Exam

Name___________________________________

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

1) The economic problems studied in macroeconomics include:

1) the level of economic activity;

2) competition policy;

3) the rate of unemployment.

A) 1 and 3 B) 1 only C) 2 only D) 1 and 2 E) 3 only

1)

2) A nation's real national income in a given year measures the

A) value of output produced by the economy, measured in constant dollars.

B) dollar income earned by the nation's producing sector.

C) market value of national output produced by the economy.

D) level of national income that is subject to taxation by the federal government.

E) opportunity cost of the economy's national output.

2)

3) In macroeconomics, the term "national income" refers to

A) total current spending by all households.

B) all sales of both current production and used goods.

C) the value of a nation's total wealth.

D) only those sales of currently produced goods sold to other nations.

E) the value of the income generated by the production of total output.

3)

4) Real GDP measures

A) the quantity of total output produced by the nation's economy over the period of one year.

B) the fluctuations of national income around its long-term trend.

C) the annual growth rate of real national income.

D) the long-term trend in total output produced by the nation's economy.

E) the constant-dollar value of the potential output of the nation's economy over the period of

one year.

4)

1

The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year

Actual Output

(billions of $)

Potential Output

(billions of $)

Unemployment Rate

($ of labour force)

2002 402 404 7.1

2003 408 411 7.2

2004 415 415 6.3

2005 420 418 5.9

2006 422 420 6.0

2007 420 423 7.0

2008 425 425 6.3

TABLE 19-1

5) Refer to Table 19-1. In which years was this economy experiencing a recessionary gap?

A) 2005, 2006

B) 2006, 2007, 2008

C) 2002, 2003, 2007

D) 2002, 2003, 2004

E) 2004, 2008

5)

6) Refer to Table 19-1. In which years was this economy experiencing an inflationary gap?

A) 2006, 2007

B) 2004, 2008

C) 2002, 2003, 2007

D) 2002, 2003

E) 2005, 2006

6)

7) Refer to Table 19-1. What is the unemployment rate when this economy is at full employment?

A) 6.0% B) 7.1% C) 7.0% D) 5.9% E) 6.3%

7)

8) If the cyclical unemployment rate is negative, then the

A) frictional unemployment rate is greater than the structural unemployment rate.

B) frictional unemployment rate is negative.

C) economy is operating at less than full employment.

D) economy is operating beyond full employment.

E) real-wage unemployment rate is negative.

8)

9) Jodie's Bakery generates a yearly revenue of $6000. Throughout the year Jodie spends $1500 on

flour, $1000 on fruit, $500 on sugar & spices, $1500 on butter, and employs an assistant whom she

pays $1000. Calculate the value of the annual output produced by Jodie's Bakery using the value

added method.

A) $1000 B) $1500 C) $4500 D) $5000 E) $6000

9)

2

10) Suppose a government collects $12 billion in various tax revenues, and pays $2.5 billion in debt

interest, $9 billion in social security benefits, and $0.5 billion in government employee wages.

What is the direct contribution to GDP coming from this government's fiscal actions?

A) $11.5 billion

B) $0.5 billion

C) $2.5 billion

D) $3.0 billion

E) $12.0 billion

10)

11) When calculating GDP using the expenditure approach, the investment component includes

A) gross investment plus depreciation.

B) net investment only.

C) net investment minus depreciation.

D) fixed investment minus depreciation.

E) net investment plus depreciation.

11)

12) Transfer payments are excluded from the government component in the calculation of GDP

because

A) they are not counted as income by any economic agent.

B) they do not represent the purchase of a good or a service.

C) it is difficult to assess the market value of a transfer payment.

D) they do not generate additional income in the economy.

E) they are small enough to ignore when computing the national accounts.

12)

13) When calculating GDP from the income side, which of the following is included in non-factor

payments?

A) GST

B) bond interest

C) wages and salaries

D) business profits

E) income tax

13)

14) If the amount of income generated in Canada that is remitted to foreigners is greater than the

amount of income generated abroad that is remitted to Canadian residents, then

A) GDP is equal to GNP.

B) GNP is lower than GDP.

C) GNP is less than disposable personal income.

D) GNP is negative.

E) GDP is lower than GNP.

14)

15) Suppose that the nominal national income in some country increased by 10 percent during the year,

when inflation was 5 percent. Therefore the real national income

A) fell by 10 percent.

B) fell by 5 percent.

C) was unaffected.

D) rose by 5 percent.

E) rose by 10 percent.

15)

3

16) Which of the following is included in the current calculations of GDP?

