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

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1 These 101 questions have been randomly selected (for the chapters eligible for examination) by the computer from the test bank that accompanies your text. Your prof. has not seen these questions, so as not to bwe influenced by them when setting the final exam. The answer list is at the end of the exam. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If constant-dollar national income decreased by $6 billion, then it must be true that A) the price level decreased. B) aggregate output decreased. C) aggregate output increased and the price level decreased. D) aggregate output decreased and the price level increased. E) the level of individual output decreased. 2) Macroeconomics is mainly concerned with the study of A) governments and their intervention in individual markets. B) individual households and how they deal with problems like inflation and unemployment. C) fluctuations and trends in disaggregated data. D) fluctuations and trends in aggregated data. E) large economic units such as General Motors or Molson Breweries 3) Consider a small economy with 3 individuals. Individual A produces 100 chickens that sell for $8 each. Individual B produces 50 bags of corn that sell for $10 each. Individual C produces 40 bushels of apples that sell for $20 each. National product in this economy is A) $2100. B) $2470 C) 190 units of goods produced. D) 100 chickens plus 50 bags of corn plus 40 bushels of apples. E) not determinable from the information provided. 4) If a countryʹs labour force is 15 million people, and 1 million of those are unemployed, the countryʹs unemployment rate is A) 2.5 percent. B) 3.3 percent. C) 4.5 percent. D) 6.7 percent. E) 9.0 percent. 5) During the 1970s, Canada experienced an unusual pattern of interest rates. During this period A) the nominal interest rate was less than the real interest rate. B) the inflation rate was negative, implying a nominal interest rate higher than the real interest rate. C) the inflation rate was negative, implying a real interest rate that was higher than the nominal interest rate. D) the nominal and real interest rates were equal to each other. E) the inflation rate exceeded the nominal interest rate, implying a negative real interest rate. 6) An example of a topic outside the scope of macroeconomics is A) the level of productivity, as compared with that in the United States. B) changes in the price of a particular good in a specific market. C) changes in the unemployment rate. D) the aggregate growth rate of the economy. E) the overall level of unemployment. 21

2 7) To compare the economyʹs aggregate output in two different time periods, economists compare the A) unemployment rates for the two periods. B) real national income for the two periods. C) potential national incomes for the two periods. D) inflation rates for the two periods. E) nominal national income for the two periods. The table below shows total output for an economy over 3 years. TABLE 20-5 Year Money GDP* Deflator Real GDP** 2003 $ 105 $760, $820, $ 2005 $855,000 $800,000 * millions of dollars ** real GDP measured in millions of 2002 dollars 8) Refer to Table The implicit GDP deflator for 2005 is approximately A) 106. B) 107. C) 108. D) 109. E) ) Refer to Table The real GDP in 2004, expressed in 2002 prices, was A) $ B) $ C) $ D) $ E) $ FIGURE ) Refer to Figure Nominal GDP increased by approximately percent between 1985 and A) 20 B) 45 C) 65 D) 85 E)

3 11) Which of the following statements about national-income accounting is correct? A) GDP on the expenditure side is calculated by adding up all the income claims generated by the act of production. B) The value of the expenditure on a nationʹs output is equal to the total income claims generated by producing that output. C) GDP from the expenditure side and GDP from the income side differ by the amount of investment in the economy. D) GDP on the income side is calculated by adding up total expenditure for each of the main components of final output. E) The total value added in the economy is equal to the sum of all components in the circular flow of expenditure and income. 12) When adding up the value of all goods produced in the economy, double counting can be avoided if only the is included. A) revenue of intermediate goods and services. B) value of intermediate goods and services. C) revenue of all goods and services. D) value of final good and services. E) cost of intermediate goods and services. The table below shows total output for an economy over 3 years. TABLE 20-5 Year Money GDP* Deflator Real GDP** 2003 $ 105 $760, $820, $ 2005 $855,000 $800,000 * millions of dollars ** real GDP measured in millions of 2002 dollars 13) Refer to Table The growth rate of nominal output from 2003 to 2004 is A) 2.76 percent. B) 3.36 percent. C) 4.09 percent. D) 4.27 percent. E) 5.00 percent. The table below shows total output for an economy over 2 years. TABLE Price Quantity Good A $ units Good B $ units Good C $ units 2008 Price Quantity Good A $ units Good B $ units Good C $ units 14) Refer to Table The implicit GDP deflator in 2008, when 2007 is used as the base year, was approximately A) 105. B) 160. C) 180. D) 193. E)

