Questions of this SAMPLE exam were randomly chosen and may NOT be representative of the difficulty or focus of the actual examination. The professor did NOT review these questions. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) 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) $2470 B) 100 chickens plus 50 bags of corn plus 40 bushels of apples. C) 190 units of goods produced. D) $2100. E) not determinable from the information provided. 2) Most of the statistics used in macroeconomics are A) indications of industry performance. B) close-up pictures of individual markets. C) statistics on the price of individual commodities, such as wheat or corn. D) detailed statistics on output, such as the output of shoes. E) broad indications of economic performance, such as total employment or the average of all market prices. 3) Consider a small economy with real GDP of $1 billion and the number of workers employed equal to 2500. Which of the following is the best measure of labour productivity in this economy? A) real GDP per employed worker = $200 000 B) real GDP per hour worked = $400 C) real GDP per employed worker = $400 000 D) real GDP per hour worked = $200 E) indeterminable from the information provided 4) Probably the most commonly used measure of national income is A) gross domestic product. B) current dollar national income. C) dollar value of potential output. D) constant dollar national income. E) gross national product. 5) In general, productivity is a measure of A) the amount of output that the economy produces per unit of input. B) the total amount of output that the economy is capable of producing. C) the economy's ability to increase real GDP per capita. D) potential output. E) real GDP as a function of total employment. 6) In the study of short-run fluctuations in national income, potential income (output) is usually assumed to be A) constant. B) equal to actual income. C) moving together with potential output in neighbouring countries. D) falling at its average growth rate. E) irrelevant, as the economy is rarely there. 1
7) Which of the following statements about depreciation is true? A) Net investment is equal to gross investment plus depreciation. B) Depreciation includes net additions to the economy's total stock of capital. C) Depreciation is equal to net investment. D) The total amount of capital goods in a country is called depreciation. E) Net investment is equal to gross investment minus depreciation. 8) Which of the following is included in the current calculations of GDP? A) Pizza purchased by college students for dinner B) Welfare payments C) The purchase of a 1939 painting D) Volunteer work undertaken by Mary Smith E) The purchase of a second hand automobile 9) Suppose you are hired as a consultant to estimate the increase in consumer demand for automobiles for the coming year. Which measure of aggregate income would be most useful to you for this type of forecasting? A) Net National Product B) GDP Deflator C) Gross Domestic Product D) Disposable Income E) Gross National Product 10) Which of the following statements regarding housing expenditures in the national accounts is correct? A) New residential construction is classified as consumption. B) Owner-occupied housing is counted as investment by imputing the value of the housing services enjoyed by the owner. C) Rental payments for houses are counted as part of consumption. D) The provision of new public housing by the government is classified as private investment. E) The cost of a home purchased from its previous occupant is part of investment. 11) Which one of the following is an example of "government purchases"? A) $600 paid to an unemployed worker for employment insurance B) $1000 paid to a poor person for income support C) $4000 spent for services provided by a private consultant D) $100 000 paid as interest on the national debt E) $2000 paid to a retiree 12) Statistics Canada excludes from GDP the value of goods and services exchanged "under the counter" because A) these goods do not contribute to well-being. B) their production has zero opportunity cost. C) these goods are all intermediate goods. D) satisfactory methods for their measurement have not been developed. E) Statistics Canada is responsible for making an ethical decision about which activities to exclude from national income measures. 13) Suppose aggregate output is demand-determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $12 billion, the marginal propensity to spend must be A) 2/5. B) 1/3. C) 1/2. D) 2/3. E) 4/5. 2
