Test Bank For Macroeconomics for Life Smart Choices for All, 2nd edition Avi J. Cohen Chapter 1-13 by StudyGuide

Test Bank For Macroeconomics for Life Smart Choices for All, 2nd edition Avi J. Cohen Chapter 1-13 Chapter 1 What's in Economics for You? Scarcity, Opportunity Cost, Trade, and Models 1.1 Are You Getting Enough? Scarcity and Choice 1) Economics is about A) making money. B) greed. C) making choices because of scarcity. D) overcoming scarcity. E) overcoming greed. Answer: C Diff: 1 Type: MC Page Ref: 4 Skill: Recall Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 2) Economics is about A) how individuals make the best possible choices. B) how businesses make the best possible choices. C) how governments make the best possible choices. D) how choices interact in markets. E) all of the above. Answer: E Diff: 1 Type: MC Page Ref: 4 Skill: Recall Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 3) Which of the following limits our ability to get everything we want? A) scarcity B) specialization C) socialism D) socialization E) time Answer: E Diff: 1 Type: MC Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants.

4) Which of the following limits our ability to get everything we want? A) capitalism B) scarcity C) socialism D) democracy E) money Answer: E Diff: 1 Type: MC Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 5) Some social activists believe that scarcity occurs because we always want more. This idea is called A) activism. B) paternalism. C) monetarism. D) materialism. E) socialism. Answer: D Diff: 2 Type: MC Page Ref: 4 Skill: Recall Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 6) In a world of scarcity, A) all products are free. B) opportunity cost is zero. C) you are not limited by time. D) you do not need to work. E) you must make choices among alternatives. Answer: E Diff: 1 Type: MC Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 7) The inability to satisfy all of our wants is called the problem of A) opportunity cost. B) scarcity. C) incentives. D) marginal cost. E) comparative advantage. Answer: B Diff: 1 Type: MC Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 2 Copyright © 2021 Pearson Canada Inc.

8) The problem of scarcity exists A) only in economies without incentives. B) only in economies with incentives. C) in all economies. D) only when people are unemployed. E) now but will be eliminated with economic growth. Answer: C Diff: 2 Type: MC Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 9) The textbook title - Economics for Life - comes from a quote by George Bernard Shaw. Answer: TRUE Diff: 2 Type: TF Page Ref: 4 Skill: Recall Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 10) The textbook title - Economics for Life - comes from the quote "Economy is the art of making the most of life." Answer: TRUE Diff: 2 Type: TF Page Ref: 4 Skill: Recall Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 11) Scarcity is not a problem for a wealthy professional athlete like Tiger Woods. Answer: FALSE Diff: 1 Type: TF Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 12) Scarcity arises because we all have limited money, time, and energy. Answer: TRUE Diff: 1 Type: TF Page Ref: 4 Skill: Recall Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 13) The National Ballet of Canada does not face a problem of scarcity. Answer: FALSE Diff: 1 Type: TF Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 3 Copyright © 2021 Pearson Canada Inc.

14) There are some people and organizations who do not face the problem of scarcity. Answer: FALSE Diff: 1 Type: TF Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 15) If you could be immortal and infinitely rich, you would not face the problem of scarcity. Answer: TRUE Diff: 2 Type: TF Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 16) Economics is about overcoming scarcity. Answer: FALSE Diff: 1 Type: TF Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 17) Economics is about overcoming greed. Answer: FALSE Diff: 1 Type: TF Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 18) A government that has a budget surplus does not face the problem of scarcity. Answer: FALSE Diff: 1 Type: TF Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 19) The main implication of scarcity in economics is that people must be selfish. Answer: FALSE Diff: 1 Type: TF Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 20) The main implication of scarcity in economics is that people must make choices. Answer: TRUE Diff: 1 Type: TF Page Ref: 4 Skill: Applied 4 Copyright © 2021 Pearson Canada Inc.

Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 21) The main implication of scarcity in economics is that people must be unhappy. Answer: FALSE Diff: 1 Type: TF Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 22) Scarcity is a problem only for materialistic people. Answer: FALSE Diff: 1 Type: TF Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 23) Markets overcome the problem of scarcity. Answer: FALSE Diff: 1 Type: TF Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 24) Voluntary trade solves the problem of scarcity. Answer: FALSE Diff: 1 Type: TF Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 25) If we all wanted less, instead of always wanting more, this would solve the problem of scarcity. Answer: FALSE Diff: 1 Type: TF Page Ref: 4 Skill: Applied Objective: 1.1 Explain scarcity and describe why you must make smart choices among your wants. 1.2 Give It Up for Opportunity Cost! Opportunity Cost 1) Opportunity cost measures the cost of A) the top two alternatives. B) the worst case scenario. C) the best alternative given up. D) all alternatives given up. E) the top ten alternatives. 5 Copyright © 2021 Pearson Canada Inc.

Answer: C Diff: 1 Type: MC Page Ref: 5-6 Skill: Recall Objective: 1.2 Define and describe opportunity cost. 2) The value of the fork in the road not taken is called A) marginal cost. B) opportunity cost. C) monetary cost. D) fiduciary cost. E) cutlery cost. Answer: B Diff: 2 Type: MC Page Ref: 5-6 Skill: Recall Objective: 1.2 Define and describe opportunity cost. 3) John gave Margaret a $20,000 painting for her birthday. Last week, an art dealer offered to buy the painting from Margaret for $25,000. Margaret said no. The opportunity cost of her decision is A) $5,000. B) $45,000. C) $0. D) $20,000. E) $25,000. Answer: E Diff: 3 Type: MC Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 4) Gina missed her shift at the restaurant in order to attend a soccer game. She paid $30 for the ticket, $20 for parking, and ate $10 worth of popcorn. Had she worked her shift, Gina would have earned $100. Her opportunity cost of attending the game is A) $60. B) $150. C) $160. D) $0. E) $100. Answer: C Diff: 3 Type: MC Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 5) Gina missed her shift at the restaurant in order to attend a soccer game. She paid $30 for the ticket, $20 for parking, and ate $10 worth of popcorn. Had she worked her shift, Gina would have earned $100. Her money cost of attending the game is A) $60. B) $150. C) $160. 6 Copyright © 2021 Pearson Canada Inc.

D) $0. E) $100. Answer: A Diff: 2 Type: MC Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 6) Andrew decides to open a laboratory in his basement. He quits his job, sacrificing $30,000 a year; cashes in $200,000 of Canada Savings Bonds that were paying him an interest rate of 5 percent per year; and evicts a tenant who was paying $10,000 a year in rent to live in the basement. The opportunity cost of Andrew's decision is A) $40,000. B) $50,000. C) $0. D) $30,000. E) $240,000. Answer: B Diff: 3 Type: MC Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 7) Last week Santiago found a new pair of red Nike Air Soles in the parking lot. He had just paid $120 to buy a pair of blue Nike Air Soles a few days earlier. A friend offers $80 to buy the pair of red Air Soles. Santiago says no and decides to keep both pairs for himself. The opportunity cost of this decision is A) $80. B) $120. C) $40. D) $0. E) $200. Answer: A Diff: 3 Type: MC Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 8) Charu can earn $200 an hour playing online poker. If she spends an hour in the backyard, she can rake up 2 bags of leaves. Her opportunity cost of playing online poker is measured in units of A) bags per rake. B) rakes per dollar. C) dollars per bag. D) hours per hour. E) bags per hour. Answer: E Diff: 3 Type: MC Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost.

9) Mario divides his time between fishing and farming. In one day he can catch 20 kilograms of fish or harvest 10 bushels of potatoes. Mario's opportunity cost of farming is A) 1/2 bushel potatoes per kilogram of fish. B) 1/2 kilogram fish per bushel of potatoes. C) 2 bushels potatoes per kilogram of fish. D) 2 potatoes per fish. E) 2 kilograms fish per bushel of potatoes. Answer: E Diff: 3 Type: MC Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 10) Lydia is deciding whether to study for her economics test or her accounting test. If she chooses to study accounting, her opportunity cost is A) studying economics. B) less than the value of studying economics. C) not comparable to the value of studying economics. D) equal to the value of studying economics. E) the lost future wages if she fails her accounting test. Answer: A Diff: 2 Type: MC Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 11) When the government of Manitoba chooses to build more roads, the required inputs are no longer available to build better health care facilities. This illustrates the concept of A) marginal benefit. B) monetary cost. C) opportunity cost. D) incentives. E) entrepreneurship. Answer: C Diff: 2 Type: MC Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 12) When the government of New Brunswick chooses to use inputs to build a dam, those inputs are no longer available to build a highway. This illustrates the concept of A) a market. B) macroeconomics. C) opportunity cost. D) incentives. E) gains from trade. Answer: C Diff: 2 Type: MC Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 8 Copyright © 2021 Pearson Canada Inc.

13) Which of the following sayings best describes opportunity cost? A) "Make hay while the sun shines." B) "Love of money is the root of all evil." C) "Boldly go where no one has gone before." D) "There's no such thing as a free lunch." E) "Baseball has been very good to me." Answer: D Diff: 1 Type: MC Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 14) Because of scarcity, we must give up some of one product in order to get more of another. This is the concept of A) specialization. B) implicit cost. C) comparative advantage. D) opportunity cost. E) absolute advantage Answer: D Diff: 2 Type: MC Page Ref: 5-6 Skill: Recall Objective: 1.2 Define and describe opportunity cost. 15) The opportunity cost of attending college A) depends on your major. B) depends on what you could earn now. C) depends on what you expect to earn with your college degree. D) must be greater than the money cost. E) must be less than the money cost. Answer: B Diff: 2 Type: MC Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 16) Which statement(s) is/are true? 1 If unemployment increases, the opportunity cost of attending college decreases. 2 If men generally earn more than women, the opportunity cost of attending college is higher for men than for women. A) 1 only B) 2 only C) 1 and 2 D) neither 1 nor 2 E) impossible to tell without more information 9 Copyright © 2021 Pearson Canada Inc.

Answer: C Diff: 3 Type: MC Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 17) Which statement(s) is/are true? 1 If unemployment decreases, the opportunity cost of attending college decreases. 2 If men generally earn more than women, the opportunity cost of attending college is higher for men than for women. A) 1 only B) 2 only C) 1 and 2 D) neither 1 nor 2 E) impossible to tell without more information Answer: B Diff: 3 Type: MC Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 18) Which statement(s) is/are true? 1 If unemployment increases, the opportunity cost of attending college decreases. 2 If men generally earn more than women, the opportunity cost of not attending college is higher for men than for women. A) 1 only B) 2 only C) 1 and 2 D) neither 1 nor 2 E) impossible to tell without more information Answer: A Diff: 3 Type: MC Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 19) Which statement(s) is/are true? 1 If unemployment decreases, the opportunity cost of attending college decreases. 2 If men generally earn more than women, the opportunity cost of not attending college is higher for men than for women. A) 1 only B) 2 only 10 Copyright © 2021 Pearson Canada Inc.

