial assets, which will cause interest rates to rise.

E) sell financial assets, which will cause interest rates to rise.

60)

Use the figure below to answer the following question(s)

Figure 26.1

61) Refer to Figure 26.1. Which one of the graphs best depicts the short-run and long-run effects of anincrease in the money supply?

A) (a).

B) (b).

C) (c).

D) (d).

E) None of the above.

61)

15

62) Complete the following sentence. The Bank of Canada

A) was originally independent of the federal government, but after 1967 became subordinate.

B) is totally controlled by the minister of finance.

C) is totally independent of the federal government.

D) has always been subordinate to the federal government.

E) was originally subordinate to the federal government, but after 1967 became independent.

62)

63) The Bank of Canada is subordinate to the federal government

A) and, therefore, can only comment on the correct monetary policy.

B) but still has considerable power to make independent policy decisions.

C) and, therefore, must meekly follow its orders.

D) and, therefore, is less democratic than an independent central bank.

E) and, therefore, must print money to cover any federal deficit.

63)

64) If the Bank of Canada buys government securities in the open market, the supply curve of realmoney will shift to the

A) left and the interest rate will fall.

B) right and the interest rate will rise.

C) right and the interest rate will remain constant as money demand will shift right as well.

D) left and the interest rate will rise.

E) none of the above.

64)

65) The attempt to control inflation and moderate the business cycle by changing the quantity ofmoney in circulation and adjusting interest rates is called

A) public policy.

B) monetary policy.

C) foreign exchange policy.

D) fiscal policy.

E) bank policy.

65)

16

Use the tables below to answer the following question(s)

Table 26.4 Chartered Banks' Balance Sheets

(a) Assets Liabilities Reserves +200 Securities -200

(b) Assets Liabilities Reserves -200 Securities +200

(c) Assets Liabilities Reserves 200 Deposits +200

(d) Assets Liabilities Reserves -200 Deposits -200

66) Which of the balance sheets in Table 26.4 shows the initial balance sheet effect of the Bank ofCanada selling government securities to the chartered banks?

A) (a).

B) (b).

C) (c).

D) (d).

E) None of the above.

66)

67) Which of the following statements about the overnight loans rate is false?

A) The overnight loans rate will not be higher than the bank rate.

B) The overnight loans rate and the treasury bill rate move closely together.

C) The higher the overnight loans rate, the higher the money supply.

D) The overnight loans rate will not be lower than the banker's deposit rate.

E) The overnight loans rate and the 10-year government bond rate move in the same direction.

67)

68) To lower interest rates, the Bank of Canada could

A) increase the treasury bill rate.

B) raise the bank rate.

C) buy government securities.

D) decrease bank reserves.

E) raise the exchange rate.

68)

69) Why is the exchange rate a key monetary variable?

A) It is one of the four main policy tools.

B) It is part of the channel by which a change in money supply affects aggregate demand.

C) It is a key policy objective.

D) It is a barometer of monetary policy.

E) It shows how much the monetary base must be multiplied in order to measure the resultingincrease in the money supply.

69)

17

70) Complete the following sentence. Open market operations

A) refer to the purchase or sale of government securities to the public by the Bank of Canada.

B) refer to changes in exchange rates by the Bank of Canada.

C) refer to loans made by the Bank of Canada to chartered banks.

D) can change bank deposits but cannot alter the money supply.

E) refer to the Bank of Canada's sales and purchases of corporate stock.

70)

71) An expansionary monetary policy will

A) lower interest rates and raise the exchange rate.

B) have no impact on interest rates, but raise the exchange rate.

C) raise interest rates and lower the exchange rate.

D) lower interest rates and the exchange rate.

E) have no impact on interest rates nor on the exchange rate.

71)

72) The monetary expansion process continues until

A) the Bank of Canada eliminates required reserves.

B) the prime rate is lower than the bank rate.

C) the bank rate is lower than the prime rate.

D) required reserves are eliminated.

E) excess reserves are eliminated.