14) When desired consumption exceeds disposable income, desired saving is ; when desired consumption is less than the disposable income, desired saving is. A) negative; positive B) zero; positive C) positive; negative D) negative; negative E) positive; positive 15) The Smith family's disposable income rose from $40 000 per year to $42 000 and their desired consumption expenditure rose from $38 000 to $39 600. It can be concluded that their A) marginal propensity to consume is 0.8. B) marginal propensity to save is 0.8. C) average propensity to consume is 0.8. D) average propensity to save is 0.8. E) marginal propensity to consume is $800. 16) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the saving function is S = -100 + (0.4)Y, the simple multiplier is A) 0.2. B) 1. C) 2.5. D) 5. E) insufficient information to know. 17) The marginal propensity to save refers to the A) additional saving that occurs out of an additional dollar of income. B) change in saving divided by total income. C) total saving divided by a change in income. D) additional saving that occurs over time. E) additional saving that occurs out of an additional dollar of investment. 18) If a family's annual disposable income rose from $60 000 to $65 000 and their desired consumption expenditures rose from $50 000 to $54 000, it can be concluded that the family's A) average propensity to consume is 0.8. B) marginal propensity to consume is 0.8. C) marginal propensity to save is 0.8. D) average propensity to save is 0.8. E) marginal propensity to consume is $800. 19) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + 0.43Y, I = 150, G = 260, T = 0, X = 90, IM = 0.06Y. The marginal propensity to spend on national income, z, is. A) 0.06 B) 0.37 C) 0.43 D) 0.49 E) 0.63 20) A fall in the Canadian-dollar price of foreign currency, other things being equal, causes Canada's net export (NX) function to shift and. A) downward; become flatter B) downward; keep the same slope C) upward; become steeper D) upward; become flatter E) downward; become steeper 3
21) In a simple macro model with a constant price level, a decrease in the net tax rate causes the AE curve to A) shift parallel upward. B) remain stationary. C) shift parallel downward. D) rotate downward. E) rotate upward. 22) Consider the following news headline: "Government follows through on election promise cuts income-tax rate by 5 percentage points." Assuming that aggregate output is demand-determined, what will be the effect of this action, all other things equal, on the AE function and on equilibrium national income? A) the AE function will rotate upward (become steeper) and equilibrium national income will rise. B) the AE function will rotate downward (become flatter) and national income will fall. C) there will be no change in the AE function or in equilibrium national income. D) the AE function will shift up parallel to itself and equilibrium national income will rise. E) the AE function will shift down parallel to itself and equilibrium national income will fall. The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: marginal propensity to consume (mpc) = 0.75 net tax rate (t) = 0.20 no foreign trade fixed price level all expenditure and income figures are in billions of dollars. FIGURE 22-1 23) Refer to Figure 22-1. What is the value of the multiplier in this economy? A) 1.33 B) 2.5 C) 2.0 D) 1.67 E) 6.67 4
24) Consider the following news headline: "Finance minister announces that the federal income-tax rate will rise by three percentage points." Assuming that aggregate output is demand-determined, what will be the effect of this action, all other things equal, on the AE function and equilibrium national income? A) the AE function will rotate upward (become steeper) and equilibrium national income will rise. B) there will be no change in the AE function or in equilibrium national income. C) the AE function will shift up parallel to itself and equilibrium national income will rise. D) the AE function will rotate downward (become flatter) and national income will fall. E) the AE function will shift down parallel to itself and equilibrium national income will fall. 25) A movement along the economy's AS curve could be caused by a change in A) labour productivity. B) the price level, caused in turn by an AD shock. C) the wage rate. D) the cost of capital. E) technology. 26) Consider the nature of macroeconomic equilibrium. If, at a particular price level, the total output demanded is greater than that supplied by producers, then A) the aggregate supply curve will shift to the right, re-establishing an equilibrium. B) the price level will decline toward its equilibrium value. C) the price level will rise toward its equilibrium value. D) the aggregate demand curve will shift to the left, re-establishing an equilibrium. E) none of the above. 27) The economy's AS curve will shift upward in the short run if there is: A) a decrease in the price level. B) an improvement in technology. C) a decrease in the cost of capital. D) a decrease in labour productivity. E) a decrease in the wage rate. 28) When the price level varies, the multiplier is the simple multiplier. A) larger than B) equal to C) not comparable to D) smaller than E) definitionally the same as 5