4 Consider the following information for an economy with demand-determined output and a constant price level. There is no government or foreign trade. TABLE Y = C + I 2. C = Y 3. I = ) Refer to Table The simple multiplier in this economy is A) 2.0. B) 2.5. C) 3.0. D) 4.0. E) 5.0. Consider the following information describing a closed economy with no government. Aggregate output is demand determined and the price level is constant. TABLE Y = C + I 2. C = Y 3. I = ) Refer to Table The simple multiplier in this economy is A) 2.0. B) 2.5. C) 3.0. D) 4.0. E) ) The marginal propensity to consume is defined to be A) the change in desired consumption divided by total disposable income. B) the change in desired consumption divided by the change in disposable income. C) total desired consumption divided by total disposable income. D) the change in desired consumption divided by the change in saving. E) total desired consumption divided by the change in disposable income. Consider the following information concerning an economy with demand-determined output. There is no government or foreign trade. TABLE Y = C + I 2. C = Y 3. I = ) Refer to Table This economyʹs equilibrium level of national income is A) 500. B) 600. C) 750. D) E) ) The Smith familyʹs disposable income rose from $ per year to $ and their desired consumption expenditure rose from $ to $ It can be concluded that their A) average propensity to consume is 0.8. B) marginal propensity to consume is $800. C) average propensity to save is 0.8. D) marginal propensity to save is 0.8. E) marginal propensity to consume is

5 Consider the following information describing a closed economy with no government and where aggregate output is demand determined: 1. the equilibrium condition is Y = C + I 2. the marginal propensity to save is the autonomous part of C is $30 4. investment is autonomous and is $40 TABLE ) Refer to Table At the equilibrium level of national income, desired saving will be A) zero. B) $ 40. C) $ 70. D) $200. E) $ ) 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) B) C) D) 125 E) 50 22) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = Y, I = 400, G = 700, T = 0, X = 130, IM = 0.08Y. Desired consumption expenditure at equilibrium national income is. A) B) C) D) E) ) Suppose G = 300 and the governmentʹs net tax revenue is equal to 0.12Y. The government budget is balanced when Y equals. A) 350 B) C) D) E) ) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = Y, I = 150, G = 260, T = 0, X = 90, IM = 0.06Y. The value of the simple multiplier in this model is. A) 0.37 B) 1.59 C) 2.04 D) 2.32 E) ) A decrease in the value of the simple multiplier can be caused by A) a decrease in the net tax rate. B) a decrease in the marginal propensity to import. C) an increase in the marginal propensity to consume. D) an increase in the marginal propensity to spend. E) an increase in the marginal propensity to save. The table below shows national income and imports. The level of exports is fixed at $300. All figures (in table and questions) are in millions of dollars. Income (Y) Imports (IM) Net Exports (NX) a b c d TABLE ) Refer to Table In this economy, if actual national income increases by $600, the level of imports will A) rise by $60. B) rise by $100. C) fall by $100. D) not change. E) rise by $30. 25