C) 1 and 2 D) neither 1 nor 2 E) impossible to tell without more information Answer: D Diff: 3 Type: MC Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 20) Scarcity means every choices involves a trade-off. Answer: TRUE Diff: 1 Type: TF Page Ref: 5-6 Skill: Recall Objective: 1.2 Define and describe opportunity cost. 21) To make a smart choice, the value of what you get must be greater than the value of what you give up. Answer: TRUE Diff: 2 Type: TF Page Ref: 5-6 Skill: Recall Objective: 1.2 Define and describe opportunity cost. 22) The true cost of any choice is the cost of the best alternative given up. Answer: TRUE Diff: 1 Type: TF Page Ref: 5-6 Skill: Recall Objective: 1.2 Define and describe opportunity cost. 23) The true cost of any choice is the cost of all alternatives given up. Answer: FALSE Diff: 1 Type: TF Page Ref: 5-6 Skill: Recall Objective: 1.2 Define and describe opportunity cost. 24) The true cost of any choice is the money cost. Answer: FALSE Diff: 1 Type: TF Page Ref: 5-6 Skill: Recall Objective: 1.2 Define and describe opportunity cost. 25) There is no such thing as a free lunch. Answer: TRUE Diff: 1 Type: TF Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 26) Opportunity cost includes money cost. Answer: TRUE Diff: 2 Type: TF Page Ref: 5-6 11 Copyright © 2021 Pearson Canada Inc.

Skill: Recall Objective: 1.2 Define and describe opportunity cost. 27) Opportunity cost is always greater than money cost. Answer: FALSE Diff: 1 Type: TF Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 28) Opportunity cost is always less than money cost. Answer: FALSE Diff: 1 Type: TF Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 29) Money cost includes opportunity cost. Answer: FALSE Diff: 1 Type: TF Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 30) Germaine plans to attend college next year. Tuition costs $3,000, books cost $600, and residence fees cost $4,000. She currently earns $24,000 a year working at Chapters but would have to quit work. Germaine's opportunity cost of attending college is $7,600. Answer: FALSE Diff: 3 Type: TF Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 31) Germaine plans to attend college next year. Tuition costs $3,000, books cost $600, and residence fees cost $4,000. She currently earns $24,000 a year working at Chapters but would have to quit work. Germaine's opportunity cost of attending college is $24,000. Answer: FALSE Diff: 3 Type: TF Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 32) Germaine plans to attend college next year. Tuition costs $3,000, books cost $600, and residence fees cost $4,000. She currently earns $24,000 a year working at Chapters but would have to quit work. Germaine's opportunity cost of attending college is $31,600. Answer: TRUE Diff: 3 Type: TF Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 33) Incentives work because these rewards and penalties change the costs and benefits of the choices you make. Answer: TRUE 12 Copyright © 2021 Pearson Canada Inc.

Diff: 2 Type: TF Page Ref: 5-6 Skill: Recall Objective: 1.2 Define and describe opportunity cost. 34) Smart choices will not change when incentives change. Answer: FALSE Diff: 2 Type: TF Page Ref: 5-6 Skill: Recall Objective: 1.2 Define and describe opportunity cost. 35) You should include the risk of getting a parking ticket in opportunity cost when making a smart choice between parking illegally and buying a parking permit. Answer: TRUE Diff: 2 Type: TF Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 36) When you have no alternatives, the opportunity cost is zero. Answer: TRUE Diff: 2 Type: TF Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 37) Women who do not go to college or university give up a bigger income gain than men who do not go. Answer: TRUE Diff: 2 Type: TF Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 38) The opportunity cost of going to college or university is the same for men and women. Answer: FALSE Diff: 2 Type: TF Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost. 39) To encourage a child to do his chores, you should either increase the reward for doing, or increase the penalty for not doing the chores. Answer: TRUE Diff: 2 Type: TF Page Ref: 5-6 Skill: Applied Objective: 1.2 Define and describe opportunity cost.

1.3 Why Don't You Cook Breakfast? Gains From Trade 1) Mutually beneficial trade occurs if both persons A) increase production of the product for which they have a comparative advantage. B) decrease production of the product for which they have a lower opportunity cost. C) increase production of the product for which they have a higher opportunity cost. D) increase production of the product for which they have an absolute advantage. E) increase consumption of the product for which they have a higher opportunity cost. Answer: A Diff: 2 Type: MC Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 2) Mutually beneficial trade is also called A) a zero-sum game. B) self-sufficiency. C) international subsidization. D) voluntary trade. E) involuntary trade. Answer: D Diff: 2 Type: MC Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 3) Mutual gains from voluntary trade require differences in A) depreciation costs. B) comparative advantage. C) external costs. D) implicit costs. E) absolute advantage. Answer: B Diff: 2 Type: MC Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off.

4) Mutual gains from voluntary trade require differences in A) internal costs. B) implicit costs. C) opportunity costs. D) import tariffs. E) external costs. Answer: C Diff: 2 Type: MC Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 5) In a zero-sum game A) both players can lose. B) the number of players is zero. C) both players can win. D) one player gains only when another player loses. E) both players get zero gains. Answer: D Diff: 2 Type: MC Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 6) Specialization eliminates A) scarcity. B) dependency. C) self-sufficiency. D) mutual benefits. E) opportunity cost. Answer: C Diff: 1 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 7) It takes Mom 30 minutes to cook dinner. In the same time, she can iron 6 shirts. Dad takes an hour to cook dinner and 30 minutes to iron a single shirt. A) Dad has an absolute advantage in ironing shirts. B) Mom's opportunity cost of cooking dinner is ironing 6 shirts. C) Mom has a comparative advantage in cooking dinner. D) Dad's opportunity cost of cooking dinner is ironing half a shirt. E) Dad's opportunity cost of cooking dinner is 6 shirts. Answer: B Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 15 Copyright © 2021 Pearson Canada Inc.

8) It takes Mom 30 minutes to cook dinner. In the same time, she can iron 6 shirts. Dad takes an hour to cook dinner and 30 minutes to iron a single shirt. A) Dad has an absolute advantage in cooking. B) Mom should cook dinner and iron; trade is impossible. C) Dad has an absolute advantage in ironing shirts. D) Dad should cook dinner; the opportunity cost is only 2 shirts. E) Dad should cook dinner; the opportunity cost is only 1 shirt. Answer: D Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 9) It takes Mom 30 minutes to cook dinner. In the same time, she can iron 6 shirts. Dad takes an hour to cook dinner and 30 minutes to iron a single shirt. A) Mom should cook dinner; even though the opportunity cost is 12 shirts. B) there are no gains from trade. C) Dad has an absolute advantage in cooking dinner. D) Dad has an absolute advantage in ironing shirts. E) Mom shouldn't cook dinner; her opportunity cost is 6 shirts. Answer: E Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 10) In one hour, Chloe can bake 24 cookies or 12 blueberry muffins; Zabeen can bake 6 cookies or 2 blueberry muffins. Which statement is true? A) Zabeen's opportunity cost of a cookie is 2 muffins. B) Zabeen's opportunity cost of a cookie is 6 muffins. C) Chloe's opportunity cost of a muffin is 12 cookies. D) Chloe's opportunity cost of a muffin is 2 cookies. E) Zabeen's opportunity cost of a cookie is 4 muffins. Answer: D Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 11) In one hour, Chloe can bake 24 cookies or 12 blueberry muffins; Zabeen can bake 6 cookies or 2 blueberry muffins. For mutually beneficial trade, Chloe should A) bake muffins because she has a comparative advantage. B) give up. Mutually beneficial trade is impossible in this situation. C) bake cookies because she has an absolute advantage. D) bake cookies because she has a comparative advantage. E) bake muffins because she has an absolute advantage. Answer: A 16 Copyright © 2021 Pearson Canada Inc.

Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 12) If Canada specializes in the production of wine we can produce 10,000 bottles per month. If Canada specializes in the production of wheat we can produce 200,000 bushels per month. The opportunity cost of a bottle of wine in Canada is A) 120,000 bottles of wine. B) 20 bushels of wheat. C) 200 bushels of wheat. D) 2,500 bottles of wine. E) 1/20 of a bushel of wheat. Answer: B Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 13) In two hours of work, Clinton can catch 4 fish or he can pick 5 pints of berries. In two hours, Dong can catch 6 fish or she can pick 9 pints of berries. Which statement is true? A) Clinton has a comparative advantage in catching fish. B) Clinton has an absolute advantage in picking berries. C) Clinton has an absolute advantage in catching fish. D) Clinton has a comparative advantage in picking berries. E) Clinton will lose if he trades. Answer: A Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 14) In two hours of work, Clinton can catch 4 fish or he can pick 5 pints of berries. In two hours, Dong can catch 6 fish or she can pick 9 pints of berries. Which statement is true? A) Clinton and Dong will trade and both persons will benefit. B) Clinton and Dong will trade but only Dong will benefit. C) Clinton and Dong will not trade. D) Clinton and Dong will trade but only Clinton will benefit. E) Clinton and Dong will both lose if they trade. Answer: A Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 15) Canada has an absolute advantage in situations where A) we can produce the product on weekends. 17 Copyright © 2021 Pearson Canada Inc.