FIGURE 23-3 29) Consider Figure 23-3. Initially the economy is in equilibrium at point A. An unexpected shock then shifts both the AD and the AS curves as shown and results in a new equilibrium represented by point B. Which of the following events could cause such a shock? A) a decrease in firms' desired investment expenditures B) a decrease in the world price of oil C) a decrease in labour productivity D) an increase in factor prices E) an increase in the net tax rate 30) The economy's aggregate supply (AS) curve shows the relationship between the price level and the total A) investment that firms wish to make, with input prices given. B) wealth accumulated by households, with national income given. C) investment that firms wish to make, as input prices vary. D) output that firms wish to produce and sell, as input prices vary. E) output that firms wish to produce and sell, with input prices given. 31) Which of the following is a defining characteristic of the AD/AS macro model in the long run? A) technology used in production is constant B) factor prices are assumed to be fixed C) factor supplies are assumed to be fixed D) changes in real GDP are determined by the changes in potential output E) the level of potential output is constant 32) Suppose the economy is experiencing an inflationary gap in the short run. The advantage of using a contractionary fiscal policy rather than allowing the economy's natural adjustment process to operate is that A) it will reduce the inflationary pressure on prices that would otherwise occur. B) it will close the output gap. C) it will shorten what might otherwise be a long recession. D) it will reduce the downward pressure on prices that would otherwise occur. E) if private-sector expenditures increase on their own, the policy will stabilize real GDP. 6
33) What is sometimes called the "long-run aggregate supply curve" relates the aggregate price level to real GDP A) when wages are in adjustment but prices are unstable. B) when national income is at less than potential income. C) when technology is allowed to change. D) in the short run. E) after factor prices have fully adjusted to eliminate output gaps. 34) Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts right unexpectedly, the fiscal policy may be, and real GDP may potential GDP. A) appropriate; equal B) too strong; stay below C) too weak; rise above D) too strong; rise above E) too weak; stay below 35) 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 left fairly rapidly. C) AS curve shifts to the right very rapidly. D) AD curve shifts to the left rapidly. E) none of the above -- the AS curve remains unchanged. 36) If wages rise faster than increases in labour productivity, then unit labour costs will A) rise and the AS curve will shift left. B) not change because only total labour costs change. C) fall and the AS curve will shift right. D) fall and the AS curve will shift left. E) rise and the AS curve will shift right. 37) 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 increase in this economy's potential output, and an adjustment back to its original level after factor prices have adjusted. B) an increase in this economy's potential output in the long run. C) an inflationary gap caused by simultaneous rightward shifts of the aggregate demand and aggregate supply curves. D) a rightward shift of the aggregate demand curve due to the increased wealth of the private sector. E) a rightward shift of the aggregate supply curve, and an adjustment back to Y*. 38) In the short run, changes in real GDP are primarily determined by changes in factor-utilization rates which, in turn, are due to changes in A) aggregate supply only. B) aggregate supply because when firms increase prices they are then willing to produce more. C) both aggregate demand and aggregate supply. D) aggregate demand because increases in demand will lead to increases in output. E) aggregate demand only. 7
39) A former Governor of the Bank of Canada argued that interest rates must be increased in order to reduce inflation, and this would ultimately result in lower interest rates. This apparent contradiction can be explained by noting that A) higher interest rates in the short run put downward pressure on inflation which, in turn, lowers demand for borrowed funds, thus decreasing interest rates in the long run. B) the Governor of the Bank of Canada is typically a patronage appointment with little formal training or knowledge of economic theory. C) higher interest rates promote saving which increases the supply of funds for lending and, other things constant, drives the "price" of borrowing down. D) interest rates move in cycles and therefore tend to rise before they fall. E) none of the above. 40) In the long run, increases in potential GDP are possible only if there is A) no government interference with the market system. B) growth in the supply of available factors or growth in factor productivity. C) an increase in the general price level. D) an increase in the unemployment rate. E) continuous growth in the saving rate. 41) Changes in factor-utilization rates are considered important for explaining short-run changes in real GDP because A) the employment ratio of labour and the amount of excess capacity respond quickly to changes in aggregate demand or supply. B) additions to the labour force occur more frequently than changes in the utilization rate. C) changes to the capital stock are almost impossible to make in the short run. D) land and capital can change only in the short run. E) wages increase and decrease rapidly in the short run, dampening the effect of factor utilization. 42) Which of the following may increase real GDP in the short run but may actually decrease the long-run growth rate of GDP? A) decrease in households' desired saving B) increase in the unemployment rate C) increase in factor supplies D) decrease in factor productivity E) increase in factor-utilization rates in the short run 43) An increase in the government budget surplus, everything else constant, will cause a(n) A) equal decrease in private investment. B) increase in national saving. C) equal increase in private consumption. D) decrease in national saving. E) decrease in the growth rate. 44) In the Neoclassical growth model, decreases in the population, other things being equal, would eventually result in A) increasing GDP and increasing living standards. B) decreasing GDP and falling living standards. C) increasing savings and increasing living standards. D) decreasing GDP and increasing living standards. E) increasing GDP and falling living standards. 8
