Economics 1012A Introduction to Macroeconomics Fall 2008 Dr. R. E. Mueller Final Examination December 11, 2008

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1 Economics 1012A Introduction to Macroeconomics Fall 2008 Dr. R. E. Mueller Final Examination December 11, 2008 Answer all of the following questions by selecting the most appropriate answer on your bubble sheet. Be sure to read each question carefully. Each question is worth 1 point (100 points total) and this exam will count as 40 per cent of your final course grade. NOTE: The use of calculators and electronic translators is prohibited. 1. The distinction between positive and normative economics is that A) positive economics posits or assumes abstract principles, whereas normative economics studies the normal functioning of the economy. B) positive economics is not objective, and normative economics studies how the economy works. C) positive economics studies how the economy does in fact work, and normative economics studies what the goals of an economy should be. D) positive economics studies what will make society better off and normative economics studies what will make the normal or average individual better off. 2. Which of the following is NOT a behavioural postulate of economics? A) For each person, some goods are scarce. B) People are not willing to give up one good to get more of other goods. C) The law of diminishing returns. D) Each person desires many goods. E) All of the above are behavioural postulates of economics. 3. When your wages rise A) the opportunity cost of an hour of work decreases. B) the opportunity cost of an hour of leisure stays the same. C) the cost of working increases. D) the opportunity cost of an hour of leisure increases. 4. In deciding whether to go to lectures in the middle of the semester you should A) include tuition as part of the cost of that decision. B) not include tuition as part of the cost of that decision. C) include a portion of tuition as part of the cost of that decision. D) include tuition only if you, not your parents, paid it. Page 1

2 5. A basic difference between microeconomics and macroeconomics is that A) microeconomics focuses on the choices of individual consumers, while macroeconomics considers the behaviour of large businesses. B) microeconomics focuses on financial reporting by individuals, while macroeconomics focuses on financial reporting by large firms. C) microeconomics examines the choices made by individual participants in an economy, while macroeconomics considers the economy's overall performance. D) microeconomics focuses on national markets, while macroeconomics concentrates on international markets. Use the following to answer question 6: Computers a b Computers d c Guns Guns 6. A law about the growth of efficiency of computers states that computer chip technology doubles the efficiency of computers each year. If that holds true, which of the four arrows would demonstrate the appropriate shifting of the production possibility curve? A) a. B) b. C) c. D) d. Use the following to answer question 7: Children's toys A B Children's toys C D Pre-K toys Pre-K toys Page 2

3 7. Which of the following would be most likely to shift Iraq's production possibility curve in? A) Damage done to its human and capital resources during the U.S.-led invasion. B) Attacks by insurgents opposed to the U.S. presence. C) Aid given by foreign countries. D) All of the above. E) A and B. 8. The principle of increasing marginal opportunity costs states that the A) initial opportunity costs are high, but they decrease the more you concentrate on the activity. B) initial opportunity costs are low, but they increase the more you concentrate on the activity. C) initial opportunity costs are high, but they increase the more you concentrate on the activity. D) initial opportunity costs are low, but they decrease the more you concentrate on the activity. 9. An increase in productive resources available for use in an economy will A) imply that the law of increasing costs no longer applies. B) shift the production possibilities curve inward. C) shift the production possibilities curve outward. D) have no effect on the production possibilities curve. Use the following to answer question 10: Mary Paul Economics Math Economics Math Given Mary and Paul's production possibility tables for answering economics and math problems in a day, how many days would it take each of them to answer 15 economics problems and 15 math problems? A) It would take Mary 6 days and Paul 4 days. B) It would take Mary 3 days and Paul 2 days. C) It would take Mary 2 days and Paul 1 days. D) It would take Mary 6 days and Paul 2 days. Page 3