6 27) Suppose exports are $200 and imports are given by IM = 0.2Y. At what level of national income will net exports equal zero? A) $1000 B) $1250 C) $200 D) $250 E) $0 28) When determining the AE function for an open economy with government, it is generally assumed that as real national income A) decreases, exports will decrease. B) increases, net exports will decrease. C) decreases, net exports will decrease. D) increases, imports will decrease. E) increases, exports will decrease. 29) Consider the following news headline: ʺGovernments plan massive hospital construction programs across the country.ʺ Choose the statement below that best describes the likely macroeconomic effects. A) the AD curve shifts to the right; the price level rises and real GDP rises B) the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises C) the AD curve shifts to the left; the price level falls and real GDP falls D) the AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate E) the AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate 30) Aggregate supply shocks cause the price level and real GDP to change in A) opposite directions but by the same amount. B) the same direction with price changing by more than output. C) the same direction and by the same amount. D) opposite directions with price changing by less than output. E) opposite directions but not necessarily by the same amount. 31) Which of the following will cause a negative aggregate demand shock? A) a decrease in the domestic price level B) an increase in the domestic price level C) an increase in the price of raw materials D) an increase in tax rates E) an increase in government expenditures 32) If the AS curve is vertical and there is a decrease in aggregate demand, the result is A) an increase in national income. B) a decrease in the price level with no change in real GDP. C) no change in either price level or real GDP. D) an equal decrease in national income. E) an increase in the price level. 33) In building a macro model with an AS curve, it is assumed that producers will A) decrease their prices without changing output. B) decrease their prices when they expand output. C) increase prices without changing their output. D) produce as much as possible at the existing price level. E) produce more output only if prices rise. 26

7 34) Consider the basic AD/AS model. If there is a decrease in the cost of non -labour inputs to production, the result will be to A) cause a movement to the left along the AS curve. B) shift the AD curve to the right. C) shift the AD curve to the left. D) shift the AS curve to the right. E) shift the AS curve to the left. 35) Which of the following characteristics define the long run in macroeconomics? A) Factor prices are exogenous, technology and factor prices are exogenous. B) Factor prices adjust to output gaps, and technology and factor supplies are constant. C) Factor prices are exogenous, and technology and factor supplies are changing. D) Factor prices are exogenous, and technology and factor supplies are constant. E) Factor prices adjust to output gaps, and technology and factor supplies are changing. 36) Which of the following will occur as part of the automatic adjustment process in an economy with an inflationary gap? A) rising wages B) increasing investment C) falling prices D) declining government purchases E) increasing tax rates 37) Consider the basic AD/AS macro model. An expansionary AD shock has price -level effect in the short run and price-level effect in the long run. A) a positive; a smaller B) a negative; no C) a positive; no D) a negative; a positive E) a positive; an even larger 38) If the short-run macroeconomic equilibrium occurs with real GDP greater than potential output, the economy is A) at its full-employment level of output. B) in a recessionary output gap. C) threatened with a demand shock. D) operating at full capacity. E) in an inflationary output gap. 39) If the short-run macroeconomic equilibrium occurs with real GDP les than Y*, the economy is A) in an inflationary gap. B) operating at full capacity. C) at its full-employment level of output. D) in a recessionary gap. E) threatened with an acceleration of inflation. 27