45) Modern growth theories are more optimistic than Neoclassical growth theories because the former emphasize the unlimited potential of. A) more educated government policy making B) modern capital C) economic theory D) knowledge-driven technological change E) modern labour 46) If a country experiences growth in "total factor productivity", then A) none of the growth in real GDP can be accounted for by growth in capital and the labour force. B) all growth in real GDP can be explained by growth in the capital stock. C) all growth in real GDP can be explained by growth in the labour force. D) material standards of living are falling. E) there is some growth in real GDP that cannot be accounted for by growth in capital or the labour force. 47) If real income grows at approximately 4 percent per year, the number of years it will take for real income to double is approximately A) 5. B) 12. C) 18. D) 36. E) 72. 48) The "new" theories of growth emphasize that basic research to price and profit signals. A) is directly related and population growth is inversely related B) is directly related and product development is inversely related C) and product development are both unrelated D) and product development are both directly related E) is unaffected by but product development is directly related 49) In order to be considered "money", paper currency must be A) impossible to counterfeit. B) issued by a government agency. C) convertible into a precious metal. D) generally acceptable as a medium of exchange. E) issued by a chartered bank. 50) A desire by has no effect on the ability of the banking system to expand bank deposits. A) households to maintain a certain fraction of their money holdings in the form of currency B) banks to maximize profits C) potential borrowers to be more cautious in their borrowing D) banks to delay making loans in expectation of higher interest rates E) households to stash money in safety-deposit boxes 51) The major problem of a currency that is fractionally backed and convertible into a precious metal is that of A) clipping, which debases the metal coins. B) counterfeiting. C) paper money being less durable than gold. D) perennial shortages of paper currency. E) maintaining its convertability into the metal. 9
52) Commercial banks in Canada A) have a reserve ratio of 100 percent. B) never have excess reserves. C) have a reserve ratio of zero. D) have a positive reserve ratio. E) are required by the Bank Act to hold required reserves. 53) Commercial banks in Canada are prohibited by law from A) issuing paper currency. B) accepting demand deposits. C) lending money to households and firms. D) accepting term deposits. E) settling inter-bank debts through a clearinghouse. 54) A commercial bank's target reserve ratio is the A) fraction of its deposit liabilities that it actually holds as cash in its own vaults. B) fraction of its deposit liabilities that it wishes to holds as reserves, either as cash or as deposits with the Bank of Canada. C) ratio of chequable deposits to term deposits that the bank holds on its books. D) ratio of Canadian dollars to foreign currencies that the bank holds on its books. E) fraction of its deposit liabilities that are backed by gold. 55) In the AD/AS model with a sustained and constant inflation, A) there is no effective set of monetary policy tools to reduce inflation. B) the AS curve is shifting upward because of inflation expectations. C) there is a tendency for the price of bonds to be increasing rapidly. D) the AD curve is not shifting at all. E) expected inflation tends to be significantly less than actual inflation. 56) Suppose the economy is currently in long-run equilibrium with real GDP equal to potential GDP. A positive demand shock, that is not validated by the Bank of Canada, will eventually result in A) no change in the price level. B) a higher price level and GDP at potential output. C) an ongoing inflation in the economy. D) an ongoing deflation in the economy. E) a lower price level and real GDP below potential output. 57) The sacrifice ratio reflects the cost of as measured by the. A) supply shocks; change in the price level B) validation; change in inflationary expectations C) the Phillips curve; change in the NAIRU D) disinflation; loss in economic activity E) inflationary expectations; change in the rate of inflation 58) Beginning from a position of long-run equilibrium, a contractionary monetary policy by the Bank of Canada causes: A) an increase in potential output. B) aggregate demand for goods and services to exceed potential output. C) a fall in most market interest rates. D) an increase in the general price level. E) potential output to exceed aggregate demand for goods and services. 10