4 11. Capitalism and socialism have not existed forever. Capitalism came into existence in the and socialism came into existence in the. A) mid 1800s; early 1900s B) early 1900s; mid 1800s C) mid 1700s; early 1900s D) early 1900s; mid 1700s 12. Which of the following is a characteristic of market economies? A) Private property. B) Government ownership of the means of production. C) Distribution according to need. D) Tradition determines the what, how, and for whom decisions. 13. Suppose that initially, the equations for demand and supply are Qd = 48-4P and Qs = 4P - 16, respectively. If the quantity demanded increases by 12 at every price (so that the demand curve shifts to the right), the equilibrium price will change from A) $8 to $9.50. B) $8 to $12. C) $12 to $9.5. D) $9.50 to $ Suppose that initially, supply is given by the equation Qs = 4P If, as a result of higher production costs, the quantity supplied decreases by 4 at every price, the new supply equation would be A) Qs = 8P B) Qs = P C) Qs = 4P D) Qs = 4P Suppose that initially, the equations for demand and supply are Qd = 48-4P and Qs = 4P - 16, respectively. If the quantity supplied decreases by 4 at every price (so that the supply curve shifts to the left), the equilibrium price will change from A) $8 to $7.50. B) $8 to $8.50. C) $8.50 to $7.50. D) $7.50 to $ Q s = P and Q d = 18-6P respectively, where price is dollars per litre and quantity is thousands of litres. The equilibrium market price and quantity is A) P = $2, Q = 6 thousand litres. B) P = $3, Q = 6 thousand litres. C) P = $14, Q = 66 thousand litres. D) P = $22, Q = 106 thousand litres. Page 4

5 Use the following to answer question 17: Price per unit A B Price per unit D C Quantity per unit of time Quantity per unit of time 17. Refer to the graph above. The arrow which best shows an increase in supply is A) A. B) B. C) C. D) D. Use the following to answer question 18: Price A B I II III Quantity 18. Given the individual supply curves A and B shown above, the market supply curve would fall in which area? A) I. B) II. C) III. D) It cannot be determined with the information given. 19. When the wage rate paid to labour is above equilibrium A) the supply of labour increases. B) the demand for labour decreases. C) the number of workers seeking jobs exceeds the number of jobs available. D) the number of jobs available exceeds the number of workers seeking jobs. Page 5

6 20. Suppose excess demand causes price to rise. As price rises A) the quantity demanded and supplied will fall. B) the quantity demanded and supplied will rise. C) the quantity demanded will rise and the quantity supplied will fall. D) the quantity demanded will fall and the quantity supplied will rise. 21. Today Canada's civilian labour force is roughly A) 31 million. B) 25 million. C) 17 million. D) 12 million. 22. Mexico can produce vine-ripened tomatoes at a lower opportunity cost than firms in the United States. Through negotiations the United States lifted quotas limiting the import of tomatoes from Mexico. Some firms in Florida, in the face of this new competition, had to close their farms and layoff their workers. Many of the workers could not find new jobs right away. What type of unemployment describes the workers' situation? A) Cyclical unemployment. B) Full unemployment. C) Structural unemployment. D) Frictional unemployment. 23. Which of the following statements best characterizes the Classical view of business cycles? A) Fluctuations in business activity occur in regular and predictable patterns. B) Fluctuations in business activity are to be expected and should be accepted just as changes in the seasons are accepted. C) Expansions and recessions are symptoms of underlying problems and should be addressed by macroenomic policy. D) The appropriate macroeconomic policy can eliminate fluctuations in business activity. 24. Unlike during a recession, almost all economists agree that during a depression A) economic policy should be used to improve economic conditions. B) economic policy is counterproductive. C) the demand for output is inadequate. D) the demand for output is excessive. 25. Which of the following problems is not one of the central concerns of macroeconomics? A) Product pricing. B) Growth. C) Business cycles. D) Unemployment. Page 6

7 26. The short-run business cycle framework focuses on factors A) affecting demand. B) affecting supply. C) affecting both supply and demand. D) other than supply and demand. 27. If the prices used in two countries are exactly the same, then a comparison of the per capita GDPs of the two countries provides A) no insight into living standards. B) some insight into living standards, depending on the extent of non-market activities in each country. C) some insight into living standards, depending on the accuracy of purchasing power parity. D) an exact comparison of living standards. 28. The largest component of national income is A) interest. B) rents. C) employee compensation. D) profits. 29. In Keynesian economics, equilibrium income A) is equal to potential income. B) is below potential income. C) is above potential income. D) may be different than potential income. Page 7