B) we consume less of this product than do people in other countries. C) we consume more of this product than do people in other countries. D) our opportunity cost of production is very high. E) we can produce at lower cost than producers in other countries. Answer: E Diff: 2 Type: MC Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 16) Tova and Ron are the only two people on the planet Melmac. It takes Tova 1 hour to produce a widget and 2 hours to produce a woggle. It takes Ron 3 hours to produce a widget and 3 hours to produce a woggle. Based on the information above, Tova and Ron A) can both gain from trade if Tova specializes in producing widgets and Ron specializes in producing woggles. B) can both gain from trade if Tova specializes in producing woggles and Ron specializes in producing widgets. C) cannot both gain from trade because Tova has an absolute advantage in producing widgets and woggles. D) can trade, but only Tova will gain. E) can trade, but only Ron will gain. Answer: A Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. Figure 1.3.2 Monthly Production Possibilities for a Country Producing Only Hockey Sticks and Maple Leaves

Possibility

Hockey Sticks

Maple Leaves

A) 2 hockey sticks. B) 3 hockey sticks. C) 6 hockey sticks. D) 1/6 hockey stick. E) 1/3 hockey stick. Answer: E Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 18) According to Figure 1.3.2, A) the opportunity cost of producing hockey sticks stays the same as more hockey sticks are produced. B) a combination of 3 hockey sticks and 9 maples leaves is possible. C) a combination of 3 hockey sticks and 2 maple leaves is possible. D) the opportunity cost of producing hockey sticks increases as more hockey sticks are produced. E) the opportunity cost of producing hockey sticks decreases as more hockey sticks are produced. Answer: A Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 19) In Figure 1.3.2, moving from possibility c to possibility b, the opportunity cost of producing one additional hockey stick is A) 2 maple leaves. B) 3 maple leaves. C) 6 maple leaves. D) 1/6 maple leaves. E) 1/3 maple leaves. Answer: B Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 20) According to Figure 1.3.2, A) the best possibility is 2 hockey sticks and 3 maple leaves. B) a combination of 3 hockey sticks and 9 maples leaves is not possible. C) a combination of 3 hockey sticks and 2 maple leaves is possible. D) the opportunity cost of producing hockey sticks increases as more hockey sticks are produced. E) the opportunity cost of producing hockey sticks decreases as more hockey sticks are produced. 19 Copyright © 2021 Pearson Canada Inc.

Answer: B Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 21) In Portugal, the opportunity cost of a bale of wool is 3 bottles of wine. In England, the opportunity cost of 1 bottle of wine is 3 bales of wool. Based on this information, A) England has an absolute advantage in producing wine. B) England has an absolute advantage in producing wool. C) no trade will occur. D) Portugal has a comparative advantage in producing wool. E) Portugal has a comparative advantage in producing wine. Answer: E Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 22) Figure 1.3.3 Monthly Production Possibilities for a Country Producing Only Butter and Guns

Possibility

Butter

Guns

23) In an eight-hour day, Andy can produce either 24 loaves of bread or 8 kilograms of butter. In an eight-hour day, Rolfe can produce either 24 loaves of bread or 24 kilograms of butter. Based on the information above, which statement is true? A) Andy has an absolute advantage in producing butter. B) Rolfe has an absolute advantage in producing bread. C) Andy has an absolute advantage is producing bread. D) Andy has a comparative advantage in producing bread. E) Rolfe has a comparative advantage in producing bread. Answer: D Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 24) In an eight-hour day, Andy can produce either 24 loaves of bread or 8 kilograms of butter. In an eight-hour day, Rolfe can produce either 8 loaves of bread or 8 kilograms of butter. Based on the information above, the opportunity cost of producing 1 loaf of bread is A) 1 hour for Andy and 20 minutes (1/3 hour) for Rolfe. B) 1/3 kilogram of butter for Andy and 1 kilogram of butter for Rolfe. C) 3 kilograms of butter for Andy and 1 kilogram of butter for Rolfe. D) 8 kilograms of butter for both Andy and Rolfe. E) not calculable from the given information. Answer: B Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 25) Mexico and Canada produce both oil and apples using labour only. A barrel of oil can be produced with 8 hours of labour in Mexico and 4 hours of labour in Canada. A bushel of apples can be produced with 12 hours of labour in Mexico and 8 hours of labour in Canada. Mexico has A) an absolute advantage in producing oil. B) an absolute advantage in producing apples. C) a comparative advantage in producing oil. D) a comparative advantage in producing apples. E) none of the above. Answer: D Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off.

26) Canada and Chile produce both oil and apples using labour only. A barrel of oil can be produced with 4 hours of labour in Canada and 8 hours of labour in Chile. A bushel of apples can be produced with 8 hours of labour in Canada and 12 hours of labour in Chile. Chile has A) an absolute advantage in producing oil. B) an absolute advantage in producing apples. C) a comparative advantage in producing oil. D) a comparative advantage in producing apples. E) none of the above. Answer: D Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 27) Tova and Ron are the only two people on the planet Melmac. It takes Tova 3 hours to produce a widget and 3 hours to produce a woggle. It takes Ron 1 hour to produce a widget and 2 hours to produce a woggle. Based on the information above, Tova and Ron A) can both gain from trade if Tova specializes in producing widgets and Ron specializes in producing woggles. B) can both gain from trade if Tova specializes in producing woggles and Ron specializes in producing widgets. C) cannot both gain from trade because Tova has an absolute advantage in producing widgets and woggles. D) can trade, but only Tova will gain. E) can trade, but only Ron will gain. Answer: B Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off.

28) Figure 1.3.7 Monthly Production Possibilities for a Country Producing Only Butter and Guns

Possibility

Butter

Guns

According to the production possibilities in Figure 1.3.7, A) a combination of 1 butter and 6 gun is possible. B) a combination of 0 butter and 4 guns is possible. C) the opportunity cost of producing guns increases as more guns are produced. D) the opportunity cost of producing guns decreases as more guns are produced. E) the opportunity cost of producing guns stays the same as more guns are produced. Answer: C Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 29) To gain from comparative advantage, countries must trade, and must A) save. B) invest. C) do research and development. D) add add capital equipment. E) specialize. Answer: E Diff: 1 Type: MC Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off.

30)

Figure 1.3.8

The graph in Figure 1.3.8 shows Adam's PPF for food and cloth. The shape of the PPF tells us that Adam has ________ opportunity cost of food and ________ opportunity of cloth. A) increasing; decreasing B) constant; constant C) decreasing; increasing D) increasing; increasing E) decreasing; decreasing Answer: B Diff: 2 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off.

31) On a graph of a production possibilities frontier (PPF), opportunity cost is measured by A) the points inside the PPF. B) the points outside the PPF. C) where the PPF touches the vertical axis. D) the slope of the PPF. E) where the PPF touches the horizontal axis. Answer: D Diff: 1 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 32) On a graph of a production possibilities frontier (PPF), possible combinations of outputs are represented by A) points inside the PPF. B) points outside the PPF. C) points only on the PPF. D) the slope of the PPF. E) all of the above. Answer: A Diff: 1 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 33) On a graph of a production possibilities frontier (PPF), impossible combinations of outputs are represented by A) points inside the PPF. B) points outside the PPF. C) points on the PPF. D) the slope of the PPF. E) none of the above. Answer: B Diff: 1 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off.

34) On a graph of a production possibilities frontier (PPF), maximum combinations of outputs are represented by A) points inside the PPF. B) points outside the PPF. C) points on the PPF. D) the slope of the PPF. E) none of the above. Answer: C Diff: 1 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 35) If Ying must decrease production of some other product to increase his production of houses, then Ying A) is producing on his production possibilities frontier. B) is producing outside his production possibilities frontier. C) is producing inside his production possibilities frontier. D) must prefer houses to any other product. E) has too little capital equipment. Answer: A Diff: 2 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 36) If Ying can increase production of houses without decreasing production of any other product, then Ying A) is producing on his production possibilities frontier. B) is producing outside his production possibilities frontier. C) is producing inside his production possibilities frontier. D) must have constant opportunity costs. E) must prefer houses to any other product. Answer: C Diff: 2 Type: MC Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 37) Specializing and trading makes us all better off. Answer: TRUE Diff: 2 Type: TF Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off.

38) Specializing and trading makes us dependent on others. Answer: TRUE Diff: 2 Type: TF Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 39) Specializing and trading makes each of us less able to support ourselves compared to Canadian pioneers. Answer: TRUE Diff: 2 Type: TF Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 40) Opportunity cost is the key to achieving the mutual benefits from trade. Answer: TRUE Diff: 1 Type: TF Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 41) Opportunity cost can be calculated as Get divided by Give Up. Answer: FALSE Diff: 1 Type: TF Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 42) Absolute advantage is the ability to produce a product or service at a lower opportunity cost than another producer. Answer: FALSE Diff: 3 Type: TF Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 43) Differences in comparative advantage are the key to mutually beneficial gains from trade. Answer: TRUE Diff: 2 Type: TF Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off.

44) Specialization and voluntary trade eliminate the problem of scarcity. Answer: FALSE Diff: 1 Type: TF Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 45) Voluntary trade is a smart choice because the value of what you give up is less than the value of what you get. Answer: TRUE Diff: 1 Type: TF Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 46) It takes Amber 5 minutes to iron a shirt and 20 minutes to wash her car. Gina can wash her car in 15 minutes but it takes her 10 minutes to iron a shirt. There is a mutually beneficial trade if Amber specializes in ironing shirts and Gina specializes in washing cars. Answer: TRUE Diff: 3 Type: TF Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 47) Absolute advantage is the key to mutually beneficial gains from trade. Answer: FALSE Diff: 1 Type: TF Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 48) Differences in opportunity costs are the key to mutually beneficial gains from trade. Answer: TRUE Diff: 1 Type: TF Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 49) Voluntary trade is a smart decision because we can specialize and produce what we are good at producing, rather than work at producing only what we wish to consume. Answer: TRUE Diff: 2 Type: TF Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off.

50) Voluntary trade is a zero-sum game. Answer: FALSE Diff: 1 Type: TF Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 51) In a zero-sum game, one person's gain equals another person's loss. Answer: TRUE Diff: 1 Type: TF Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 52) In a zero-sum game, there is a loser for every winner. Answer: TRUE Diff: 1 Type: TF Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 53) Trade is only mutually beneficial if the traders have different comparative advantages. Answer: TRUE Diff: 2 Type: TF Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 54) If China has an absolute advantage in producing everything at lower cost then Canada, mutually benefical trade is impossible. Answer: FALSE Diff: 2 Type: TF Page Ref: 7-12 Skill: Recall Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 55) In one hour, Francis can read 10 pages of an economics textbook or read 20 pages of an accounting textbook. Francis' opportunity cost of reading a page of accounting is 2 pages of economics. Answer: FALSE Diff: 2 Type: TF Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off.

56) In one hour, Francis can read 10 pages of an economics textbook or read 20 pages of an accounting textbook. Francis' opportunity cost of reading a page of economics is 2 pages of accounting. Answer: TRUE Diff: 2 Type: TF Page Ref: 7-12 Skill: Applied Objective: 1.3 Describe how comparative advantage, specialization, and trade make us all better off. 1.4 Economists As Mapmakers and Scientists: Thinking Like An Economist 1) All of the following are inputs except A) natural resources. B) capital equipment. C) entrepreneurial ability. D) government. E) labour. Answer: D Diff: 2 Type: MC Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 2) Who wrote the 1890 book, Principles of Economics? A) Adam Smith B) Alfred Pennyworth C) Alfred Marshall D) Adam West E) Alfred E. Newman Answer: C Diff: 1 Type: MC Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 3) Who wrote The Wealth of Nations? A) Alfred Marshall B) Alfred Pennyworth C) Alfred E. Newman D) Adam West E) Adam Smith Answer: E Diff: 1 Type: MC Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 30 Copyright © 2021 Pearson Canada Inc.