A) the purchase of a 1939 painting from the previous owner

B) the purchase of a second hand automobile from the previous owner

C) welfare payments

D) pizza purchased by college students for dinner

E) volunteer work undertaken by Mary Smith

16)

FIGURE 21-1

17) Refer to Figure 21-1. If disposable income is equal to Y3, desired consumption expenditure is

equal to

A) Y3D. B) DE. C) Y3. D) Y3F. E) Y3E.

17)

18) Refer to Figure 21-1. The marginal propensity to consume is equal to

A) EF/DF. B) ED/CF. C) EF/Y2Y3. D) DF/Y2Y3. E) ED/Y2Y3.

18)

19) Refer to Figure 21-1. If disposable income is Y3, the level of desired saving is

A) Y3D. B) DE. C) FD. D) Y3F. E) Y2Y3.

19)

20) Refer to Figure 21-1. If disposable income is Y3, the level of desired saving is

A) Y2Y3. B) FD. C) Y3F. D) Y3D. E) DE.

20)

21) Consider a consumption function of the following form: C = 50 + (0.6)YD. At what level of

disposable income will desired savings be equal to zero?

A) 208.33 B) 83.33 C) 125 D) 50 E) 31.25

21)

4

22) Consider the simplest macro model with a constant price level and demand-determined output. If

desired aggregate expenditure is less than actual national income, then

A) actual national income must be above the equilibrium level.

B) inventories begin to fall, causing national income to fall.

C) actual national income is below the equilibrium level.

D) inventories begin to fall, causing firms to increase production.

E) actual national income must be at equilibrium.

22)

23) Consider a simple macro model with a constant price level and demand-determined output. If

national income is above its equilibrium level, it is likely that inventories are ________, and so

national income tends to ________.

A) being depleted; fall

B) constant: fall

C) accumulating; rise

D) accumulating; fall

E) being depleted; rise

23)

24) Consider an exogenous increase in the real interest rate in the simple macro model. This will tend

to cause ________ in desired consumption and ________ in desired investment.

A) an increase; an increase

B) a decrease; no change

C) a decrease; a decrease

D) a decrease; an increase

E) an increase; a decrease

24)

25) If the government's net tax rate increases, then for a given level of national income disposable

income will ________ but net tax revenue will ________.

A) decrease; increase

B) increase; increase

C) not change; increase

D) increase; decrease

E) decrease; decrease

25)

26) A fall in domestic prices relative to foreign prices, other things being equal, causes the net export

(NX) function to shift ________ and ________.

A) downward; become flatter

B) downward; and maintain the same slope

C) upward; become steeper

D) upward; become flatter

E) downward; become steeper

26)

5

The diagrams below show the import, export, and net export functions for an economy.

FIGURE 22-1

27) Refer to Figure 22-1. The function for desired imports for this economy can be expressed as

A) IM = 450 - 0.5(Y)

B) IM = 0.2(Y)

C) NX = 450 - Y

D) NX = 0.5(Y)

E) IM = 0.5(Y)

27)

28) Refer to Figure 22-1. The net export function for this economy can be expressed as

A) NX = 450 - 0.2(Y)

B) NX = 2250 - 450

C) NX = 2250 - .2(IM)

D) NX = 0.2Y

E) NX = 2250 - 450(Y)

28)

29) Refer to Figure 22-1. If actual national income in this economy is equal to $1000, then net exports

are equal to

A) $90. B) $375. C) $250. D) $200. E) $400.

29)

6

30) Consider a simple macro model with a constant price level and demand-determined output. The

equations of the model are: C = 150 + 0.84Y, I = 400, G = 700, T = 0, X = 130, IM = 0.08Y. Equilibrium

national income is ________.

A) 1816 B) 5750 C) 7307 D) 7935 E) 17 250

30)

31) Consider a simple macro model with a constant price level and demand-determined output. The

equations of the model are: C = 150 + 0.84Y, I = 400, G = 700, T = 0, X = 130, IM = 0.08Y. Desired

consumption expenditure at equilibrium national income is ________.

A) 1675.44 B) 4060.04 C) 4830.00 D) 4980.00 E) 6815.40

31)

32) Consider a simple macro model with demand-determined output. If the level of exports decreases

unexpectedly by 60, then if the government wants to restore the initial equilibrium level of output

it could, all other things equal, ________ by ________.

A) increase its purchases; more than 60

B) decrease its purchases; 60

C) increase its net tax revenues; less than 60

D) increase its net tax revenues; 60

E) increase its purchases; 60

32)

33) Consider a simple macro model with a given price level and demand-determined output. An

exogenous change in the domestic price level changes equilibrium real GDP

A) in the same direction.

B) by the same amount in the same direction.

C) by a lesser amount in either direction.

D) in the opposite direction.

E) by the same amount in the opposite direction.

33)

34) The AD curve relates the price level to

A) equilibrium nominal GDP if output is demand determined.

B) desired aggregate expenditure.