72)

73) Which one of the following would not affect the size of the monetary base?

A) The Bank of Canada buys government securities from a bank.

B) The Bank of Canada buys government securities from someone other than a bank.

C) A bank exchanges vault cash for a deposit at the Bank of Canada.

D) The Bank of Canada sells government securities to a bank.

E) A bank exchanges government securities for a deposit at the Bank of Canada.

73)

74) In mid 1990s, Bank of Canada's policy was to keep interest rate low in order to

A) boost economic growth.

B) decrease persistent highly unemployment rate.

C) decrease inflation.

D) A & B.

E) none of the above.

74)

75) Which of the following quotations correctly describes the impact of monetary policy on theeconomy?

A) "The extra money pumped into the economy by the central bank is creating less exports."

B) "Businesses are investing more, now that monetary policy has become less expansionary."

C) "The tightening of money growth is helping sell goods abroad."

D) "House sales are down lots, due to the higher money growth."

E) "The extra money pumped into the economy by the central bank is creating more jobs."

75)

18

76) Overall, a tax cut will

A) increase aggregate planned expenditure by causing the interest rate to fall.

B) increase aggregate planned expenditure by causing investment to rise.

C) decrease aggregate planned expenditure by causing the interest rate to rise.

D) increase aggregate planned expenditure by causing disposable income to increase.

E) decrease aggregate planned expenditure by causing disposable income to fall.

76)

77) The government and the Bank of Canada tend to have policy conflicts because

A) the government wants to keep the exchange rate high.

B) the government has a shorter time horizon.

C) the Bank of Canada has a shorter time horizon.

D) the Bank of Canada wishes to keep interest rates low.

E) the Bank of Canada wants to buy government debt, but cannot.

77)

78) If the supply of money increases, bond prices are most likely to

A) rise as the interest rate falls.

B) rise as the interest rate rises.

C) stay constant.

D) fall as the interest rate rises.

E) fall as the interest rate falls.

78)

79) Which of the following quotations correctly describes crowding out in the context of contractionaryfiscal policy?

A) "The cutbacks on infrastructure spending by the government has led to more spending onnew computer systems by firms."

B) "The Bank of Canada is worried about the inflationary effects of the government's newinfrastructure program."

C) "The infrastructure spending has led to less exports."

D) "The infrastructure spending on roads has encouraged firms to buy more trucks."

E) "The government's infrastructure spending has led to less spending on new computer systemsby firms."

79)

80) A decrease in the money supply will generally lead to a decrease in real GDP which will shift thedemand curve for real money to the

A) left causing the interest rate to rise.

B) right causing the interest rate to fall.

C) left causing the interest rate to fall.

D) right causing the money supply to rise.

E) right causing the interest rate to rise.

80)

19

Use the figure below to answer the following question(s)

Figure 27.4 The figures below show an economy initially in equilibrium at r0, I0 and Y0. The diagrams also show the effectsof a government policy.

81) Refer to Figure 27.4. The total impact of the first and second round effects of the policy illustratedin the diagram is

A) a fall in consumption and a fall in investment.

B) no change in consumption and a fall in investment.

C) a rise in consumption and a rise in investment.

D) a rise in consumption and a fall in investment.

E) a fall in consumption and a rise in investment.

81)

82) Which one of the following sets of beliefs is characteristic of a monetarist?

A) The economy is inherently unstable, and fiscal policy is more important than monetary policy.

B) The economy is inherently unstable, and monetary policy is more important than fiscal policy.

C) The economy is inherently stable, and crowding out is strong.

D) The economy is inherently stable, and monetary policy is more important than fiscal policy.

E) The economy is inherently stable, and fiscal policy is more important than monetary policy.

82)

20

83) If the aggregate supply curve was upward-sloping, expansionary fiscal policy would cause all ofthe following except

A) an increase in interest rates.

B) an increase in the price level.

C) an increase in the demand for real money.

D) a decrease in investment.

E) an increase in investment.