8 Use the following to answer question 30: Real income in thousands of dollars A B Real output in thousands of dollars C D 30. Refer to the graph above. The graphical representation of the equation AE = 0.5Y is shown by which curve? A) A. B) B. C) C. D) D. 31. Given AE = $ Y, when income equals $6000, induced expenditures will be A) $ 500. B) $1,000. C) $4,800. D) $5,800. Use the following to answer question 32: Page 8

9 32. Refer to the graph above. If the mpc were to change to 1/3, equilibrium real income would be A) greater than $600. B) $600. C) less than $600. D) indeterminate. Use the following to answer question 33: Income Expenditures $ 0 $ 500 1,000 1,167 1,500 1,500 2,000 1,833 2,500 2, Given the table above, what is the level of induced expenditures if income is $2,000? A) $500 B) $833 C) $1,333 D) $1, If the mpc is 0.8 and autonomous expenditures are $2,000, then the multiplier equation implies that total equilibrium expenditures in the economy are A) $2,500. B) $4,000. C) $10,000. D) $40, Induced expenditures are defined as expenditures that A) occur in equilibrium. B) do not depend on income. C) occur even when income is zero. D) change as income changes. 36. Prices are likely to be LEAST flexible when the economy A) is in the Keynesian range. B) is in the intermediate range. C) is in the Classical range. D) is at potential output. Page 9

10 37. If an economy is in the Keynesian range and consumer and business expectations about the future improve, output will A) rise in the short run and the long run. B) rise in the short run but not the long run. C) rise in the long run but not the short run. D) fall in the short run and the long run. 38. The long-run aggregate supply curve is A) another name for the AD curve. B) upward-sloping. C) a vertical line. D) a horizontal line. 39. The long-run aggregate supply curve shows the output level an economy can produce when A) firms adjust quantity rather than price. B) capital is fully employed. C) labour is fully employed. D) both capital and labour are fully employed. 40. In the long run, the position of the long-run aggregate supply curve determines A) output but not the price level. B) the price level but not output. C) both output and the price level. D) neither output nor the price level. 41. The income tax A) is an automatic stabilizer because income tax revenues rise as income increases, slowing an economic expansion. B) is an automatic stabilizer because income tax revenues rise as income increases, accelerating an economic expansion. C) is an automatic stabilizer because income tax revenues fall as income increases, accelerating an economic expansion. D) is not an automatic stabilizer. Page 10

11 Use the following to answer question 42: 42. Refer to the graph above. If wage and price controls had not been introduced during the Second World War, the massive increase in military spending would have eventually A) shifted the SAS curve to the right. B) shifted the AD curve to the left. C) shifted the SAS curve to the left. D) had no effect on AD and SAS. 43. The policy that follows from the multiplier and AS/AD model is generally called A) aggregate supply management. B) aggregate demand management. C) price-level policy. D) exchange rate policy. 44. Consider the case where prices are flexible in the short run and the government wants to eliminate a recessionary gap of $2000 by increasing government spending. If the mpc is. 8, then the government should increase spending by A) $20. B) $40. C) greater than $40. D) $ When potential output is known to be within a particular range of values A) a more expansionary fiscal policy is appropriate. B) a more contractionar ry fiscal policy is appropriate. C) no change in fiscal policy is appropriate until potential output can be determinedd more precisely. D) the choice of fiscal policy will depend on the level of equilibrium output. Page 11

12 46. Suppose the government never borrows, so that it always finances its expenditures with taxes. Suppose further that government spending does not depend on equilibrium income. In this case, A) both government spending and taxes are automatic stabilizers. B) government spending is an automatic stabilizer but taxes are not. C) taxes are an automatic stabilizer but government spending is not. D) neither government spending nor taxes are automatic stabilizers. 47. The aggregate expenditure model assumes all of the following EXCEPT A) financing the deficit has offsetting effects. B) the government knows what the mpc is. C) the government knows the level of potential income. D) the government can quickly change its spending and taxes. 48. The Fisher equation is best represented by A) Real deficit = Nominal deficit + (inflation Total debt). B) Nominal deficit = Real deficit (inflation Total debt). C) Real deficit = Nominal deficit (inflation Total debt). D) i = r + π e. 49. As a percentage of GDP, Canadian budget deficits in the post-1960 period were A) smallest in the 1980s. B) largest in the 1960s. C) largest in D) largest in the early 1990s. 50. Suppose the nominal interest rate in Brazil is 40 percent and the expected inflation rate is 150 percent. The real interest rate is A) -110 percent. B) -190 percent. C) 110 percent. D) 190 percent. 51. The advent of Keynesian economics A) increased the pressure to eliminate budget deficits. B) increased the pressure to run budget surpluses. C) reduced the pressure to eliminate budget surpluses. D) reduced the pressure to eliminate budget deficits. 52. If taxes and government outlays were constant and did not vary with equilibrium income, then A) passive surpluses would increase. B) passive surpluses would not exist. C) structural surpluses would increase. D) structural surpluses would not exist. Page 12