C) equilibrium savings and wealth.

D) desired consumption.

E) equilibrium real GDP if output is demand determined.

34)

35) Consider the relationship between the AE curve and the AD curve. A fall in the amount of desired

consumption, investment, government purchases, or net exports at any given level of national

income

A) causes a movement along the AE curve.

B) causes a shift of the AE curve but no movement of the AD curve.

C) shifts the AD curve to the right.

D) shifts the AD curve to the left.

E) causes a movement along the AD curve.

35)

36) Consider a closed economy. Other things being equal, a ________ marginal propensity to spend

will lead to a ________ AD curve.

A) lower; flatter

B) lower; leftward shift of the

C) lower; rightward shift of the

D) higher; flatter

E) higher; steeper

36)

7

37) The aggregate supply curve will shift as a result of a change in

1) the wage rate;

2) the price level;

3) technology.

A) 2 only B) 2 and 3 C) 1 and 3 D) 3 only E) 1 only

37)

38) Over the horizontal range of the economy's AS curve (assuming such a range exists), a leftward

shift of the AD curve will result in

A) a decrease in both real GDP and prices.

B) an increase in prices and no change in real GDP.

C) a decrease in real GDP but no change in prices.

D) an increase in real GDP and no change in prices.

E) an increase in both real GDP and prices.

38)

39) Consider the basic AD/AS model. Real GDP is demand determined along the

A) downward-sloping portion of the AS curve.

B) horizontal portion of the AS curve.

C) upward-sloping portion of the AS curve.

D) vertical portion of the AS curve.

E) none of the above -- real GDP cannot be demand determined.

39)

40) Aggregate demand shocks have a large effect on real GDP and a small effect on the price level

A) the steeper the AS curve.

B) if the AD curve is steep.

C) the flatter the AS curve.

D) when the AS curve is vertical.

E) on the downward-sloping portion of the AS curve.

40)

41) A common assumption among macroeconomists is that when real GDP is less than potential

output, factor prices adjust and the

A) AS curve shifts to the right only very slowly.

B) AS curve shifts to the right very rapidly.

C) AD curve shifts to the left rapidly.

D) AS curve shifts to the left fairly rapidly.

E) none of the above -- the AS curve remains unchanged.

41)

42) Which of the following statements about output gaps is true?

A) When actual GDP is below potential GDP, there is upward pressure on wages.

B) When actual GDP is above potential GDP, there is downward pressure on wages.

C) When actual GDP is below potential GDP, there is upward pressure on output prices.

D) When actual GDP is above potential GDP, there is downward pressure on output prices.

E) When actual GDP is above potential GDP, there is upward pressure on wages.

42)

43) As the macro economy adjusts from the short run to the long run,

A) aggregate supply shocks cause deviations from potential output.

B) wages and other factor prices remain constant.

C) potential output is adjusting to close inflationary or recessionary gaps.

D) aggregate demand shocks cause deviations from potential output.

E) wages and other factor prices adjust to close output gaps.

43)

8

The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output

for each economy is $340 billion.

Real GDP

Rate of Wage

Change

Economy A 300 -1%

Economy B 320 -0.5%

Economy C 340 0%

Economy D 360 +3.5

Economy E 380 +6%

TABLE 24-1

44) Refer to Table 24-1. Which of the economies is operating at its long-run equilibrium?

A) Economy A

B) Economy B

C) Economy C

D) Economy D

E) Economy E

44)

45) Refer to Table 24-1. Which of the economies are experiencing an inflationary gap?

A) Economies A and B

B) Economies B and C

C) Economies C and D

D) Economies D and E

E) none of the economies

45)

46) Refer to Table 24-1. Which of the following statements best describes the situation facing Economy

B?

A) There is an inflationary gap of $40 billion and wages are rising.

B) There is a recessionary gap of $40 billion and wages are falling slowly.

C) There is a recessionary gap of $20 billion and wages are falling slowly.

D) There is an output gap of $20 billion and wages are rapidly adjusting.

E) There is no output gap and wages are stable.

46)

47) Suppose that the economy is initially in a long-run macroeconomic equilibrium. A shock then hits

the economy and we observe that the unemployment rate decreases and the price level increases.

We can conclude that ________ has increased and there is now a(n) ________ gap.

A) aggregate demand; recessionary B) aggregate demand; inflationary

C) aggregate supply; inflationary D) aggregate supply; recessionary

47)

9

The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 24-3

48) Refer to Figure 24-3. The initial effect of a positive AS shock results in ________.

A) an inflationary output gap of 300

B) an inflationary output gap of 550

C) a recessionary output gap of 250

D) an inflationary output gap of 200

E) a recessionary output gap of 450

48)

49) Refer to Figure 24-3. The positive aggregate supply shock results in a new short-run equilibrium

where the price level is ________ and real GDP is ________.