83)

84) Counting the first round and second round effects, the impact of an expansionary monetary policyis to increase real GDP,

A) reduce the interest rate, and increase investment.

B) reduce the interest rate, and reduce investment.

C) increase the interest rate, and reduce investment.

D) increase the interest rate, and increase investment.

E) none of the above.

84)

85) A change in interest rates will affect aggregate demand through which one of the followingchanges?

A) A shift of the demand for real money curve and the investment demand curve.

B) A shift of the investment demand curve and a movement along the aggregate demand curve.

C) A shift of the investment demand curve and the aggregate expenditure function.

D) A movement along the investment demand curve and a shift of the aggregate demand curve.

E) Movements along both the investment demand and the aggregate demand curves.

85)

86) To decrease aggregate demand with no change in the exchange rate, the economy needs

A) an expansionary fiscal policy and a contractionary monetary policy.

B) an expansionary fiscal policy and an expansionary monetary policy.

C) a contractionary fiscal policy and an expansionary monetary policy.

D) just a contractionary fiscal policy.

E) a contractionary fiscal policy and a contractionary monetary policy.

86)

87) Partial crowding out is said to occur if a $1 increase in government spending induces an increase ininterest rates and a

A) less than $1 increase in investment.

B) $1 increase in investment.

C) more than $1 decrease in investment.

D) $1 decrease in investment.

E) less than $1 decrease in investment.

87)

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88) Which one of the following might be considered an opportunity cost of a government borrowing topay its bills?

A) The tradeoff between social problems and economic problems.

B) Reduced private investment caused by higher interest rates.

C) Higher future capital stock.

D) A stronger national defence.

E) Higher real GDP and employment caused by expansionary policy.

88)

89) Which of the following quotations correctly describes crowding in?

A) "The cutbacks on infrastructure spending by the government has led to more spending onnew computer systems by firms."

B) "The infrastructure spending has led to less exports."

C) "The infrastructure spending on roads has encouraged firms to buy more trucks."

D) "The government's infrastructure spending has led to less spending on new computer systemsby firms."

E) "The Bank of Canada is worried about the inflationary effects of the government's newinfrastructure program."

89)

90) If the interest rate increases, the

A) money supply decreases.

B) demand for real money curve shifts to the left.

C) demand for real money curve shifts to the right.

D) amount of investment decreases.

E) investment demand curve shifts to the left.

90)

91) Inflation is defined as a continuing increase in

A) the wages of all workers.

B) the general level of prices.

C) real versus money wages.

D) money GDP.

E) the prices of specific products.

91)

92) All else constant, if the Bank of Canada increases the money supply at a rate of 10 percent per year,and people come to expect this constant policy, then a reduction in the rate of money supplygrowth will cause

A) prices to fall.

B) aggregate demand to be greater than expected.

C) aggregate demand to be less than expected.

D) long-run aggregate supply to be less than expected.

E) long-run aggregate supply to be greater than expected.

92)

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93) The central proposition in the theory of the Phillips curve is, all else constant, the higher the

A) growth rate of the money supply, the higher is the inflation rate.

B) price level, the lower is the unemployment rate.

C) money supply, the lower is the unemployment rate.

D) price level, the lower is the inflation rate.

E) unemployment rate, the lower is the inflation rate.

93)

Use the figure below to answer the following question(s)

Figure 28.2

94) Figure 28.2 illustrates an economy initially in equilibrium at the intersection of AD0 and SAS0. Ifthe AD curve is expected to remain at AD0 but, in fact, it shifts to AD1, the new equilibrium will bereal GDP =

A) $380 billion and price level = 125.

B) $620 billion and price level = 125.

C) $500 billion and price level = 150.

D) $500 billion and price level = 125.

E) $500 billion and price level = 100.

94)

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Use the figure below to answer the following question(s)

Figure 28.5

95) Figure 28.5 illustrates an economy's Phillips curves. If the current inflation rate is 4 percent, what isthe current unemployment rate?

A) 3 percent.