8 40) The growth rate of potential output might be decreased by an expansionary fiscal policy if A) public investment has high productivity. B) the simple multiplier is small. C) the budget deficits are persistent. D) the policy crowds out private investment. E) the composition of output is not altered. 41) 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) (FE/F) D) GDP E) F 42) An economyʹs current GDP is $100 billion, the labour force is composed of 2.2 million people, and 2 million people are employed. What is the economyʹs labour productivity? A) $50 B) 0.45 C) $ D) 0.91 E) $ ) GDP can be represented by the equation: GDP = L x [E/L] x [GDP/E]. In this equation, the term [E/L] represents A) the level of employment at a given period of time. B) the productivity of labour. C) one minus the unemployment rate. D) the ratio of the population unemployed. E) none of the above 44) Inflationary gaps are typically associated with A) excess demand for factors and higher-than normal factor-utilization rates. B) excess supply of factors and higher-than-normal factor-utilization rates. C) excess supply of factors and normal factor-utilization rates. D) excess supply of factors and lower-than-normal factor-utilization rates. E) excess demand for factors and lower-than-normal factor-utilization rates. 45) A characteristic of the short run in macroeconomics is that A) actual GDP is always less than potential GDP. B) the output gap opens or closes as the economy moves through the phases of the business cycle. C) actual GDP is always growing at the same rate as potential GDP. D) the output gap is constant because the capital stock cannot change. E) actual GDP is always greater than potential GDP. 46) Long-run increases in potential GDP would most likely be caused by a (an) A) decrease in factor-utilization rates. B) increased availability of key factors of production. C) increases in the prices of factors of production such as wages or interest rates. D) decrease in factor productivity. E) decrease in saving in the short run. 47) A decrease in long-run real GDP (potential GDP) would be most likely caused by a (an) A) decrease in unemployment rates. B) decrease in interest rates. C) decrease in factor productivity. D) increase in factor-utilization rates. E) all of the above 28

9 48) Given the enormous world population growth of recent decades, the present needs and aspirations of the worldʹs population can likely only be met through A) increasing knowledge and technological improvements. B) coordination of fiscal and monetary policies. C) relatively small increases in the saving rates of the developing economies. D) reductions in the worldʹs capital stock, as a means of controlling the exhaustion of natural resources. E) enormous increases in financial capital. 49) For a given level of technology, a more rapid rate of economic growth can probably be achieved only if a countryʹs citizens are prepared to A) redistribute income. B) sacrifice some present consumption. C) decrease interest rates. D) increase their demand for goods and services. E) pay more taxes. 50) If a country transfers resources from the production of consumption goods to the production of capital goods, the result will be to A) raise future consumption. B) decrease the long-run growth rate. C) lower future living standards. D) raise current living standards. E) raise current consumption. 51) A common measure of a countryʹs rate of economic growth is A) the marginal efficiency of capital. B) the change in output per capita. C) the level of output per capita. D) the capital-output ratio. E) the level of real gross domestic product. 52) Consider a closed economy in the long run. A country with a low national saving rate (as a fraction of real GDP) is likely to have A) a high growth rate because aggregate expenditure will be high out of any given income. B) an AS curve moving continually to the right. C) trouble achieving potential real national income in the short run. D) either a high or low growth rate depending on the investment schedule. E) a low growth rate because sustained high investment is not possible with low saving. 53) According to the Neoclassical growth model, which of the following scenarios explains improvements in long-run material living standards? A) an increase in population B) an equal increase in both population and the stock of capital C) an equal increase in both population and output D) a decrease in unemployment rates E) an increase in the stock of physical capital 29

10 The diagram below show the market for loanable funds assuming that national income is constant at Y*. FIGURE ) Refer to Figure Suppose national saving is reflected by NS0 and investment demand is reflected by I0 D. Now suppose there is a reduction in government purchases (G). What is the effect on the equilibrium real interest rate? A) national saving shifts to NS1 and the interest rate falls to i3. B) the real interest rate rises because of the decrease in the budget surplus. C) the real interest rate falls because of the decrease in the budget surplus. D) there is no effect on NS or ID, and the interest rate remains at i*. E) investment demand shifts to I1 D, and the interest rate rises to i2. 55) Without a central bank, commercial banks in Canada would probably hold reserves than they do now, resulting in a money supply than at present. A) the same; the same B) less; smaller C) less; larger D) more; smaller E) more; larger 56) Greshamʹs law predicts that A) debased money will be driven from circulation. B) money is neutral in the long run. C) debased money will circulate with undebased money. D) undebased money will be driven from circulation. E) good money drives out bad money. 30