A) 90; 750 B) 90; 1200 C) 110; 1300 D) 60; 1300 E) 60; 1000

49)

50) Refer to Figure 24-3. After the positive aggregate supply shock shown in the diagram, which of the

following would shift the AS curve leftward during the economy's adjustment process?

A) an increase in factor supplies

B) an increase in wages and other factor prices

C) an increase in labour productivity

D) an increase in the unemployment rate

E) a decrease in wages and other factor prices

50)

51) Suppose the economy begins in a long-run equilibrium with Y = Y*. A permanent increase in

aggregate demand will have its short-run effect on real GDP reversed in the long run with a

________ shift of ________.

A) rightward; the aggregate supply curve

B) rightward; the aggregate demand curve

C) leftward; the aggregate demand curve

D) rightward; Y*

E) leftward; the aggregate supply curve

51)

10

52) One advantage of using expansionary fiscal policy rather than relying on automatic adjustment to

recover from a recessionary gap is that

A) inflation will not be as stimulated.

B) price level will rise higher than otherwise.

C) the recovery may be more rapid.

D) the recovery will be slower, thereby causing less disruption.

E) the economy will overshoot potential GDP and a boom will be underway.

52)

53) Other things being equal, a country with a high national saving rate may have a ________ long-run

growth rate because more saving increases the ________.

A) high; interest rate and encourages more investment

B) low; unemployment and decreases wages in the long run

C) low; consumption in the long run

D) high; wealth of people and increases future consumption

E) high; availability of funds, thus lowering the interest rate

53)

54) Potential GDP is defined as the level of aggregate output at which

A) there is only cyclical and frictional unemployment, and capital equipment is being used at 100

percent capacity.

B) all factors of production are employed at 100 percent capacity.

C) there is only cyclical and structural unemployment.

D) all factors of production are employed at their "normal" utilization rates.

E) the unemployment rate is zero.

54)

55) The study of the short run in macroeconomics focuses

A) primarily on changes to actual GDP with no interest in the output gap.

B) equally on potential GDP and actual GDP.

C) primarily on changes to the output gap with less emphasis on changes to potential GDP.

D) primarily on changes to potential GDP.

E) primarily on changes to potential GDP with less emphasis on changes in actual GDP.

55)

56) At any given time, the level of potential GDP depends on

1) the available supply of factors of production;

2) normal rates of utilization for labour and capital;

3) the productivity of factors of production.

A) 3 only B) 1 only C) 1, 2, and 3 D) 2 only E) 2 and 3

56)

57) GDP can be represented by the equation: GDP = F x (Fe/F) x (GDP/Fe), where F represents the total

factor supply and Fe represents the number of employed factors. The term (GDP/Fe) represents

A) average factor productivity.

B) factor supply per level of output.

C) income per person.

D) output per capital.

E) factor utilization.

57)

11

58) GDP can be represented by the equation: GDP = F x (Fe/F) x (GDP/Fe). In this equation, the term

(Fe/F) represents

A) factor productivity.

B) output per capital.

C) income per person.

D) factor supply per level of output.

E) the factor-utilization rate.

58)

59) GDP can be represented by the equation: GDP = F x (Fe/F) x (GDP/Fe). The term Fe represents

A) the factor-utilization rate.

B) income per person.

C) output per capital.

D) the number of employed factors.

E) factor productivity.

59)

60) Consider the equation GDP = F × (FE/F) × (GDP/FE). Which component describes the fraction of the

available factors actually employed at any time?

A) FE B) (GDP/FE) C) GDP D) F E) (FE/F)

60)

61) Consider an economy in long-run equilibrium where factor supply is 2.5 million units, the factor

utilization rate is 0.85 and a simple measure of productivity (GDP per factor employed) is $200.

Now suppose that, other things being equal, the productivity measure rises to $210. The effect of

this change will be

A) an inflationary gap caused by simultaneous rightward shifts of the aggregate demand and

aggregate supply curves.

B) a rightward shift of the aggregate supply curve, and an adjustment back to Y*.

C) an increase in this economy's potential output, and an adjustment back to its original level

after factor prices have adjusted.

D) an increase in this economy's potential output in the long run.

E) a rightward shift of the aggregate demand curve due to the increased wealth of the private

sector.

61)

62) Consider the equation GDP = F × (FE/F) × (GDP/FE). If the economy enters a recessionary gap

because of a negative aggregate demand shock, the equation changes in which of the following

ways?

A) the value of GDP/FE falls as workers are laid off and equipment is used less intensively.

B) there are no short-run changes in this case.

C) the value of FE/F rises as the rate of unemployment rises.

D) the value of FE/F falls as workers are laid off and equipment is used less intensively.