59) Consider an economy that is in the process of a disinflation. If the sacrifice ratio is 3, then A) it costs 3 percent of GDP to reduce inflation by one percentage point. B) unemployment increases by 3 percent for every one percent reduction in inflation. C) the cumulative loss of output in the economy will reach a total of 3 percent. D) the costs of disinflation are 3 times the benefits of disinflation. E) unemployment increases by 3 percent during the period of disinflation 60) If the central bank responds to repeated negative supply shocks with monetary validations, the economy will be faced with A) continuous inflation. B) a one-time decrease in prices. C) alternating periods of inflation and deflation. D) steady reductions in real output. E) a one-time increase in prices. 61) Which statement by an employer is consistent with the New Classical theory of unemployment? A) "Unions have only their current members' interests at heart." B) "I pay more than the going rate so I can hire good workers." C) "Workers can always find jobs, if only they lower their expectations." D) "I love it when inflation goes up because that drives down my wage costs." E) "I pay only enough to attract workers who are at the bottom of the pay scale." 62) Some economists argue that increases in labour-force participation rates by young people and females in the 1970s and 1980s caused A) a decrease in NAIRU. B) a decrease in cyclical unemployment. C) a decrease in frictional unemployment. D) an increase in cyclical unemployment. E) an increase in NAIRU. 63) Suppose the NAIRU in April, 2008 is 7.2 percent. If the actual unemployment rate is 8.1 percent, then A) the NAIRU has increased by 0.9 percentage points. B) there is an inflationary gap. C) 0.9 percentage points are due to cyclical factors. D) the sum of frictional and structural unemployment is greater than the NAIRU. E) cyclical unemployment is 8.1 percent. 64) Which of the following best explains why a certain amount of unemployment may be socially desirable? A) A pool of unemployed workers drives down the average wage in the economy, and keeps workers from becoming greedy. B) Unemployed workers have the time to upgrade their skills and training. C) When some workers become unemployed it provides a chance to others in the labour force to become employed. D) The time spent unemployed by the worker is valuable for finding the most appropriate match with firms. E) A pool of unemployed workers provides an incentive to those employed to remain productive. 11
65) If labour markets had perfectly flexible wages, as the New Classical theories suggest, involuntary unemployment would A) rise when the labour supply curve shifts to the right. B) not exist. C) rise when the labour supply curve shifts to the left. D) rise when the labour demand curve shifts to the left. E) rise when the labour demand curve shifts to the right. 66) If there are more job vacancies in the economy than there are unemployed workers, then it is likely that A) there is no structural unemployment in this economy. B) fiscal policy aimed at increasing aggregate demand would cause the actual unemployment rate to move toward the NAIRU. C) the economy has a high NAIRU. D) the actual unemployment rate is less than the NAIRU. E) there is excessive involuntary unemployment in this economy. 67) The government's annual primary budget deficit is equal to the A) excess of government's program expenditures over tax revenues in a given fiscal year. B) accumulation of government borrowing. C) total amount of government spending on program expenses, personnel, and capital outlays. D) excess of current revenue over current expenditure. E) decrease in the stock of government debt during the course of a year. 68) In general, the government will have flexibility in implementing counter-cyclical fiscal policy when the outstanding stock of government debt is relative to the size of GDP. A) less; insignificant B) less; small C) more; small D) less; large E) more; large 12
The diagram below is for a closed economy which begins in long-run equilibrium at Y*. FIGURE 32-1 69) Refer to Figure 32-1. Suppose the government implements an expansionary fiscal policy, which increases the budget deficit. The economy's adjustment process returns real GDP to Y* in the long run. Since real GDP is not affected in the long run, how are future generations likely to be harmed by this government policy? A) The budget deficit causes an appreciation in the domestic currency which reduces the income of future generations. B) Investment in infrastructure has been crowded out, which will harm future generations. C) Private investment has been crowded out, which may lead to a lower future growth rate of potential GDP. D) The inflationary gap is harmful to the economy and reduces real GDP in the future. E) Future generations are definitely not harmed by this policy. 13
The diagram below shows two budget deficit functions for a hypothetical economy. FIGURE 32-3 70) Consider Figure 32-3. Initially, suppose the economy is at point A. If the level of potential output were 400, the cyclically adjusted budget deficit would be A) negative. B) $4 million. C) $14 million. D) positive. E) both B and D are correct. 14