4) The three sets of players in the circular flow of economic life include A) wheat. B) machines. C) buildings. D) houses. E) governments. Answer: E Diff: 2 Type: MC Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 5) Inputs in the circular flow of economic life include A) businesses. B) people. C) households. D) churches. E) governments. Answer: B Diff: 2 Type: MC Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 6) In the circular flow of economic life, the role that only governments can play is to A) boldly go where no one has gone before. B) hire entrepreneurial abilities from corporations. C) own the assets of all large corporations. D) sell businesses' labour services. E) set the rules of the game. Answer: E Diff: 2 Type: MC Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 7) Activities in input markets include A) households paying businesses money for labour services. B) businesses paying households money for labour services. C) households paying businesses money for services. D) households paying businesses money for food. E) households paying businesses money for products. Answer: B Diff: 2 Type: MC Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 31 Copyright © 2021 Pearson Canada Inc.

8) Positive statements are A) evaluated by checking the facts. B) inefficient. C) rarely used in economics. D) unfair. E) value judgements. Answer: A Diff: 2 Type: MC Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 9) Normative statements A) can be rejected simply by checking the facts. B) are unfair. C) are never used in economics. D) can be evaluated as true simply by checking the facts. E) involve value judgements. Answer: E Diff: 2 Type: MC Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 10) A positive statement is about A) what ought to be. B) value judgements. C) what is. D) what should never be. E) what the future should be. Answer: C Diff: 2 Type: MC Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier.

11) A normative statement is about A) what might happen in the future. B) what has happened in the past. C) what ought to be. D) the assumptions of economists. E) the predictions of economists. Answer: C Diff: 2 Type: MC Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 12) Which statement is normative? A) Drinking 14 beers in one hour will probably make you ill. B) Young drivers cause more accidents than older drivers. C) Women live longer than men. D) You should call your mother at least once a week. E) Men live longer than women. Answer: D Diff: 1 Type: MC Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 13) Which statement is normative? A) People who have high grades in economics have more friends. B) People who have high grades in calculus have no friends. C) Sound travels faster than light. D) Everyone is entitled to his or her own opinion. E) A 2-litre carton of milk can survive being dropped from a 20-story building. Answer: D Diff: 2 Type: MC Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 14) A good economic model A) leaves out unnecessary information. B) is difficult to test. C) assumes that "other things are unchanged." D) is the mental equivalent of controlled experiments in a laboratory. E) does all of the above. Answer: E Diff: 1 Type: MC Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 33 Copyright © 2021 Pearson Canada Inc.

15) A good economic model A) includes as much information as possible. B) helps you understand or predict the economic world around you. C) changes many factors at the same time. D) is easier to test than experiments in a laboratory. E) does all of the above. Answer: B Diff: 1 Type: MC Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 16) Individuals in households ultimately own all of the inputs of an economy. Answer: TRUE Diff: 2 Type: TF Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 17) Businesses are sellers and households are buyers in input markets. Answer: FALSE Diff: 2 Type: TF Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 18) Businesses are buyers and households are sellers in input markets. Answer: TRUE Diff: 2 Type: TF Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 19) Businesses are sellers and households are buyers in output markets. Answer: TRUE Diff: 2 Type: TF Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 20) Businesses are buyers and households are sellers in output markets. Answer: FALSE Diff: 2 Type: TF Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 34 Copyright © 2021 Pearson Canada Inc.

21) An investor purchases 1,000 shares of stock in General Motors. This interaction takes place in input markets. Answer: TRUE Diff: 1 Type: TF Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 22) Businesses are sellers in input markets. Answer: FALSE Diff: 2 Type: TF Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 23) Businesses are buyers in input markets. Answer: TRUE Diff: 2 Type: TF Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 24) Households are buyers in input markets. Answer: FALSE Diff: 2 Type: TF Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 25) When you get hired as a cashier at Canadian Tire, that interaction happens in an input market. Answer: TRUE Diff: 1 Type: TF Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 26) Households are buyers in output markets. Answer: TRUE Diff: 2 Type: TF Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier.

27) Businesses are buyers in output markets. Answer: FALSE Diff: 2 Type: TF Page Ref: 1-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 28) Businesses are sellers in output markets. Answer: TRUE Diff: 2 Type: TF Page Ref: 13-17 Skill: Recall Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 29) When the government hires contractors to repair potholes, that is an example of setting the rules of the game. Answer: FALSE Diff: 1 Type: TF Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 30) Positive statements can be evaluated as true or false simply by checking the facts. Answer: TRUE Diff: 1 Type: TF Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 31) Normative statements can be evaluated as true or false simply by checking the facts. Answer: FALSE Diff: 1 Type: TF Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 32) Normative statements involve value judgments. Answer: TRUE Diff: 1 Type: TF Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier.

33) "Men live longer than women" is a positive statement. Answer: TRUE Diff: 1 Type: TF Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 34) "Who was the greatest rock star?" is a positive question. Answer: FALSE Diff: 1 Type: TF Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 35) "Who was the greatest rock star?" is a normative question. Answer: TRUE Diff: 1 Type: TF Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 36) The suggestion that "cats have nine lives" is a normative statement. Answer: FALSE Diff: 1 Type: TF Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 37) Student leaders who argue that "tuition should be free" are making a positive statement. Answer: FALSE Diff: 1 Type: TF Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier. 38) Student leaders who argue that "75 percent of students live below the poverty line" are making a positive statement. Answer: TRUE Diff: 1 Type: TF Page Ref: 13-17 Skill: Applied Objective: 1.4 Explain how models like the circular flow of economic life make smart choices easier.

1.5 Where and How to Look: Models for Microeconomics and Macroeconomics 1) Opportunity cost does not include A) external consequences from making a choice. B) legal costs from making a choice. C) monetary costs from making a choice. D) income that you sacrifice from making a choice. E) benefits that you get from making a choice. Answer: E Diff: 1 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 2) Which is a macroeconomic decision? A) How you divide your spending between food and clothing. B) You decide to buy a hybrid car in order to protect the environment. C) The Bank of Canada decides to raise interest rates. D) Whether or not you adopt a pet. E) How many hours a week you will work at a wage of $20 an hour. Answer: C Diff: 2 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 3) Which is a macroeconomic decision? A) The Government of Canada reduces the HST. B) You switch your cellular plan from Fido to Bell. C) You switch your cellular plan from Rogers to Fido. D) You add international calling to your cellular plan. E) You add Canada-wide calling to your cellular plan. Answer: A Diff: 2 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices.

4) Which is a microeconomic decision? A) A reduction in the HST intended to stimulate consumer spending. B) A decision by the Bank of Canada to allow the Canadian dollar to depreciate in response to world trade patterns. C) The Government of Canada lends Peru 7 billion dollars. D) A decision by the Conservative Party to reduce the role of government in the economy. E) A 10% tariff on imported wines to protect the Canadian wine-making industry. Answer: E Diff: 2 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 5) Which is a microeconomic topic? A) why a consumer buys more chai lattes B) why the average price level in Canada falls C) the cause of increasing unemployment D) the effect of a government budget deficit on inflation E) why the labour force in Canada decreases Answer: A Diff: 1 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 6) The study of how wages are set for New Brunswick call centre workers is a A) macroeconomic topic. B) microeconomic topic. C) positive externality. D) negative externality. E) bore. Answer: B Diff: 1 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices.

7) Which headline is about macroeconomics? A) Consumers switching from minivans to hybrids B) Chapters/Indigo bookstores fight tax on e-commerce C) Unexpected freeze in Nova Scotia will make blueberry pie more expensive in the Maritimes D) Japan's economy still stagnating E) Farmers avoiding pesticides Answer: D Diff: 1 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 8) All are macroeconomic topics except the A) reasons for increasing unemployment. B) cause of recessions. C) effect of a government budget deficit on inflation. D) rising value of the Canadian dollar. E) switch from workers to robots in automobile factories. Answer: E Diff: 1 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 9) Macroeconomics analyzes A) the operation of individual markets in the economy. B) the economic choices of individual households. C) government decisions to regulate the cellular phone industry. D) insider trading in the stock market. E) the performance of the national economy and the global economy. Answer: E Diff: 2 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 10) Macroeconomics analyzes A) decisions of individual businesses. B) effects of government safety regulations on the price of cars. C) the performance of the global economy. D) prices of individual products and services. E) the effects of federal taxes on the price of gasoline. Answer: C Diff: 1 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 40 Copyright © 2021 Pearson Canada Inc.

11) Microeconomics analyzes the A) reasons for a fall in the price of oil. B) effect of a rise in the value of the Canadian dollar on Canada's exports. C) effect of interest rates on Canada's economic growth rate. D) effect of a government budget deficit on employment. E) reasons for a fall in the inflation rate. Answer: A Diff: 1 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 12) Microeconomics analyzes the A) length of a recession. B) cause of unemployment in the economy. C) effect of a government budget surplus on election outcomes. D) the determination of aggregate income. E) size of prize money awards for kite-boarding competitions. Answer: E Diff: 1 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 13) George spends $2,000 for a plane ticket to Vancouver and gives up $500 because he has to take time off work. He spends $1,500 on his hotel room. In Vancouver, George is trying to decide whether he should spend $1,000 to take a side trip to go snowboarding in Whistler or just snooze in the hotel. Going to Whistler would be a smart decision as long as his benefits from the side trip are at least A) $1,500. B) $4,000. C) $5,000. D) $1,000. E) $500. Answer: D Diff: 3 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices.

14) Charles paid $12 for a ticket to see the Blue Jays play baseball at the Rogers Centre. Once inside, he must decide whether or not he wants to pay $8 for a beer. Buying a beer would be a smart decision only if Charles gets benefits of at least A) $12. B) $8. C) $16. D) $4. E) $20. Answer: B Diff: 2 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 15) Viki paid $12 to see the new Star Trek movie. Once inside, she must decide whether or not to buy a bag of popcorn for $4. Buying the popcorn would be a smart decision if Viki gets benefits of at least A) $12. B) $16. C) $4. D) $8. E) $20. Answer: C Diff: 2 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 16) Matthew spent $20 at an all-you-can eat sushi buffet. Several hours later, he is trying to decide whether to order a bowl of ice cream for $2. Ordering the ice cream would be a smart decision if Matthew gets benefits of at least A) $18. B) $22. C) $24. D) $20. E) $2. Answer: E Diff: 2 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices.