11 57) The expansion of deposits resulting from an injection of cash to the banking system can be calculated as follows: A) the change in deposits is equal to the change in reserves divided by the target reserve ratio. B) the change in deposits is equal to the change in reserves divided by the sum of the target reserve ratio and the cash-deposit ratio. C) the change in deposits is equal to the change in loans divided by the sum of the target reserve ratio. D) the change in deposits is equal to the change in reserves divided by the cash-deposit ratio. E) the change in deposits is equal to the change in reserves divided by the sum of excess reserves and cash drain. 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 ) Refer to Table The maximum creation of new deposits by the banking system, including the dealerʹs original deposit at Bank XYZ, is A) $25 million. B) $22.5 million. C) $20 million. D) $15 million. E) $5 million. 59) Which of the following entries would appear on the liabilities side of the Bank of Canadaʹs balance sheet? A) deposits of commercial banks B) savings deposits C) shareholdersʹ equity D) advances to commercial banks E) Government of Canada securities 60) Other things being equal, the purchasing power of money is A) directly related to the level of aggregate demand. B) inversely related to the level of aggregate demand. C) inversely related to the price level. D) directly related with the cost of living. E) directly related to the price level. 61) The basic functions of the Bank of Canada include A) acting as banker for the chartered banks. B) acting as lender of last resort to the commercial banks. C) supporting the financial markets. D) regulating the money supply. E) all of the above 31

12 62) Consider monetary equilibrium. A rise in the price level, with no change in the supply of money, will A) decrease the demand for money and increase aggregate demand. B) increase the demand for money and increase aggregate expenditure. C) decrease aggregate demand but not affect the demand for money. D) decrease the demand for money and decrease aggregate demand. E) increase the demand for money and decrease aggregate expenditure. 63) Consider a disturbance to monetary equilibrium which changes the interest rate. This change will affect aggregate demand through A) a shift of the investment demand function and a movement along the aggregate expenditure curve. B) a shift of both the investment demand function and the aggregate expenditure curve. C) movements along the investment demand function and the aggregate expenditure curve. D) a movement along the investment demand function and a shift of the aggregate expenditure curve. E) a movement along the aggregate expenditure curve. 64) Which of the following correctly describes the way in which a change in the money supply affects aggregate demand? A) a movement along the ID curve and a shift of the aggregate demand curve B) a shift of both the ID curve and the aggregate demand curve C) a movement along the aggregate demand curve. D) movements along the ID curve and the aggregate demand curve E) a shift of the ID curve and a movement along the aggregate demand curve 65) The monetary transmission mechanism is activated when a rise in the price level causes A) an increased demand for money balances, leading people to sell bonds, which in turn raises the interest rate. B) a decreased demand for money balances, leading people to sell bonds, which in turn raises the interest rate. C) an increased demand for money balances, leading people to buy bonds, which in turn decreases the interest rate. D) a decreased demand for money balances, leading people to buy bonds, which in turn decreases the interest rate. E) an increased demand for money balances, leading people to sell bonds, which in turn decreases the interest rate. 66) Other things being equal, the flatter is the investment demand function, the A) less responsive is desired investment to a change in interest rates. B) more responsive is desired investment to a change in interest rates. C) less responsive is the demand for money to a change in interest rates. D) less responsive is the interest rate to a change in the money supply. E) more responsive is the demand for money to a change in interest rates. 67) Other things being equal, a decrease in the money supply will lead to in real interest rates and, in the short run, in real GDP because. A) a decrease; an increase; of the increase in domestic investment. B) a decrease; a decrease; of the decrease in domestic investment. C) a decrease; a decrease, of the decrease in net exports. D) an increase; a decrease; of the decline in domestic investment. E) an increase; an increase; more money is available for investing in bonds from abroad 32