E) the value of F falls as the rate of unemployment rises.

62)

63) If a country transfers resources from the production of consumption goods to the production of

capital goods, the result will be to

A) raise current living standards.

B) raise future consumption.

C) decrease the long-run growth rate.

D) lower future living standards.

E) raise current consumption.

63)

12

64) The costs of long-run economic growth include:

1) declining future average living standards;

2) that current consumption must be sacrificed to increase investment in capital goods;

3) current increases in investment may only generate greater consumption in the distant future.

A) 2 and 3 B) 1 and 2 C) 3 only D) 2 only E) 1 only

64)

65) Which of the equations is a correct expression for national saving in the long run when real GDP

equals potential output?

A) NS = Y* - C - G

B) NS = Y* - T - C

C) NS = Y* - C + T - G

D) NS = T - G - C

E) NS = T - G

65)

The table below shows aggregate values for a hypothetical economy. Suppose that this economy has real GDP equal to potential output.

Potential GDP $2500

Net Tax Revenues $50

Government Purchases $200

Investment $100

Consumption $2350

Net Exports -$135

TABLE 26-1

66) Refer to Table 26-1. What is the level of private saving for this economy?

A) $50 B) $200 C) $100 D) $300 E) $150

66)

67) Refer to Table 26-1. What is the level of public saving for this economy?

A) -$50 B) $150 C) $200 D) -$200 E) -$150

67)

68) Refer to Table 26-1. What is the level of national saving for this economy?

A) $200 B) -$200 C) -$50 D) $150 E) -$150

68)

69) If the government has a budget deficit of $400 and the country's level of national saving is $200,

then private saving must be

A) $200. B) -$400. C) $400. D) $600. E) $800.

69)

70) Consider the Neoclassical growth model. The effect of an increase in population (or the labour

force) in an economy, with everything else held constant, is

A) an inward shift of the production possibilities boundary.

B) an increasingly aging population.

C) a decrease in per capita output.

D) a decrease in the capital-output ratio.

E) an increase in per capita national income.

70)

13

71) In the Neoclassical growth model, whenever diminishing returns applies, increases in the

population, other things being equal, are accompanied by

A) increasing GDP and increasing living standards.

B) decreasing GDP and falling living standards.

C) increasing GDP and constant living standards.

D) increasing GDP and falling living standards.

E) decreasing GDP and increasing living standards.

71)

72) In Neoclassical growth theory, increasing the amount of capital employed in production ________

the average standard of living as long as the marginal product of capital exceeds zero.

A) has no effect on

B) unambiguously reduces

C) unambiguously raises

D) at first reduces but eventually raises

E) at first raises but eventually reduces

72)

73) In the Neoclassical growth model, the law of diminishing marginal returns implies that capital

accumulation leads to ever

A) larger levels of unemployment but small increases in the standard of living.

B) larger decreases in GDP and large decreases in living standards.

C) larger increases in GDP but smaller decreases in living standards.

D) smaller increases in GDP and living standards.

E) larger levels of unemployment but larger increases in the standard of living.

73)

74) According to the Neoclassical growth model, which of the following scenarios explains

improvements in long-run material living standards?

A) an equal increase in both population and the stock of capital

B) a decrease in unemployment rates

C) an increase in population

D) an increase in the stock of physical capital

E) an equal increase in both population and output

74)

75) According to the Neoclassical growth theory, sustained rising material living standards can only be

explained by

A) exogenous technological change.

B) growth in human capital.

C) balanced growth of labour and capital.

D) growth in physical capital.

E) growth in the labour force.

75)

76) In order for money to be successfully used as a medium of exchange, it must

1) be readily acceptable;

2) be easily divisible;

3) have a high value-weight ratio.

A) 1, 2, and 3 B) 1 only C) 3 only D) 2 only E) 1 and 2

76)

14

77) Suppose an economy has two types of money -- gold and silver coins -- that are both legal tender

but have different non-monetary values. Gresham's law has come into effect when

A) the lower-valued coin is taken out of circulation.

B) people refuse to use the coins of lesser value.

C) the higher-valued coin is taken out of circulation.

D) people use the higher-valued coins for exchange and the lower-valued for savings.

E) the value of the coins is in the same ratio as their non-monetary values.

77)

78) The largest element of the Canadian money supply today is

A) the debt of the federal government.

B) gold.

C) paper money.

D) bank deposits.

E) coins.

78)

79) The largest component of the liabilities of the Bank of Canada is

A) deposits of commercial banks and other financial institutions.

B) Government of Canada securities.

C) Government of Canada deposits.

D) Canadian dollars in circulation.

E) loans to private individuals.