17) Which is an example of a negative externality? A) second-hand smoke B) an outdoor statue C) free bus rides for seniors D) charity E) specialization Answer: A Diff: 1 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 18) Which is an example of a negative externality? A) automobile emissions B) a cut in pay C) a peace treaty D) brand proliferation E) education Answer: A Diff: 2 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 19) Which is an example of a positive externality? A) non-refundable deposits B) scarcity C) a statue in your closet D) government E) anti-virus software on your computer Answer: E Diff: 2 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 20) Failure to consider the impact of a positive externality from an activity results in A) an internality. B) too little of that activity. C) scarcity. D) too much of that activity. E) a negative externality. Answer: B Diff: 1 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 43 Copyright © 2021 Pearson Canada Inc.

21) Failure to consider the impact of a negative externality results in A) scarcity. B) an internality. C) a positive externality. D) too little of that activity. E) too much of that activity. Answer: E Diff: 1 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 22) Governments can try and correct the problem of negative externalities from smoking by A) providing free medical care for smokers. B) investing in tobacco companies. C) using taxes and fines to reward smoking. D) using taxes and fines to penalize smokers. E) using subsidies to lower the cost of buying cigarettes. Answer: D Diff: 2 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 23) Amber baked five chocolate cheesecakes. When all costs, including implicit and external costs are included, the five cheesecakes cost her a total of $100. Producing a sixth cheesecake would increase these costs from $100 to $120. The smart choice for Amber is to produce the sixth cheesecake only if the benefits from the sixth cheesecake are more than A) $25. B) $20. C) $24. D) $120. E) $30. Answer: B Diff: 3 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices.

24) Julia's total benefit from taking four university courses is $10,000. If she takes a fifth course, her total benefits increase to $12,000. Julia should take this fifth course only if her A) total costs are less than $10,000. B) additional costs are less than $2,000. C) additional costs are less than $2,400. D) total costs are less than $12,000. E) course is free. Answer: B Diff: 3 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 25) Smart choices require that A) typical benefits exceed typical costs. B) additional benefits exceed average costs. C) additional benefits exceed additional costs. D) average benefits exceed additional costs. E) expected benefits exceed total costs. Answer: C Diff: 1 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 26) Key 1 to smart choices says: Choose only when A) average benefits are greater than average opportunity costs. B) additional benefits are greater than additional opportunity costs. C) average benefits are greater than average implicit costs. D) total benefits are greater than total opportunity costs. E) additional benefits are greater than additional implicit costs. Answer: B Diff: 2 Type: MC Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices.

27) Marginal benefits are the A) additional costs from your next choice. B) average costs from your next choice. C) benefits that affect others external to a choice of a trade. D) additional benefits from your next choice. E) average benefits from your next choices. Answer: D Diff: 2 Type: MC Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 28) Saskatchewan used to have more hospitals than Ontario, despite having far fewer people. The Saskatchewan government closed many of these hospitals despite local protests. Which statement is true? A) Since hospitals have positive benefits, they should never be closed. B) If Saskatchewan had more hospitals than Ontario, it must have had too many hospitals. C) The Saskatchewan government must have thought the marginal benefit from one of these closed hospitals exceeded its marginal cost. D) The Saskatchewan government must have thought the marginal benefit from one of these closed hospitals was less then its marginal cost. E) These closures did not impose costs on the communities where the hospitals were located because the communities did not pay any of the hospital operating costs. Answer: D Diff: 2 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 29) Monika will choose to eat a seventh pizza slice if A) the marginal benefit from the seventh slice is greater than its marginal cost. B) the marginal benefit from the seventh slice is less than its marginal cost. C) the total benefit from all seven slices is greater than their total cost. D) the total benefit from all seven slices is less than their total cost. E) she has enough money to pay for it. Answer: A Diff: 2 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices.

30) Before starring in Iron Man, Robert Downey Jr. had played in many movies with firstweekend box office revenues averaging about $5 million. Iron Man earned $102 million in its first weekend. The success of Iron Man ________ the opportunity cost of hiring Robert Downey Jr. and ________ the marginal benefit to movie producers of hiring him. A) increases; decreases B) decreases; decreases C) decreases; increases D) increases; increases E) decreases; does not change Answer: D Diff: 2 Type: MC Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 31) The Three Keys to Smart Choices focus your attention on information most useful for making a smart choice, leaving all other information in the background. Answer: TRUE Diff: 2 Type: TF Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 32) A university adds a 10% surcharge to tuition fees to pay for a new cafeteria. This is a microeconomic decision. Answer: TRUE Diff: 1 Type: TF Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 33) In response to a wage increase, a manufacturer decides to hire fewer workers. This a microeconomic decision. Answer: TRUE Diff: 1 Type: TF Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 34) When your employer offers a higher wage, you decide to work more hours. This is a macroeconomic decision. Answer: FALSE Diff: 1 Type: TF Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 47 Copyright © 2021 Pearson Canada Inc.

35) More drivers in Canada are buying imported automobiles. This is a macroeconomic decision. Answer: FALSE Diff: 1 Type: TF Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 36) Microeconomics analyzes choices that individuals in households, individual businesses, and governments make, and how those choices interact in markets. Answer: TRUE Diff: 2 Type: TF Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 37) Macroeconomics analyzes performance of the whole Canadian economy and global economy; the combined outcomes of all individual microeconomic choices. Answer: TRUE Diff: 2 Type: TF Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 38) Macroeconomics analyzes choices that individuals in households, individual businesses, and governments make, and how those choices interact in markets. Answer: FALSE Diff: 2 Type: TF Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 39) Microeconomics analyzes performance of the whole Canadian economy and global economy; the combined outcomes of all individual microeconomic choices. Answer: FALSE Diff: 2 Type: TF Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 40) When you buy macrobiotic food at a health food store, that is a macroeconomic decision. Answer: FALSE Diff: 1 Type: TF Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices.

41) The Three Keys to Smart Choices summarize the core of macroeconomics. Answer: FALSE Diff: 1 Type: TF Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 42) The Three Keys to Smart Choices summarize the core of microeconomics. Answer: TRUE Diff: 1 Type: TF Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 43) A smart choice is based on a comparison of marginal benefits and marginal opportunity costs. Answer: TRUE Diff: 1 Type: TF Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 44) Costs paid in the past are not relevant in making smart choices about your future. Answer: TRUE Diff: 2 Type: TF Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 45) Resale value is irrelevant when you are deciding about leasing a car. Answer: FALSE Diff: 2 Type: TF Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 46) Deciding how many hours to study should not depend on how much you have paid for tuition. Answer: TRUE Diff: 2 Type: TF Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices.

47) Implicit costs measure the opportunity costs of investing your own money or time. Answer: TRUE Diff: 1 Type: TF Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 48) Andrew decides to open a tattoo parlour in his basement and quits his job at TD Securities, sacrificing an annual salary of $64,000. Andrew will have to evict his tenant who currently pays $16,000 a year to rent the basement. Andrew's implicit cost of opening the tattoo parlour is $80,000. Answer: TRUE Diff: 2 Type: TF Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 49) Andrew decides to open a tattoo parlour in his basement and quits his job at TD Securities, sacrificing an annual salary of $64,000. Andrew will have to evict his tenant who currently pays $16,000 a year to rent the basement. Andrew's implicit cost of opening the tattoo parlour is $64,000. Answer: FALSE Diff: 2 Type: TF Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 50) Failure to recognize the negative externality costs of producing electricity with coal-burning generators results in over-production of electricity. Answer: TRUE Diff: 2 Type: TF Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 51) A generous roommate who buys a large number of the latest DVDs creates a positive externality for you. Answer: TRUE Diff: 1 Type: TF Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices.

52) A roommate who throws wild parties every weekend might create positive externalities or negative externalities, depending on your mood. Answer: TRUE Diff: 2 Type: TF Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 53) The decision to take this economics course creates a positive externality because your skills will help businesses who might hire you. Answer: TRUE Diff: 2 Type: TF Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 54) If you are thinking about starting to smoke, a smart choice will not consider the external costs associated with smoking. Answer: FALSE Diff: 2 Type: TF Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 55) If you are thinking about starting to smoke, a smart choice will consider the effects of second-hand smoke on others. Answer: TRUE Diff: 2 Type: TF Page Ref: 17-21 Skill: Applied Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 56) Implicit costs are costs that affect others external to a choice or a trade. Answer: FALSE Diff: 1 Type: TF Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 57) Positive externalities are costs that affect others external to a choice or a trade. Answer: FALSE Diff: 2 Type: TF Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices.

58) Negative externalities are costs that affect others external to a choice or a trade. Answer: TRUE Diff: 2 Type: TF Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 59) Positive externalities are benefits that affect others external to a choice or a trade. Answer: TRUE Diff: 2 Type: TF Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices. 60) Negative externalities are benefits that affect others external to a choice or a trade. Answer: FALSE Diff: 2 Type: TF Page Ref: 17-21 Skill: Recall Objective: 1.5 Differentiate microeconomic and macroeconomic choices, and explain the Three Keys model to Smart Choices.

Macroeconomics for Life: Smart Choices for All?, Updated 2e (Cohen) Chapter 2 Making Smart Choices: The Law of Demand 2.1 Put Your Money Where Your Mouth Is: Weighing Benefits, Costs, and Substitutes 1) Your preferences measure A) the availability of alternatives. B) how badly you want something. C) the availability of substitutes. D) how limited your time is. E) the price of a product. Answer: B Diff: 1 Type: MC Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 2) A Sociology class is a substitute for an Economics class if A) attending the two classes has the same opportunity cost. B) the two classes satisfy the same want. C) the tuition for the two classes is the same. D) both classes are taught by the same professor. E) both classes are at the same time. Answer: B Diff: 2 Type: MC Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 3) Substitutes must A) have the same price. B) satisfy the same want. C) be sold in the same store. D) have the same opportunity cost. E) be exactly the same product or service. Answer: B Diff: 2 Type: MC Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service.

4) To get tickets to see the Spice Girls reunion tour Sue missed a day at work, which cost her $300, drove her car downtown and parked, which cost her $30, and paid $170 for the tickets. Sue's expected benefits from attending the concert are at least A) $300. B) $200. C) $130. D) $500. E) $170. Answer: D Diff: 2 Type: MC Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 5) What you can afford is limited by A) preferences. B) demand. C) substitutes. D) money. E) externalities. Answer: D Diff: 2 Type: MC Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 6) What you can afford is limited by A) preferences. B) externalities. C) substitutes. D) demand. E) time. Answer: E Diff: 2 Type: MC Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service.