13 68) Suppose the Canadian economy had an inflationary gap. To decrease the level of aggregate desired investment, the Bank of Canada could A) buy securities in the open market. B) reduce its spending. C) lower short-term interest rates. D) raise its target for the overnight interest rate. E) either A or D would be effective. 69) One difficulty in attempting to stabilize the economy by controlling the money supply is that A) the commercial banks may choose not to hold excess reserves. B) the Canadian government requires long-term loans. C) the money demand function may be unstable. D) firms may be sensitive to changes in the rate of interest. E) the Bank of Canada can print more money. 70) If we observe that the actual overnight interest rate has increased, we can definitely conclude that the A) Bank of Canada has implemented a contractionary monetary policy. B) Bank of Canada has abandoned its inflation target. C) Bank of Canada has implemented an expansionary monetary policy. D) Government of Canada has reduced the money supply. E) none of the above. 71) The economic variables that the Bank of Canada tries to influence are in the short run and in the long run. A) the distribution of income; the unemployment rate B) the exchange rate; the rate of inflation C) real GDP; the exchange rate D) the distribution of income; economic efficiency E) real GDP; the path of the price level 72) In 1994, the federal minister of finance (Paul Martin) appointed Gordon Thiessen as the new governor of the Bank of Canada, who proceeded to A) abandon the tough and unpopular contractionary monetary policy of his predecessor in favour of a policy designed to depreciate the Canadian dollar. B) increase the overnight lending rate in order to stabilize the Canadian-U.S. exchange rate. C) continue the popular low overnight lending policy of his predecessor. D) abandon the tough and unpopular contractionary monetary policy of his predecessor in favour of a low-interest-rate policy. E) continue the tough and unpopular contractionary monetary policy of his predecessor. 73) The Bank of Canadaʹs purchases and sales of government securities, when they occur, are referred to as A) reserve requirements. B) open-market operations. C) increases and decreases in government expenditure. D) margin requirements. E) the setting of the bank rate. 33

14 74) Suppose the economy is at full employment and the AS curve shifts upward due to a once-and-for-all increase in the price of oil. If the central bank does not respond to this shock, A) an inflationary gap will be created, which will cause the AS curve to shift upward again. B) a recessionary gap will be created, which will eventually cause the AS curve to shift back downward. C) a recessionary gap will be created and will cause a permanent reduction in employment. D) prices will rise and stay at the higher level with no further inflation. E) aggregate demand will shift up and cause further inflation. 75) Of the three phases involved in the elimination of a sustained inflation in Canada, the second phase is represented by A) aggregate output being returned to potential output. B) increased inflation with rising output and falling unemployment. C) stagflation with falling output and continuing inflation. D) the Bank of Canada slowing the rate of monetary expansion. E) the Bank of Canada pursuing an expansionary monetary policy. 76) A rightward shift of the AD curve accompanied by a rightward shift of the AS curve will A) increase GDP but have an uncertain effect on the price level. B) reduce GDP but have an uncertain effect on the price level. C) reduce the price level but have an uncertain effect on GDP. D) reduce both the price level and GDP. E) increase the price level but have an uncertain effect on GDP. 34

15 The three figures below show the phases of a disinflation. In part (i), the economy is experiencing a sustained inflation at E1. FIGURE ) Refer to Figure 30-3, part (ii). The upward shift of the AS curve can be caused by A) an increase in the productivity of workers. B) the Bank of Canada engaging in an expansionary monetary policy. C) an increase in the unemployment rate. D) inflationary expectations that cause wages to continue rising. E) workers accepting a reduction in their wages. 78) Assuming that the economy is currently in a long-run equilibrium with real GDP equal to Y*, a positive AD shock (with no change in the money supply) will eventually result in A) a lower price level and GDP below its potential level. B) no change in the price level. C) an ongoing inflation in the economy. D) a higher price level and GDP at its potential level. E) a lower price level and GDP at its potential level. 79) If the unemployment rate is less than the NAIRU, A) there is no pressure on the AS curve to shift. B) demand forces will exert upward pressure on wages. C) there is a recessionary output gap. D) the AS curve will shift downward. E) none of the above. 35