13 53. Suppose the real rate of interest is 5 percent and the rate of annual inflation is 3 percent. What is the nominal rate of interest? A) 2 percent. B) 8 percent. C) -2 percent. D) 15 percent. 54. Fisher's version of the quantity theory predicts that an increase in the quantity of money will A) increase the transaction velocity of money. B) increase the price level. C) increase the Cambridge k. D) decrease the price level. 55. Liquidity preference refers to A) the choice between holding bonds and money. B) the choice between holding cash and keeping money in a bank account. C) the need to hold money to meet any unforeseen expenses. D) the need to hold money to make transactions. 56. If the Bank of Canada issued too much money, money's relative price would A) fall, and the money price of goods would rise. B) rise, and the money price of goods would fall. C) fall, and the money price of goods would fall. D) rise, and the money price of goods would rise. 57. The Bank of Canada does not issue too much money because doing so would destroy money's usefulness as a A) unit of account. B) store of wealth. C) medium of exchange. D) unit of account, store of wealth, and medium of exchange. 58. In Gondor, the price level is 1, the velocity of money is 2, and 5,000 transactions are made a year, all of which are paid for with money. The quantity of money is A) $2,500. B) $4,000. C) $625. D) $10, A decrease in interest rates A) increases consumption spending. B) decreases money demand. C) decreases investment. D) increases the value of the Canadian dollar. Page 13

14 60. If the reserve ratio is 0.1 and the ratio of money people hold as cash relative to deposits is 0.2, the money multiplier will be A) B) C) D) If a deposit of $50 in the banking system can lead to a maximum expansion in bank deposits of $250, using the deposit multiplier formula, the reserve ratio must be A) 20 percent. B) 25 percent. C) 40 percent. D) 50 percent. 62. The price of a fixed interest rate bond A) rises as the market interest rate rises. B) falls as the market interest rate falls. C) depends on the market interest rate. D) does not depend on the market interest rate. 63. Flows that do not enter the spending stream enter the financial sector in the form of A) saving. B) investment. C) real assets. D) expenditures. 64. When a large majority of a bank's depositors lose faith in it and attempt to withdraw their deposits, the bank will A) not experience difficulties because its reserves will be adequate to meet withdrawals. B) not experience difficulties because it will hold sufficient excess reserves to meet withdrawals. C) experience difficulties but will not fail. D) fail unless it can obtain additional reserves or government assistance. 65. If a bank acquires excess reserves and lends them out, the money supply A) does not increase. B) decreases. C) increases. D) may increase or decrease, depending on how the loan is used. Page 14

15 66. Political pressure on the Bank of Canada A) makes it hard to maintain a contractionary monetary policy. B) is very strong since the Governor of the Bank of Canada is directly accountable to voters. C) makes it hard to maintain an expansionary monetary policy. D) forces the Bank of Canada to use contractionary monetary policy during a recession and expansionary monetary policy during a boom. 67. Which of the following Bank of Canada policies would help the economy out of a recession? A) Open market purchases of government bonds. B) Open market sales of government bonds. C) An increase in the bank rate. D) An increase in the overnight financing rate. 68. The distinction between real and nominal interest rates A) makes it easier to assess the impact of monetary policy. B) makes it harder to assess the impact of monetary policy. C) does not affect the assessment of monetary policy since nominal interest rates are observable. D) does not affect the assessment of monetary policy since real interest rates are observable. 69. Which of the following monetary policies raises aggregate demand and output? A) An open market sale of government securities. B) An open market purchase of government securities. C) An increase in the bank rate. D) An increase in the overnight financing rate. 70. In the European Union, A) each country maintains independent control of its own monetary policy. B) countries have given up significant control of monetary policy to the European Central Bank. C) the governors of the European Central Bank are elected and must be members of the European Parliament. D) the Bundesbank has been given authority to administer European monetary policy. 71. Lags in monetary policy A) make it hard to predict when monetary policy will begin to affect the economy. B) give the Bank of Canada the time it needs to implement the most effective policy. C) are short and do not impede expansionary or contractionary monetary policies. D) are a problem for the Bank of Canada only when it has no estimate of potential output. Page 15