7) Your demand for tickets to the Lady Gaga concert depends on A) how much you like Lada Gaga. B) your income. C) what other live concerts you are interested in. D) what else you might spend the money on. E) all of the above. Answer: E Diff: 1 Type: MC Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 8) Economists describe all of your wants - and how intense each want is - as your preferences. Answer: TRUE Diff: 1 Type: TF Page Ref: 28-29 Skill: Recall Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 9) For economists, the terms wants and demands mean the same thing. Answer: FALSE Diff: 2 Type: TF Page Ref: 28-29 Skill: Recall Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 10) Your preferences can be affected by advertising. Answer: TRUE Diff: 2 Type: TF Page Ref: 28-29 Skill: Recall Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 11) Your preferences are determined only by your logical needs. Answer: FALSE Diff: 2 Type: TF Page Ref: 28-29 Skill: Recall Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 12) Making a smart choice depends on what substitutes are available and what they cost. Answer: TRUE Diff: 1 Type: TF Page Ref: 28-29 Skill: Recall Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 55 Copyright © 2021 Pearson Canada Inc.

13) Sam will drink anything that is cold, while Dave will only drink Gatorade. We expect Sam is willing to pay more for Gatorade than is Dave. Answer: FALSE Diff: 1 Type: TF Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 14) Sam will drink anything that is cold, while Dave will only drink Gatorade. We expect Dave is willing to pay more for Gatorade than is Sam. Answer: TRUE Diff: 1 Type: TF Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 15) Smart choices are based on a comparison of expected benefits and opportunity costs. Answer: TRUE Diff: 2 Type: TF Page Ref: 28-29 Skill: Recall Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 16) Substitutes need to be exactly the same product or service as the product or service you want. Answer: FALSE Diff: 1 Type: TF Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 17) Substitutes can be different products or services as long as they satisfy the same want. Answer: TRUE Diff: 1 Type: TF Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 18) What you can afford is limited by more than just money. Answer: TRUE Diff: 1 Type: TF Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service.

19) What you can afford is just about money. Answer: FALSE Diff: 1 Type: TF Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 20) If you buy a product or service that has no substitutes, your expected benefits must be zero. Answer: FALSE Diff: 2 Type: TF Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 21) You are generally willing to pay more for a product or service that has no close substitutes. Answer: TRUE Diff: 2 Type: TF Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 22) The term demand describes a consumer's willingness and ability to pay for a product or service. Answer: TRUE Diff: 2 Type: TF Page Ref: 28-29 Skill: Recall Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 23) The term demand describes a consumer's wants for a product or service. Answer: FALSE Diff: 2 Type: TF Page Ref: 28-29 Skill: Recall Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 24) When you download music for free, you have a demand for music. Answer: FALSE Diff: 2 Type: TF Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service.

25) Your demand for a product or service depends only on your preferences, not on your income. Answer: FALSE Diff: 2 Type: TF Page Ref: 28-29 Skill: Recall Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 26) If you feel strongly about protecting the environment, this affects your demand for cars and your demand for public transit. Answer: TRUE Diff: 1 Type: TF Page Ref: 28-29 Skill: Applied Objective: 2.1 Describe what determines your willingness and ability to pay for a product or service. 2.2 Living On the Edge: Smart Choices Are Marginal Choices 1) You have a bet that you can eat more pizza slices than your friend. The loser has to pay for all the pizza. Which statement is true ? A) Your total benefit increases with each slice of pizza you choose to eat. B) As long as you don't get sick, there will be some positive marginal benefit from every slice you choose to eat. C) Each additional slice of pizza has a lower marginal benefit than the slice before. D) You will stop eating when the expected marginal benefit of the last slice is zero. E) All of the above are true. Answer: E Diff: 2 Type: MC Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 2) People take their parents for granted because parents typically have ________ total benefits and ________ marginal benefits. A) low; low. B) low; high. C) zero; infinite. D) high; high. E) high; low. Answer: E Diff: 2 Type: MC Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits.

3) Your instructor advised you to study for at least a week before your economics test. If you ignored his advice and only studied for one hour just before the test, your studying probably has ________ total benefits and ________ marginal benefits. A) zero; infinite. B) high; low. C) low; high. D) high; high. E) low; low. Answer: C Diff: 3 Type: MC Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 4) Products and services that are rare and essential will typically have A) many alternatives. B) a high total benefit. C) a low price. D) a low marginal benefit. E) a high marginal benefit. Answer: E Diff: 2 Type: MC Page Ref: 30-32 Skill: Recall Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 5) Products and services that are plentiful and essential will typically have A) few alternatives. B) a low total benefit. C) a high price. D) a low marginal benefit. E) a high marginal benefit. Answer: D Diff: 2 Type: MC Page Ref: 30-32 Skill: Recall Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits.

6) A person's marginal growth (in height) decreases as they age because A) people grow more quickly when they are younger. B) older people prefer Pepsi over Coke. C) our parents lose their ability to measure us as we get older. D) circumstances change as we age. E) total growth is decreasing; we begin to get shorter once we get old enough. Answer: A Diff: 2 Type: MC Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 7) Total growth (in height) is best described by the question, A) "How much have you grown since I last saw you?" B) "Have you had a growth spurt?" C) "How tall are you?" D) "When did you get taller than your mother?" E) "Did they stretch you on the rack to make you taller?" Answer: C Diff: 2 Type: MC Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 8) Phone data plans often charge a high price for the first 10 megabytes, a lower price for the next 100 megabytes, and a very low price for the next 1,000 megabytes. An economist would say this is because A) not many people have cell phones these days. B) marginal benefits decrease as you use more megabytes. C) marginal benefits always decrease as circumstances change. D) 1,000 megabytes can be transmitted more cheaply than 100 megabytes. E) total benefits decrease as you use more megabytes. Answer: B Diff: 2 Type: MC Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits.

9) Phone data plans often charge a high price for daytime use and a lower price on evenings and weekends. An economist would say this is because A) total benefits decrease as you use more minutes. B) it is less expensive to provide service when it is dark outside. C) marginal benefits increase as you talk longer. D) not many people have cell phones these days. E) marginal benefits can decrease as circumstances change. Answer: E Diff: 3 Type: MC Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 10) People pay more for diamonds than for water because A) total benefits from diamonds are high and total benefits from water are low. B) there are no substitutes for water. C) people don't make smart choices. D) water is scarce. E) marginal benefits from water are low and marginal benefits from diamonds are high. Answer: E Diff: 2 Type: MC Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 11) The high price of diamonds relative to the price of water is due to the fact that A) total benefits from water are relatively low. B) total benefits from diamonds are relatively high. C) marginal benefits from water are relatively high. D) marginal benefits from diamonds are relatively low. E) none of the above is true. Answer: E Diff: 3 Type: MC Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits.

12) The high price of diamonds relative to the price of water is due to the fact that A) total benefits from water are relatively low. B) total benefits from diamonds are relatively high. C) marginal benefits from water are relatively low. D) marginal benefits from diamonds are relatively low. E) none of the above is true. Answer: C Diff: 2 Type: MC Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 13) The high price of diamonds relative to the price of water is due to the fact that A) total benefits from water are relatively low. B) total benefits from diamonds are relatively high. C) marginal benefits from water are relatively high. D) marginal benefits from diamonds are relatively high. E) none of the above is true. Answer: D Diff: 2 Type: MC Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 14) The diamond/water paradox can be explained by A) water having a low price relative to diamonds. B) water having high total benefits relative to diamonds. C) water having higher marginal benefits in the summer than in the spring. D) distinguishing between total benefits and price. E) distinguishing between total benefits and marginal benefit. Answer: E Diff: 2 Type: MC Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits.

15) After an intense workout at the gym with nothing to drink, the marginal benefit of a Gatorade would A) depend on what other drinks were available. B) depend on the marginal cost. C) be equal to the marginal cost. D) be high. E) be low. Answer: D Diff: 2 Type: MC Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 16) Willingness to pay depends on marginal benefit, not total benefit. Answer: TRUE Diff: 1 Type: TF Page Ref: 30-32 Skill: Recall Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 17) Willingness to pay depends on total benefit, not marginal benefit. Answer: FALSE Diff: 1 Type: TF Page Ref: 30-32 Skill: Recall Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 18) Marginal benefits change with circumstances. Answer: TRUE Diff: 2 Type: TF Page Ref: 30-32 Skill: Recall Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 19) Your marginal benefits from a choice do not reflect how intensely you want it. Answer: FALSE Diff: 2 Type: TF Page Ref: 30-32 Skill: Recall Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits.

20) If you spend the next hour studying instead of going out with a friend, that means overall, you value studying more than your friend. Answer: FALSE Diff: 1 Type: TF Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 21) If you spend the next hour studying instead of going out with a friend, that means at the margin, you value studying more than your friend. Answer: TRUE Diff: 1 Type: TF Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 22) Charging people more for a product that has high marginal benefits is a bad business idea because people won't actually pay more. Answer: FALSE Diff: 2 Type: TF Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 23) Your marginal benefits from a choice depend on your opportunity costs. Answer: FALSE Diff: 2 Type: TF Page Ref: 30-32 Skill: Recall Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 24) A once-in-a-lifetime trip to Paris will give you marginal benefits that will be the same as total benefits. Answer: TRUE Diff: 3 Type: TF Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 25) Products or services that are luxuries tend to have high marginal benefits. Answer: TRUE Diff: 2 Type: TF Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits.

26) Products or services that are essential to survival always have low marginal benefits. Answer: FALSE Diff: 2 Type: TF Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 27) As you consume more of a product or service, your marginal benefit usually gets smaller. Answer: TRUE Diff: 2 Type: TF Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 28) Marginal benefits are always larger than total benefits. Answer: FALSE Diff: 3 Type: TF Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 29) A second date is never as exciting as the first one because total benefits decrease as you date more. Answer: FALSE Diff: 2 Type: TF Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 30) Tourists are typically willing to pay more for products or services than local consumers because tourists get larger marginal benefits from these items. Answer: TRUE Diff: 2 Type: TF Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 31) The additional benefit from your second hamburger is less than the additional benefit from your first hamburger because your total benefits are decreasing. Answer: FALSE Diff: 2 Type: TF Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits.

32) Dry cleaners charge men a lower price than they charge women because men get lower total benefits than women from having clean clothes. Answer: FALSE Diff: 2 Type: TF Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 33) Dry cleaners charge men a lower price than they charge women because men get lower marginal benefits than women from having clean clothes. Answer: TRUE Diff: 2 Type: TF Page Ref: 30-32 Skill: Applied Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 34) Smart choices depend on marginal benefits. Answer: TRUE Diff: 2 Type: TF Page Ref: 30-32 Skill: Recall Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits. 35) Smart choices depend on total benefits. Answer: FALSE Diff: 2 Type: TF Page Ref: 30-32 Skill: Recall Objective: 2.2 Identify why smart choices depend on marginal benefits, not total benefits, and explain what changes marginal benefits.