16 80) Average wages in Canada have increased each year since the Second World War, even though the economy has experienced some severe recessions during this time. The explanation for this continued increase in nominal wages is A) the persistent expectation that the price level will increase. B) that the actual unemployment rate is consistently below the NAIRU. C) that wage effects of the inflationary gaps outweigh the wage effects of the recessionary gaps. D) the existence of powerful labour unions in Canada. E) a continued shortage of labour. 81) Which of the following statements about frictional unemployment is most accurate? A) The only way to reduce it is to shift the AD curve to the left. B) It exists when only there are no jobs for the unemployed people in the economy. C) Its source is that unemployed workers and the employers with job vacancies have not yet found each other. D) Its source is a mismatch between the needs of employers with job vacancies and the unemployed workers. E) The only way to reduce it is to shift the AD curve to the right. 82) Suppose the Canadian government implements a new program to provide training to unemployed workers. The government is likely trying to reduce A) cyclical unemployment. B) the gross flow of people out of unemployment. C) seasonal unemployment. D) structural unemployment. E) frictional unemployment. 83) A good example of an outcome that could lead to ʺhysteresisʺ in the labour market is: A) a negative supply shock persists. B) a negative demand shock persists. C) new entrants to the labour market have difficulty finding jobs, and as a result have a higher rate of unemployment throughout their working lives. D) new entrants to the labour market have a high rate of unemployment due to technological change. E) unemployment is generated by an increase in the minimum wage. 84) The New Keynesian and New Classical theories of unemployment both agree that A) actual unemployment rates will equal the NAIRU in the long run. B) wages and prices are perfectly flexible. C) actual output adjusts only gradually to potential output. D) unemployment is always voluntary. E) all of the above 85) An unemployed worker can be identified as being ʺstructurallyʺ unemployed if A) minimum wage laws prevent the worker from finding a job. B) the worker has a different set of skills than what is desired by firms. C) the worker quits a job in order to search for a better one. D) there is a recession and the worker is laid off. E) the worker wants to work only during certain months of the year. 36

17 86) One motivation for having publicly subsidized retraining programs is to A) encourage the use of efficiency wages. B) reduce cyclical unemployment. C) reduce structural unemployment. D) encourage employment in low-paying jobs. E) resist adjustment to technological change. 87) New Classical theories of the labour market feature wages, and thus involuntary unemployment. A) sticky; exists B) perfectly flexible; exists C) perfectly flexible; does not exist D) sticky; does not exist E) none of the above 88) What economists call ʺgovernment savingʺ is the same as the A) difference between household saving and business saving. B) governmentʹs actual budget surplus. C) none of the above D) difference between household saving and private saving. E) dollar amount of bonds that the government holds at any given time. 89) Financing a budget deficit by increasing the money supply will A) reduce the burden of government debt. B) allow more flexibility in the design of monetary policy. C) increase investment over time. D) create greater inflationary pressure. E) have no short-run monetary effects on the economy. 90) If the Canadian federal government adopted a formal balanced budget rule, during times that GDP was falling it would have to A) decrease interest payments on the debt. B) increase tax rates and/or decrease spending which would destabilize the economy. C) decrease spending and transfer payments while holding tax rates constant. D) decrease tax rates and/or increase spending which would destabilize the economy. E) increase tax rates and/or increase spending which would destabilize the economy. 91) The Canadian debt-to-gdp ratio reached a high of about percent in If budget surpluses continue, the debt-to-gdp ratio is expected to reach percent by A) 110; 50 B) 70; 25 C) 40; 10 D) 50; 0 E) 80; 40 92) The Canadian tax and transfer system acts as an automatic stabilizer because A) net tax revenues decrease during economic booms and decrease during economic recessions. B) tax rates will automatically increase if the government is running deficits. C) net tax revenues increase during economic booms and decrease during economic recessions. D) tax rates will automatically decrease to stimulate the economy during economic booms. E) tax rates will automatically increase to stimulate the economy during economic recessions. 37