16 72. A monetary policy that affects nominal income but not real income must result in the shift of A) both the AD and SAS curves. B) only the AD curve. C) only the SAS curve. D) neither the SAS curve nor the AD curve. 73. Monetary policy influences the economy through A) providing financial advice to the federal government. B) monitoring the competitive behavior of the chartered banks. C) changes in the money supply and the availability of credit. D) the provision of essential services to the chartered banks. 74. The bank rate refers to A) the lower price large institutions pay for government bonds. B) the rate of interest the Bank of Canada charges for loans to banks. C) the rate of interest the Bank of Canada charges for loans to individuals. D) the rate of interest the Bank of Canada charges for loans to government. 75. Which of the following is the most likely reason a developing country would choose to increase its money supply very rapidly? A) Too many counterfeit notes are in circulation. B) The velocity of its currency is falling. C) The country lacks a broad-based bond market to finance its deficits. D) Higher inflation increases the real wage of the working class. 76. The quantity theory of money A) is no longer relevant. B) is relevant in some cases but not others. C) has become increasingly relevant. D) is more relevant today then ever before. 77. The institutionalist theory of inflation focuses on A) how firms determine wages and prices. B) the equation of exchange. C) the rate of growth in the money supply. D) the institutions that determine how the money supply is determined. 78. The short-run Phillips curve is A) vertical. B) horizontal. C) upward sloping. D) downward sloping. Page 16

17 79. Inflation hurts A) everyone. B) those on fixed incomes. C) those whose incomes aren't fixed. D) no one. 80. The short-run Phillips curve tells us in theory what combinations of A) inflation and output are possible. B) the price level and output are possible. C) inflation and unemployment are possible when expectations of inflation are constant. D) the price level and unemployment are possible when expectations of inflation are constant. 81. According to the institutionalist theory of inflation, A) money supply increases are a necessary, but not a causal, link in the inflationary process. B) the money supply should increase by only the amount of real economic growth. C) people are often fooled into thinking an increase in nominal demand is actually an increase in real demand. D) accelerating inflation is inevitable whenever government attempts to reduce unemployment below the natural level. 82. In the insider/outsider model, inflation is caused by A) a perpetual surplus of demand for goods caused by too high real wages by insiders. B) a perpetual shortage of goods caused by too high real wages by insiders. C) a perpetual increase in nominal wages as insiders attempt to maintain their real wage leading to a higher price level. D) the perpetual bidding up of real wages and thus the price level as outsiders compete for jobs held by the insiders. 83. Which of the following is NOT one of the assumptions of the quantity theory of money? A) Velocity is constant. B) The money growth rate is constant. C) Real output is independent of the money supply. D) Causation goes from money supply to prices. 84. The short-run Phillips curve shifts because of changes in A) the money supply. B) expectations of employment. C) expectations of inflation. D) expectations of real income. Page 17

18 85. An exchange rate is A) the rate the Bank of Canada charges commercial banks for loans. B) the rate the Bank of Canada charges individuals for loans. C) the rate at which one country's currency can be exchanged for another country's currency. D) the speed at which exchange occurs. 86. Purchasing power parity is used to estimate equilibrium A) exchange rates. B) inflation rates. C) interest rates. D) price levels. 87. The purchase of a meal by an American tourist at a restaurant in Paris would find its way into the American balance of payments as A) a positive entry in the current account. B) a positive entry in the capital account. C) a negative entry in the current account. D) a negative entry in the capital account. 88. In the foreign exchange market, an increase in the demand for euros has the same effect on the value of the euro-dollar exchange rate as A) a decrease in the supply of dollars. B) an increase in the demand for dollars. C) a decrease in Canadian imports from France. D) a decrease in Canadian exports to France. 89. Purchasing power parity is based on the idea that exchange rates adjust to equate with A) income levels across countries. B) interest rates across countries. C) the price of a basket of goods across countries. D) the price of individual goods across countries. Page 18