2.3 Move On When the Price Isn't Right: The Law of Demand 1) An online music store charges $1 per song. Your VISA bill shows that you spent $300 on songs last month. This means that your A) marginal benefits must be less than $1 per song. B) quantity demanded was 1 dollar. C) marginal costs must be more than $1 per song. D) quantity demanded was 300 songs. E) quantity demanded was 300 dollars. Answer: D Diff: 3 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 2) At a price of $2, Michael buys 4 muffins and Matthew buys 6 muffins. The market demand for these two individuals at a price of $2 is A) 6 muffins. B) 2 muffins. C) 20 dollars. D) 10 muffins. E) 2 dollars. Answer: D Diff: 1 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 3) An economics professor offers to sell cookies to her class. At a price of 50 cents per cookie, each of the 100 students in the class spends $2.00 on cookies. At a price of 50 cents per cookie, market demand in this class is A) 400 cookies. B) 50 cents. C) 100 students. D) 1 professor. E) 200 dollars. Answer: A Diff: 2 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay.

4) Franco the barber charges $15 for a haircut. He has 200 customers who each pay Franco $30 a month. Market demand for Franco's haircuts is A) 200 haircuts per month. B) 400 haircuts per month. C) 15 dollars per haircut. D) 6,000 dollars per month. E) 200 customers per month. Answer: B Diff: 2 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 5) Gina and George had a cash bar at their party last week. At $2 a ticket, the 50 people at their party bought 2,000 tickets. Market demand at Gina and George's party was A) 2,000 tickets. B) 4,000 dollars. C) 400 tickets. D) 50 people. E) 100 dollars. Answer: A Diff: 2 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 6) The Cineplex charges $8 for admission. The 200-seat theatre is full. Market demand is A) 1,600 dollars. B) 1,600 tickets. C) 8 dollars. D) 1,600 people. E) 200 tickets. Answer: E Diff: 2 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay.

7) If the price of gasoline continues to rise, the A) demand for substitutes for gasoline decreases. B) quantity demanded for substitutes for gasoline increases. C) quantity demanded of gasoline increases. D) demand for gasoline decreases. E) quantity demanded of gasoline decreases. Answer: E Diff: 2 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 8) At $1.20 per litre you spent $240 on gasoline last month. Your A) marginal benefit must be less than 1.20 per litre. B) quantity demanded is 240 litres. C) quantity demanded is 1.20 dollars. D) quantity demanded is 240 dollars. E) quantity demanded is 200 litres. Answer: E Diff: 2 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 9) Smart consumers who will not pay $150 for a designer T-shirt make this choice because A) their marginal costs from this t-shirt are less than $150. B) they are willing to pay more than $150. C) their marginal benefits from this t-shirt are less than $150. D) their quantity demanded is greater than one t-shirt. E) their marginal benefits from this t-shirt are more than $150. Answer: C Diff: 2 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 10) As the price of butter rises, smart consumers buy A) less margarine and the quantity demanded of butter decreases. B) more margarine and the quantity demanded of butter decreases. C) more margarine and the demand for butter decreases. D) more margarine and the demand for butter increases. E) less margarine and the quantity demanded of butter increases. Answer: B Diff: 3 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 69 Copyright © 2021 Pearson Canada Inc.

11) Market demand is the A) sum of the prices each individual is willing and able to pay for each quantity demanded. B) sum of the quantities demanded by all individuals at each price. C) difference between the maximum amount each individual is willing to pay and the market price. D) difference between the minimum amount each individual is willing to pay and the market price. E) demand for stock markets. Answer: B Diff: 3 Type: MC Page Ref: 33-37 Skill: Recall Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 12) The law of demand states that, if nothing else changes, A) a rise in the price of a product or service causes a decrease in quantity demanded. B) a rise in the price of a product or service causes a decrease in quantity supplied. C) an increase in incomes causes a decrease in quantity demanded. D) a rise in the price of a product or service causes an increase in quantity demanded. E) an increase in incomes causes an increase in quantity demanded. Answer: A Diff: 1 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 13) Some sales managers are talking about business. Which quotation refers to a change in quantity demanded? A) "Since our competitors raised their prices, our sales have tripled." B) "Because it's been such a warm winter, our sales of wool scarves are down from last year." C) "We decided to cut our prices, and there has been a big increase in our sales." D) "The Green movement has made our biodegradable products best-sellers." E) None of the above Answer: C Diff: 3 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay.

14) Some sales managers are talking about business. Which quotation refers to a movement along the demand curve? A) "Since our competitors raised their prices, our sales have tripled." B) "Because it's been such a warm winter, our sales of wool scarves are down from last year." C) "We decided to cut our prices, and there has been a big increase in our sales." D) "The Green movement has made our biodegradable products best-sellers." E) None of the above Answer: C Diff: 3 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 15) Some sales managers are talking about business. Which quotation refers to a rightward shift of the demand curve? A) "Since our competitors raised their prices, our sales have tripled." B) "Because it's been such a warm winter, our sales of wool scarves are down from last year." C) "We decided to cut our prices, and there has been a big increase in our sales." D) "The Green movement has hurt sales of our non-recyclable products." E) None of the above Answer: A Diff: 3 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 16) Some sales managers are talking about business. Which quotation refers to a leftward shift of the demand curve? A) "Since our competitors raised their prices, our sales have tripled." B) "Because it's been such a warm winter, our sales of wool scarves are down from last year." C) "We decided to cut our prices, and there has been a big increase in our sales." D) "The Green movement has made our biodegradable products best-sellers." E) None of the above Answer: B Diff: 3 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay.

17) Which will cause an increase in quantity demanded? A) a rise in the price of a substitute product B) a fall in the price of a complement product C) an increase in income D) a rise in the price of the product E) a fall in the price of the product Answer: E Diff: 3 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 18) Which will cause a movement down along a demand curve? A) a rise in the price of a substitute product B) a fall in the price of a complement product C) an increase in income D) a rise in the price of the product E) a fall in the price of the product Answer: E Diff: 3 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 19) Which will cause a decrease in quantity demanded? A) a decrease in the number of consumers B) a decrease in income C) an increase in income D) a rise in the price of the product E) a fall in the price of the product Answer: D Diff: 3 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 20) Which will cause a movement up along a demand curve? A) a decrease in the number of consumers B) a decrease in income C) an increase in income D) a rise in the price of the product E) a fall in the price of the product Answer: D Diff: 3 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 72 Copyright © 2021 Pearson Canada Inc.

21) You read a A) marginal benefit curve up and over. B) marginal benefit curve over and down. C) demand curve up and over. D) demand curve as the maximum people are willing and able to pay. E) marginal benefit curve to understand the switch to substitutes. Answer: A Diff: 1 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 22) Which statements are true? 1 2 3 4

Read a demand curve up and over. Read a marginal benefit curve up and over. Read a demand curve over and down. Read a marginal benefit curve over and down.

A) 3 only B) 1 and 2 C) 1 and 4 D) 2 and 3 E) 2 and 4 Answer: D Diff: 1 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay.

23) Which statements are true? 1 2 3 4

Read a demand curve over and down. Read a marginal benefit curve over and down. Read a demand curve up and over. Read a marginal benefit curve up and over.

A) 3 only B) 1 and 2 C) 1 and 4 D) 2 and 3 E) 2 and 4 Answer: C Diff: 1 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay.

24) Look at the market for water in Figure 2.3.1. At point C, A) people plan to spend $2 on water. B) the maximum price people are willing and able to pay for all 3,000 cubic metres of water is $2. C) the minimum price people are willing and able to pay for all 3,000 cubic metres of water is $2. D) the minimum price people are willing and able to pay for the 3,000th cubic metre of water is $2. E) the maximum price people are willing and able to pay for the 3,000th cubic metre of water is $2. Answer: E Diff: 1 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay.

25) Look at the market for water in Figure 2.3.1. At point A, A) people plan to spend $1 on water. B) he maximum price people are willing and able to pay for all 5,000 cubic metres of water is $1. C) he minimum price people are willing and able to pay for all 5,000 cubic metres of water is $1. D) the minimum price people are willing and able to pay for the 5,000th cubic metre of water is $1. E) the maximum price people are willing and able to pay for the 5,000th cubic metre of water is $1. Answer: E Diff: 1 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 26) Look at the market for water in Figure 2.3.1. A movement from point D to point B is caused by a(n) A) fall in the price of water. B) rise in the price of water. C) increase in the number of consumers. D) rise in the expected future price of water. E) fall in the expected future price of water. Answer: A Diff: 2 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 27) Look at the market for water in Figure 2.3.1. A movement from point B to point D is caused by a(n) A) fall in the price of water. B) rise in the price of water. C) decrease in the number of consumers. D) rise in the expected future price of water. E) fall in the expected future price of water. Answer: B Diff: 2 Type: MC Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 28) The law of demand says that when price rises, quantity demanded decreases. Answer: TRUE Diff: 1 Type: TF Page Ref: 33-37 Skill: Recall Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 76 Copyright © 2021 Pearson Canada Inc.

29) The law of demand says that when price falls, quantity demanded increases. Answer: TRUE Diff: 1 Type: TF Page Ref: 33-37 Skill: Recall Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 30) The law of demand says that when price rises, demand decreases. Answer: FALSE Diff: 1 Type: TF Page Ref: 33-37 Skill: Recall Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 31) The law of demand states that when price rises, quantity demanded increases. Answer: FALSE Diff: 1 Type: TF Page Ref: 33-37 Skill: Recall Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 32) The law of demand works because of the availability of substitutes. Answer: TRUE Diff: 2 Type: TF Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 33) The law of demand works because of the availability of complements. Answer: FALSE Diff: 2 Type: TF Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 34) Quantity demanded is the amount you actually plan to buy at a given price. Answer: TRUE Diff: 1 Type: TF Page Ref: 33-37 Skill: Recall Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay.

35) Quantity demanded is the sum of demands of all individuals willing and able to buy a particular product or service. Answer: FALSE Diff: 1 Type: TF Page Ref: 33-37 Skill: Recall Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 36) Market demand is the sum of demands of all individuals willing and able to buy a particular product or service. Answer: TRUE Diff: 1 Type: TF Page Ref: 33-37 Skill: Recall Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 37) If the price of a movie ticket rises, the quantity demanded increases. Answer: FALSE Diff: 1 Type: TF Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 38) As the price of a product or service rises, smart consumers switch to cheaper substitutes and quantity demanded decreases. Answer: TRUE Diff: 2 Type: TF Page Ref: 33-37 Skill: Recall Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 39) As the price of a product or service rises, smart consumers switch to cheaper substitutes and demand decreases. Answer: FALSE Diff: 2 Type: TF Page Ref: 33-37 Skill: Recall Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 40) Consumers economize on products and services that become more expensive by switching to complements. Answer: FALSE Diff: 2 Type: TF Page Ref: 33-37 Skill: Recall Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 78 Copyright © 2021 Pearson Canada Inc.