18 93) Many economists argue that the long-term burden of government debt will include: A) reduced investment and as a result a lower long-run rate of economic growth. B) a burden on future generations who may have to pay interest to foreign owners of government bonds. C) a redistribution of resources away from future generations toward the current generation. D) all of the above E) none of the above 94) The accumulated stock of government debt will begin to fall A) if the growth rate of real GDP is higher than the real interest rate. B) when the governmentʹs annual budget is in surplus. C) if the governmentʹs debt-service payments are zero. D) when the governmentʹs annual budget is in deficit. E) if the government does not borrow money. 95) With respect to Canadaʹs balance of payments, A) if the current account is in deficit, the capital account must also be in deficit. B) the current account balance must be zero. C) the current account balance plus the capital account balance must be zero. D) total payments must equal total receipts. E) both C and D are correct. 96) If a basket of goods costs $1000 in Canada and the Canadian dollar exchange rate on the euro is 1.40, then according to the theory of PPP the same basket of goods in Europe should cost euros. A) B) C) D) E) FIGURE ) Refer to Figure An increase in demand or decrease in the supply of foreign exchange will A) cause the Canadian dollar to depreciate. B) cause the Canadian dollar to appreciate. C) encourage Canadians to buy more European goods. D) have no effect on the exchange rate. E) encourage Europeans to buy fewer Canadian goods. 38

19 98) The problem of the ʺtwin deficitsʺ refers to A) having both a government budget deficit and a deficit on the current account. B) an increase in the governmentʹs budget deficit and an increase in private sector borrowing. C) an increase in private saving and a decrease in the capital account. D) a decrease in the governmentʹs budget deficit. E) a decrease in domestic investment and an increase in the deficit on the capital account. 99) In a competitive foreign-exchange market between the Canadian dollar and the pound sterling, a price of pounds (in terms of dollars) below the free-market equilibrium would A) indicate that all people who wish to purchase pounds will be able to do so at the current exchange rate. B) result in a sustained shortage of pounds. C) lead to an appreciation of the dollar. D) result in the quantity of pounds supplied being greater than the quantity demanded. E) lead to a depreciation of the dollar. 100) General domestic inflation that is above inflation in the rest of the world will affect the supply and demand for foreign exchange in the following way: A) decrease both the supply and demand B) increase both the supply and demand C) decrease the demand and increase the supply D) decrease the supply and increase the demand E) there will be no effect. 101) To macroeconomists, ʺforeign exchangeʺ refers to A) the movement of goods and services from one country to another. B) the difference between exports and imports. C) foreign currency or various claims on it. D) the price at which purchases and sales of foreign goods take place. E) the actual transaction that occurs as currencies are traded. 39

20 Answer Key Testname: 209FINF07PRACTICE 1) B 2) D 3) A 4) D 5) E 6) B 7) B 8) B 9) A 10) B 11) B 12) D 13) A 14) C 15) E 16) B 17) B 18) B 19) E 20) B 21) D 22) D 23) D 24) B 25) E 26) A 27) A 28) B 29) A 30) E 31) D 32) B 33) E 34) D 35) E 36) A 37) E 38) E 39) D 40) D 41) C 42) C 43) C 44) A 45) B 46) B 47) C 48) A 49) B 50) A 51) B 52) E 53) E 54) A 55) D 56) D 57) B 58) C 59) A 60) C 61) E 62) E 63) D 64) A 65) A 66) B 67) D 68) D 69) C 70) E 71) E 72) E 73) B 74) B 75) C 76) A 77) D 78) D 79) B 80) A 81) C 82) D 83) C 84) A 85) B 86) C 87) C 88) B 89) D 90) B 91) B 92) C 93) D 94) B 95) E 96) B 97) A 98) A 99) E 100) D ) C