79)

80) Consider a new deposit of $10 000 to the Canadian banking system. The bank that initially receives

this deposit will find itself with

A) no excess reserves if there is no reserve requirement.

B) $1000 of excess cash reserves if its target reserve ratio is 10 percent.

C) $2000 of excess cash reserves if its target reserve ratio is 10 percent.

D) $8000 of excess cash reserves if its target reserve ratio is 20 percent.

E) $10 000 of excess cash reserves if its target reserve ratio is 100 percent.

80)

81) Suppose a commercial bank has a level of target reserves of $500 million and actual reserves of

$575 million. This bank's ________ is/are $75 million.

A) cash drain

B) fractional reserves

C) profits

D) reserve ratio

E) excess reserves

81)

82) Suppose Bank ABC has a target reserve ratio of 2 percent. If Bank ABC receives a new deposit of

$50 million it will immediately find itself with

A) excess cash reserves of $1 million.

B) excess cash reserves of $49.5 million.

C) excess cash reserves of $10 million.

D) excess cash reserves of $49 million.

E) no excess cash reserves.

82)

15

83) Which of the following examples constitutes a new deposit to the Canadian commercial banking

system?

A) an individual transfers money from ShipShape Credit Union to Scotiabank

B) an individual immigrates to Canada and deposits money from abroad

C) the Bank of Canada buys foreign currency from abroad

D) an individual puts cash in a safety-deposit box

E) the Bank of Canada sells government securities to an individual or a firm

83)

Bank North's Balance Sheet

Assets Liabilities

Reserves $300 Deposits $2000

Loans $2200 Capital $500

$2500 $2500

TABLE 27-1

84) Refer to Table 27-1. Assume that Bank North is operating with no excess reserves. What is their

actual reserve ratio?

A) 15% B) 12% C) 25% D) 20% E) 13.67%

84)

85) Refer to Table 27-1. What are the income-earning assets for Bank North?

A) Reserves B) Liabilities C) Deposits D) Capital E) Loans

85)

86) Refer to Table 27-1. If Bank North receives a new deposit of $400, its actual reserve ratio

immediately becomes

A) 7% B) 35% C) 15% D) 25% E) 29%

86)

87) Refer to Table 27-1. Assume that Bank North is operating at its target reserve ratio and has no

excess reserves. If Bank North receives a new deposit of $400, it can immediately expand its loans

by ________ while maintaining its target reserve ratio.

A) $340 B) $700 C) $400 D) $272 E) $260

87)

88) Refer to Table 27-1. Assume that Bank North is operating at its target reserve ratio and has no

excess reserves, and that all commercial banks have the same target reserve ratio. If a new deposit

to the Canadian banking system of $400 is deposited at Bank North, the total new deposits created

in the banking system can be calculated as follows:

A) 700/.12 = $5833.33

B) 400/.15 = $2666.67

C) 300/.136 = $2205.88

D) 400/.12 = $3333.33

E) not enough information to determine

88)

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Consider the following situation in the Canadian banking system:

· The Bank of Canada purchases $5 million worth of government securities

from an investment dealer with a cheque drawn on the Bank of Canada.

· The dealer deposits this cheque at Bank XYZ, a commercial bank.

· The target reserve ratio for all banks is 25 percent.

· All commercial banks operate with no excess reserves.

· There is no cash drain.

TABLE 27-2

89) Refer to Table 27-2. Bank XYZ is immediately in a position to expand its loans by

A) $3.75 million.

B) $15 million.

C) $5 million.

D) $1.25 million.

E) $20 million.

89)

90) Refer to Table 27-2. If Bank XYZ increases its loans to the maximum extent possible with its new

excess reserves, the second-generation banks will be able to expand their loans by

A) $1.50 million.

B) $2.81 million.

C) $1.00 million.

D) $3.75 million.

E) $0.94 million.

90)

91) What is the present value of a bond that pays $121.00 one year from today if the interest rate is 10

percent per year?

A) $100.00 B) $110.00 C) $121.00 D) $133.10 E) $221.00

91)

92) If the annual interest rate is 8 percent, an asset that promises to pay $160 after each of the next two

years has a present value of

A) $ 178.32. B) $ 285.32. C) $ 296.30. D) $ 300.00. E) $ 320.00.

92)

93) When i is the annual interest rate, the formula for calculating the present value of a bond with a

face value of R dollars, receivable in one year is

A) PV = R/i

B) PV = (1+i)/R

C) PV = R (1+i)

D) PV = R/(1+i)

E) PV = i(R+i)

93)

94) Consider a bond that promises to make coupon payments of $100 each year for three years

(beginning in one year's time) and also repays the face value of $2000 at the end of the third year. If

the market interest rate is 6 percent, what is the present value of this bond?