B) 4 percent.

C) 6 percent.

D) 9 percent.

E) Cannot be determined without more information.

95)

24

Use the figure below to answer the following question(s)

Figure 28.3

96) Figure 28.3 illustrates an economy initially in equilibrium at point a. If the money supply isexpected to increase by 50 percent, what is the rational expectation of the price level?

A) 130.

B) 120.

C) 150.

D) 100.

E) We cannot tell without more information on wage negotiations.

96)

97) If people form their expectations rationally, and if they expect higher inflation rates in the future,they will

A) lower their money wage demands to avoid unemployment.

B) wait to see what happens before changing their consumption and saving habits.

C) increase their investment expenditures.

D) ask for higher money wages immediately.

E) ask for lower money wages immediately.

97)

98) The current year's price level is 240, and the rate of inflation over the past year has been 20 percent.What was last year's price level?

A) 120. B) 220. C) 192. D) 100. E) 200.

98)

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99) Suppose, initially, the nominal rate of interest is 8 percent, and the expected rate of inflation is 5percent. If the expected rate of inflation increases to 8 percent, what will the new nominal rate ofinterest be?

A) 8 percent. B) 13 percent. C) 3 percent. D) 11 percent. E) 16 percent.

99)

100) If the actual price level is lower than the expected price level, then real GDP

A) can be above or equal to potential GDP depending on the position of the aggregate demandcurve.

B) must be above potential GDP.

C) must be equal to potential GDP.

D) can be above, below, or equal to potential GDP depending on the position of the aggregatedemand curve.

E) must be below potential GDP.

100)

101) A rise in the price level, due to a rise in the price of oil,

A) will create a stagflation in the short-run.

B) will trigger off a price-wage spiral.

C) may trigger off a price-wage spiral.

D) A and B.

E) A and C.

101)

102) The short-run Phillips curve shows the relationship between

A) the price level and unemployment in the short run.

B) unemployment and real GDP in the short run.

C) inflation and unemployment, when inflation expectations do not change.

D) inflation and unemployment, when inflation expectations can change.

E) the price level and real GDP in the short run.

102)

103) All else constant, if lenders and borrowers base their lending contract on an inflation forecast thatturns out to be too high then, in an economic sense, borrowers

A) and lenders are helped.

B) are helped and lenders are just as well off.

C) are helped, but lenders are hurt.

D) and lenders are hurt.

E) are hurt, but lenders are helped.

103)

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Use the figure below to answer the following question(s)

Figure 28.5

104) Figure 28.5 illustrates an economy's Phillips curves. If the current inflation rate is 4 percent, what isthe long-run unemployment rate?

A) 6 percent.

B) 3 percent.

C) 4 percent.

D) 9 percent.

E) Cannot be determined without more information.

104)

105) Inflation has negative effects on an economy because it

A) redistributes the purchasing power of income in an arbitrary way.

B) reduces the purchasing power of wages.

C) raises the purchasing value of money.

D) prevents relative price decreases from occurring.

E) reduces everyone's standard of living.

105)

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Use the figure below to answer the following question(s).

Figure 29.5

106) Refer to Figure 29.5 and assume that when the money wage was set, the GDP deflator wasexpected to remain constant at 150. If the GDP deflator turns out to be 200, in the short run the realwage rate will be

A) $6, and employment will be more than 100 billion hours per year.

B) $9, and employment will be less than 100 billion hours per year.

C) $9, and employment will be more than 100 billion hours per year.

D) $24, and employment will be less than 100 billion hours per year.

E) $24, and employment will be more than 100 billion hours per year.

106)

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Use the figure below to answer the following question(s).

Figure 29.4

107) Refer to Figure 29.4. When the real wage rate is $5, the GDP deflator is 100. If the GDP deflator fallsto 80, in the long run the real wage is equal to approximately

A) $6. B) $4. C) $6.67. D) $5. E) $6.25.

107)

108) Which one of the following quotations describes a shift rightward in a long-run aggregate supplycurve?