19 Use the following to answer question 90: Price of French francs Supply P1 Demand 0 Q1 Quantity of French francs 90. Refer to the graph above. If French inflation increases relative to world inflation, A) only the supply curve will shift out to the right. B) only the demand curve will shift in to the left. C) the supply curve will shift in to the left and the demand curve will shift out to the right. D) the supply curve will shift out to the right and the demand curve will shift in to the left. 91. Refer to the graph above. An increase in U.S. income would A) shift S1 in and cause the mark to gain value. B) shift S1 out and cause the mark to lose value. C) shift D1 out and cause the mark to gain value. D) shift D1 in and cause the mark to lose value. 92. In 1999, the European Union (EU) introduced the euro. Which of the following effects is NOT produced by the euro? A) A common monetary policy for the European Union countries. B) Greater monetary policy flexibility for individual European Union countries. C) Reduced foreign exchange market speculation. D) Increased foreign exchange rate stability. 93. Which of the following is a fundamental determinant of the exchange rate? A) A country's tax structure. B) A country's price level. C) A country's labour supply. D) A country's unemployment rate. Page 19

20 94. The Bretton Woods Agreement is best described as A) a pure floating exchange rate system. B) a partially flexible exchange rate system or "dirty float." C) a pure silver standard system. D) a fixed exchange rate system. 95. If businesses raise their expectations about future demand, this will cause a A) movement down the aggregate demand curve. B) movement up the aggregate demand curve. C) rightward shift of the aggregate demand curve. D) leftward shift of the aggregate demand curve. 96. A French firm buys $10 million worth of Canadian bonds. This transaction causes the Canadian A) current account balance to increase. B) current account balance to decrease. C) financial account balance to increase. D) financial account balance to decrease. 97. A country that fixes a price for its currency that is below the market price must A) accumulate official reserves. B) decrease its money supply. C) lose official reserves. D) eventually increase the value of its currency. 98. The North American Free Trade Agreement (NAFTA) A) integrated the principles of fair trade into the Free Trade Agreement between Canada and the United States. B) extended the Free Trade Agreement to include Mexico, Chile, and Costa Rica. C) was initiated by Canada in order to provide protection for Canadian natural resource industries. D) extended the Free Trade Agreement to include Mexico. 99. In the balance of payments accounts, net investment income shows up A) in the current account. B) in the capital account. C) in the official transactions account. D) nowhere; net investment income is not in the balance of payments Under which exchange rate regime is a country most likely to import the monetary policy of another country? A) Fixed exchange rates. B) Flexible exchange rates. C) Partially flexible exchange rates. D) A dirty float. Page 20

21 Answer Key 1. C 2. B 3. D 4. B 5. C 6. A 7. E 8. B 9. C 10. A 11. C 12. A 13. A 14. C 15. B 16. A 17. C 18. C 19. C 20. D 21. C 22. C 23. B 24. A 25. A 26. A 27. B 28. C 29. D 30. D 31. C 32. C 33. C 34. C 35. D 36. A 37. A 38. C 39. D 40. A 41. A 42. C 43. B 44. C Page 21

22 45. D 46. D 47. A 48. D 49. D 50. A 51. D 52. B 53. B 54. B 55. A 56. A 57. D 58. A 59. A 60. B 61. A 62. C 63. A 64. D 65. C 66. A 67. A 68. B 69. B 70. B 71. A 72. A 73. C 74. B 75. C 76. B 77. A 78. D 79. B 80. C 81. A 82. C 83. B 84. C 85. C 86. A 87. C 88. D 89. C 90. D Page 22

23 91. C 92. B 93. B 94. D 95. C 96. C 97. A 98. D 99. A 100. A Page 23