A) $1854.67 B) $1763.22 C) $283.02 D) $267.30 E) $1946.53

94)

95) Consider a bond that promises to make coupon payments of $100 each year for three years

(beginning in one year's time) and also repays the face value of $2000 at the end of the third year. If

the market interest rate is 4 percent, what is the present value of this bond?

A) $1866.67 B) $2055.50 C) $1966.39 D) $288.45 E) $1941.57

95)

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96) If the current market price of a bond is less than the present value of the income stream the bond

will produce, the price will ________ due to excess ________ for the bond.

A) fall; demand B) rise; supply C) fall; supply D) rise; demand

96)

97) An analyst is considering the purchase of a Government of Canada bond that will pay its face value

of $10 000 in one year's time, but pay no direct interest. The market interest rate is 4 percent and

the bond is being offered for sale at a price of $9400. The analyst should recommend

A) not purchasing the bond because the buyer could earn an additional $376 by investing the

$9400 elsewhere.

B) purchasing the bond because the purchase price is more than its present value and is

therefore profitable.

C) not purchasing the bond because the buyer could earn an additional $224 by investing the

$9400 elsewhere.

D) purchasing the bond because the purchase price is less than its present value and is therefore

profitable.

E) not purchasing the bond because the purchase price is less than its present value.

97)

FIGURE 28-1

98) Refer to Figure 28-1. A rightward shift of the money demand curve can be caused by

A) an increase in the rate of interest.

B) a decrease in the rate of interest.

C) a decrease in the price level.

D) an increase in the price level.

E) a decrease in real GDP.

98)

99) Refer to Figure 28-1. A leftward shift in the money demand curve can be caused by by

A) a decrease in the rate of interest.

B) an increase in real GDP.

C) an increase in the price level.

D) a decrease in real GDP.

E) an increase in the rate of interest.

99)

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100) Refer to Figure 28-1. Given the money demand curve, MD, a decrease in the quantity of money

demanded from M0 to M1

can be caused by

A) a decrease in the price level.

B) an increase in real GDP.

C) an increase in the price level.

D) a decrease in the rate of interest.

E) an increase in the rate of interest.

100)

101) Suppose the Bank of Canada were to implement an expansionary monetary policy by buying

government securities on the open market, thereby increasing cash reserves in the banking system.

If the commercial banks do not expand their lending in response, then

1) there would be no change in the money supply at all;

2) the Bank of Canada could force the commercial banks to expand their lending, based on

regulations in the Bank Act;

3) the increase in the overall money supply would be smaller than the Bank of Canada may have

intended.

A) 2 only B) 2 or 3 C) 3 only D) 1 only E) 1 or 2

101)

The diagrams below illustrate two alternative approaches to implementing monetary policy. The economy begins in monetary

equilibrium with the interest rate equal to 2% and the money supply equal to M0.

FIGURE 29-1

102) Refer to Figure 29-1. If the Bank of Canada raises the target interest rate to 3%, as shown in part

(i), then it must accommodate the resulting ________ in quantity of money demanded by ________

in financial markets.

A) increase; selling government securities

B) decrease; selling government securities

C) increase; selling government securities

D) decrease; buying government securities

E) increase; buying government securities

102)

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103) Refer to Figure 29-1. If the Bank of Canada pursues a(n) ________ monetary policy and raises the

target interest rate to 3%, then the quantity of money demanded will ________.

A) expansionary; not change

B) expansionary; rise

C) contractionary; fall

D) expansionary; fall

E) contractionary; rise

103)

104) Refer to Figure 29-1. If the Bank of Canada's goal is to increase the target interest rate to 3%, then

the most effective approach is to

A) raise the interest rate to 3%, as shown in part (i), and then sell government securities in

financial markets to accommodate the decline in the quantity of money demanded.

B) increase the money supply to M1, as shown in part (ii), and then letting the interest rate adjust

to 3%.

C) reduce the money supply to M1, as shown in part (ii), and then letting the interest rate adjust

to 3%.

D) allow the money supply to shift to M1 by market forces, which will cause the interest rate to

rise to 3%.

E) raise the interest rate to 3%, as shown in part (i), and then buy government securities in

financial markets to accommodate the decline in the quantity of money demanded.

104)

105) The bank rate is the

A) interest rate at which the Bank of Canada will lend funds to commercial banks.

B) interest rate at which the Bank of Canada will lend funds to the Canadian government.

C) interest rate that commercial banks charge their best customers.

D) same as a margin requirement.

E) interest rate that the Bank of Canada pays on deposits from the commercial banks.

105)

106) To reduce short-term market interest rates, the Bank of Canada could

A) decrease the commercial banks' reserves.

B) reduce its target for the overnight rate.

C) decrease the money supply directly.

D) reduce the commercial banks' reserve requirements.