A) "The recent lower price levels have led to lower production in the country."

B) "The recent higher price levels have lowered production in the country."

C) "The recent higher price levels have raised production in the country."

D) "The recent higher price levels have led to compensating rises in wages, so that there havebeen no changes in labour hired or production."

E) None of the above.

108)

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Use the figure below to answer the following question(s).

Figure 29.1

109) According to the data presented in Figure 29.1, as the employment of labour increases,

A) the marginal product of labour increases.

B) the marginal product of labour is constant.

C) the marginal product of labour diminishes.

D) the corresponding short-run aggregate supply curve is flat.

E) real GDP declines.

109)

110) The demand for labour and the supply of labour are both increasing over time, but the supply oflabour increases at a faster rate. Over time, therefore, we expect to see the

A) long-run aggregate supply curve shifting left.

B) real wage rate rising and employment rising.

C) real wage rate rising and employment falling.

D) real wage rate falling and employment falling.

E) real wage rate falling and employment rising.

110)

111) Which one of the following quotations describes a rightward shift in the labour supply curve?

A) "The recent lower price level has induced people to work more hours."

B) "Recent higher wage rates have led to more leisure being consumed."

C) "The recent higher real wage rate has induced people to work more hours."

D) "The recent high investment in capital equipment has raised hiring by firms."

E) None of the above.

111)

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112) A production function shows

A) the maximum amount of labour that will be used at all of the possible wage rates.

B) the maximum amount of money that can be created as the reserve requirement is met andbanks are fully loaned up.

C) how the maximum output varies as the employment of inputs varies.

D) the maximum amount of labour that will be used when the wage rate is at the marketequilibrium wage rate.

E) the amount of output that can be produced from a fixed amount of inputs.

112)

113) Which one of the following quotations describes a shift rightward in a short-run aggregate supplycurve?

A) "The recent lower price levels have led to lower production in the country."

B) "The recent higher price levels have raised production in the country."

C) "The recent higher price levels have lowered production in the country."

D) "The recent higher price levels have led to compensating rises in wages, so that there havebeen no changes in labour hired or production."

E) None of the above.

113)

Use the figure below to answer the following question(s).

Figure 29.5

114) Figure 29.5 depicts the labour market. The price level, as measured by the GDP deflator, is 150.What is the money wage rate in equilibrium?

A) $8. B) $12. C) $24. D) $18. E) $15.

114)

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115) The demand for labour and the supply of labour are both increasing over time, but the demand forlabour increases at a faster rate. Over time, therefore, we expect to see the

A) real wage rate falling and employment rising.

B) long-run aggregate supply curve shifting left.

C) real wage rate rising and employment falling.

D) real wage rate rising and employment rising.

E) real wage rate falling and employment falling.

115)

116) A shift up of the production function brings about a(n)

A) increase in the demand for labour.

B) decrease in the supply of labour.

C) increase in the supply of labour.

D) decrease in the demand for labour.

E) increase in both the demand and supply of labour.

116)

117) Which one of the following events would raise frictional unemployment?

A) A rise in unemployment insurance benefits.

B) A fall in both job destruction and job creation.

C) A fall in the pace of technological change.

D) Money wages become stickier.

E) All of the above.

117)

118) For the economy as a whole, the real wage rate is the money wage rate divided by the

A) average wage rate for the last 50 years.

B) price of land.

C) price level.

D) price of a representative firm's output, such as IBM.

E) real GDP.

118)

119) In the long run, an increase in labour productivity will lead to a

A) higher real wage rate and a lower potential GDP.

B) lower real wage rate and a higher potential GDP.

C) lower real wage rate and a lower potential GDP.

D) lower real wage rate and no change in potential GDP.

E) higher real wage rate and a higher potential GDP.

119)

120) How maximum output varies as the employment of inputs varies is the definition of the

A) short-run aggregate supply curve.

B) production function.

C) labour demand curve.

D) marginal production function.

E) short-run aggregate expenditure curve.

120)

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