E) adjust the rate paid on Treasury bills.

106)

107) The monetary transmission mechanism describes how changes in the demand for or supply of

money cause changes in the interest rate, which then cause changes in

1) aggregate demand and real GDP;

2) desired investment and net exports;

3) the price level.

A) 3 only B) 1 only C) 1, 2, and 3 D) 2 only E) 1 and 2

107)

108) Given its existing policy regime of "inflation targeting", the Bank of Canada would likely react to a

large negative AD shock by

A) selling bonds on the open market.

B) increasing its target for the overnight interest rate.

C) ignoring the shock and allowing the economy to adjust.

D) raising the bank rate.

E) decreasing its target for the overnight interest rate

108)

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109) Inflation targeting

A) is a destabilizing policy because it requires the Bank of Canada to engage in inappropriate

policy responses.

B) is a stabilizing policy because the Bank of Canada's policy adjustments act to stabilize real

GDP growth.

C) should be replaced with fiscal policy targeting because of the long-run neutrality of money.

D) is irrelevant to the stability of the economy because of the long-run neutrality of money.

E) creates output gaps that must be then offset with fiscal policy stabilizers.

109)

110) Long time lags in the effectiveness of monetary policy

A) increase the effectiveness of the Bank of Canada's fine tuning.

B) decrease the growth of the money supply.

C) increase the growth of the money supply.

D) decrease the destabilizing side-effects of Bank of Canada's monetary policy.

E) decrease the effectiveness of the Bank of Canada's fine tuning.

110)

111) Suppose economists were able to measure frictional unemployment as 3 percent, cyclical

unemployment as 2 percent, and structural unemployment as 4 percent. Then we would know that

the NAIRU is ________ and the actual unemployment rate is ________.

A) 5 percent; 9 percent

B) 7 percent; 9 percent

C) 6 percent; 6 percent

D) 7 percent; 7 percent

E) 6 percent; 5 percent

111)

112) If the unemployment rate is less than the NAIRU,

A) there will be downward pressure on wages.

B) there is no pressure on the AS curve to shift.

C) demand forces will exert upward pressure on wages.

D) the AS curve will shift downward.

E) there is a recessionary output gap.

112)

113) Actual inflation would be 2 percent when expected future inflation is ________, output-gap

inflation is ________, and supply-shock inflation is ________.

A) 0%; 0%; -2%

B) 2%; 0%; 0%

C) 1%; 1%; 1%

D) 2%; 0%; -2%

E) 2%; 2%; 2%

113)

114) Which of the following statements are correct? The expectational effect of inflation

1) is nullified as soon as the government promises zero inflation;

2) often plays a role in accelerating inflation;

3) is not directly a monetary cause of inflation.

A) 1 only B) 1 and 2 C) 2 only D) 2 and 3 E) 3 only

114)

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115) The idea that, in the long run, the Phillips curve is vertical, implying no trade-off between inflation

and unemployment, is based on the premise that

A) inflationary expectations do not influence inflation.

B) inflation and unemployment are unrelated.

C) expectations do not adjust to reflect actual inflation.

D) changes in unemployment do not influence real GDP.

E) inflationary expectations fully adjust to actual inflation.

115)

116) Assume your salary is $2000 per month and your employer gives you a raise of 6 percent. Over the

next twelve months the inflation rate is 12 percent. Your real salary will change by

A) - 6 percent.

B) 0 percent.

C) + 6 percent.

D) - 12 percent.

E) +12 percent.

116)

117) Assume that an economy is currently in long-run equilibrium at its potential output and that it is

subjected to a positive demand shock. When the economy moves back to producing its potential

level of national income, the price level will be

A) lower than it was in the short-run equilibrium but higher than it was originally.

B) lower than it was in short-run equilibrium and the lower than it was originally.

C) higher than it was in the short-run equilibrium and even higher than it was originally.

D) higher than it was in the short-run equilibrium but lower than it was originally.

E) equal to what it was originally before the demand shock.

117)

118) Suppose the economy is operating at full employment. A permanent rightward shift in the AD

curve will cause inflationary pressures that will

A) permanently increase output.

B) worsen any existing unemployment problem.

C) eventually subside unless accompanied by expansionary monetary policy.

D) cause Y to fall below Y*.

E) initiate a wage-price spiral.

118)

119) The act of "monetary validation" by a central bank can

A) perpetuate inflation.

B) act to reduce inflation.

C) increase unemployment.

D) cause a supply shock.

E) no longer be carried out by the Bank of Canada .

119)

120) An inflation that begins as a result of any demand or supply shock will eventually come to a halt

A) if there is no monetary validation.

B) in the short run.

C) in the long run.

D) if expected inflation is positive but constant.

E) independent of the economy's adjustment process.

120)

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