41) Consumers economize on products and services that become more expensive by switching to substitutes. Answer: TRUE Diff: 2 Type: TF Page Ref: 33-37 Skill: Recall Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 42) By raising the price of water, the City of Toronto encouraged smart consumers to sweep their sidewalks instead of hosing them down with water. Answer: TRUE Diff: 2 Type: TF Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 43) A phone provider who offers lower prices per minute to customers who use a lot of minutes is violating the law of demand. Answer: FALSE Diff: 2 Type: TF Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 44) Because we are all covered by provincial health insurance, the dollar price of medical care is zero. Therefore the marginal benefits of health care must be zero. Answer: FALSE Diff: 2 Type: TF Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 45) When the price of gasoline rises, the demand for gasoline decreases. Answer: FALSE Diff: 1 Type: TF Page Ref: 33-37 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay.

2.4 Moving the Margins: What Can Change Demand? 1) Demand ________ if consumers' incomes ________ and this is a ________ good. A) increases; decrease; normal B) increases; increase; inferior C) increases; decrease; inferior D) decreases; increase; normal E) decreases; decrease; inferior Answer: C Diff: 1 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 2) The demand curves shifts ________ if consumers' incomes ________ and this is a ________ good. A) rightward; decrease; normal B) rightward; increase; inferior C) rightward; decrease; inferior D) leftward; increase; normal E) leftward; decrease; inferior Answer: C Diff: 2 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 3) Demand increases when there are A) expectations of lower prices tomorrow. B) falls in the price of complementary products or services. C) decreases in the number of consumers who buy this product or service. D) decreases in income, but only for normal goods. E) falls in the price of substitute products or services. Answer: B Diff: 2 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand.

4) The demand curve shifts rightward when there are A) expectations of lower prices tomorrow. B) falls in the price of complementary products or services. C) decreases in the number of consumers who buy this product or service. D) decreases in income, but only for normal goods. E) falls in the price of substitute products or services. Answer: B Diff: 2 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 5) Instead of advertising on television, Abercrombie and Fitch might increase your demand for their clothes by A) reducing your income, but this only works for normal products and services. B) reducing the price of substitute products and services. C) reducing the price of complementary products and services. D) increasing the amount of time required to make a purchase. E) making you think that the price of their clothes will be lower next month. Answer: C Diff: 2 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 6) Demand ________ if the price of a ________ product or service ________. A) decreases; substitute; rises B) increases; substitute; falls C) increases; substitute; rises D) decreases; complement; falls E) increases; complement; rises Answer: C Diff: 2 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand.

7) The demand curve shifts ________ if the price of a ________ product or service ________. A) leftward; substitute; rises B) rightward; substitute; falls C) rightward; substitute; rises D) leftward; complement; falls E) rightward; complement; rises Answer: C Diff: 2 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 8) Economists use the term demand to summarize A) how changes in price affect consumers' purchasing power. B) how the concept of scarcity applies to the world. C) the influence of factors other than price on the quantity we want to buy. D) the behaviour of irrational consumers interacting with government in the marketplace. E) the activities of profit-oriented businesses. Answer: C Diff: 2 Type: MC Page Ref: 38-46 Skill: Recall Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 9) Economists use the term quantity demanded to summarize A) the activities of profit-oriented businesses. B) how the concept of scarcity applies to the world. C) how changes in price influence the quantity we want to buy. D) the behaviour of irrational consumers interacting with government in the marketplace. E) how changes in factors other than price will influence the quantity we want to buy. Answer: C Diff: 2 Type: MC Page Ref: 38-46 Skill: Recall Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 10) If Apple raises the price for a downloaded song at the iTunes store we will see a(n) A) increase in demand for iPods. B) decrease in consumers' incomes if downloaded songs are inferior goods. C) decrease in quantity demanded of downloaded songs. D) decrease in demand for substitutes for downloaded songs. E) increase in consumers' incomes if downloaded songs are normal goods. Answer: C Diff: 1 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 82 Copyright © 2021 Pearson Canada Inc.

11) The number of movie-goers has decreased. One explanation is that A) the prices of substitutes have fallen. B) the prices of complementary products like popcorn have fallen. C) people have higher incomes and movies are a normal good. D) people expect the price of movies will rise in the future. E) people have lower incomes and movies are an inferior good. Answer: A Diff: 2 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 12) When Wendy's runs a successful television ad for their new Baconator Hamburger, A) demand for hamburgers at McDonald's increases. B) consumer incomes increase. C) demand for french fries at Wendy's increases because these are complementary products. D) demand for french fries at Wendy's decreases because these are complementary products. E) consumer incomes decrease. Answer: C Diff: 2 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 13) The demand for gasoline has increased. One explanation is that A) consumer incomes are lower and gasoline is a normal good. B) the price of automobiles is higher and gasoline and automobiles are complements. C) consumer incomes are higher and gasoline is a normal good. D) the number of consumers has decreased. E) everyone expects tomorrow's gasoline price will be lower. Answer: C Diff: 2 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 14) The demand curve for gasoline has shifted rightward. One explanation is that A) consumer incomes are lower and gasoline is a normal good. B) the price of automobiles is higher and gasoline and automobiles are complements. C) consumer incomes are higher and gasoline is a normal good. D) the number of consumers has decreased. E) everyone expects tomorrow's gasoline price will be lower. Answer: C Diff: 2 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 83 Copyright © 2021 Pearson Canada Inc.

15) Demand for gasoline increases on Fridays because A) everyone expects gasoline prices will fall on Saturday. B) the prices of substitute products fall on Fridays. C) the prices of complementary products rise on Fridays. D) incomes are lower on Fridays and gasoline is a normal good. E) everyone expects gasoline prices will rise on Saturday. Answer: E Diff: 2 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 16) Demand for airline travel usually increases during the summer. One explanation is that A) VIA Rail offers price discounts during the summer. B) consumer incomes are lower in the summer and airline travel is a normal good. C) consumer incomes are higher in the summer and airline travel is an inferior good. D) there are more customers during the summer. E) hotel prices rise during the summer. Answer: D Diff: 2 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 17) Which could not cause an increase in demand for a service? A) an increase in income B) a decrease in income C) a decrease in the price of a substitute D) a decrease in the price of a complement E) an increase in preferences for the service Answer: C Diff: 3 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 18) Which could not cause a rightward shift of the demand curve for a service? A) an increase in income B) a decrease in income C) a decrease in the price of a substitute D) a decrease in the price of a complement E) an increase in preferences for the service Answer: C Diff: 3 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 84 Copyright © 2021 Pearson Canada Inc.

19) Turnips are an inferior good. If nothing else changes, a rise in the price of turnips causes A) a decrease in demand for turnips. B) an increase in demand for turnips. C) a decrease in the supply of turnips. D) an increase in the supply of turnips. E) none of the above. Answer: E Diff: 3 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 20) Turnips are an inferior good. If nothing else changes, a rise in the price of turnips causes A) a leftward shift in the demand curve for turnips. B) a rightward shift in the demand curve for turnips. C) a leftward shift in the supply curve of turnips. D) a rightward shift in the supply curve of turnips. E) none of the above. Answer: E Diff: 3 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 21) If a rise in the price of product A causes the demand for product B to decrease, then A) A and B are substitutes. B) A and B complements. C) B is an inferior good. D) B is a normal good. E) A and B are both inferior goods. Answer: B Diff: 3 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand.

22) If a rise in the price of product A causes the demand curve for product B to shift leftward, then A) A and B are substitutes. B) A and B complements. C) B is an inferior good. D) B is a normal good. E) A and B are both inferior goods. Answer: B Diff: 3 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 23) If Hamburger Helper is an inferior good, a decrease in income causes A) a decrease in demand for Hamburger Helper. B) an increase in demand for Hamburger Helper. C) a decrease in the quantity demanded of Hamburger Helper. D) an increase in the quantity demanded of Hamburger Helper. E) none of the above. Answer: B Diff: 3 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 24) A decrease in quantity demanded is represented by a A) rightward shift of the supply curve. B) rightward shift of the demand curve. C) leftward shift of the demand curve. D) movement up along the demand curve. E) movement down along the demand curve. Answer: D Diff: 1 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand.

25) An increase in quantity demanded is represented by a A) rightward shift of the supply curve. B) rightward shift of the demand curve. C) leftward shift of the demand curve. D) movement up along the demand curve. E) movement down along the demand curve. Answer: E Diff: 1 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 26) A decrease in demand is represented by a A) leftward shift of the supply curve. B) rightward shift of the demand curve. C) leftward shift of the demand curve. D) movement up along the demand curve. E) movement down along the demand curve. Answer: C Diff: 1 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 27) An increase in demand is represented by a A) rightward shift of the supply curve. B) rightward shift of the demand curve. C) leftward shift of the demand curve. D) movement up along the demand curve. E) movement down along the demand curve. Answer: B Diff: 1 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 28) Which "other things" are not kept constant along a demand curve? A) income B) prices of related products C) the price of the product itself D) preferences E) all of the above Answer: C Diff: 2 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 87 Copyright © 2021 Pearson Canada Inc.

29) Look at Figure 2.4.1. A decrease in quantity demanded is A) a shift from D0 to D1. B) a shift from D1 to D0. C) a movement from point B to D. D) a movement from point D to B. E) none of the above. Answer: C Diff: 1 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 30) Look at Figure 2.4.1. An increase in quantity demanded is A) a shift from D0 to D1. B) a shift from D1 to D0. C) a movement from point B to D. D) a movement from point D to B. E) none of the above. Answer: D Diff: 1 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand.

31) Look at Figure 2.4.1. A decrease in demand is A) a shift from D0 to D1. B) a shift from D1 to D0. C) a movement from point B to D. D) a movement from point D to B. E) none of the above. Answer: B Diff: 1 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 32) Look at Figure 2.4.1. An increase in demand is A) a shift from D0 to D1. B) a shift from D1 to D0. C) a movement from point B to D. D) a movement from point D to B. E) none of the above. Answer: A Diff: 1 Type: MC Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 33) Economists use the term quantity demanded to summarize the influences of factors other than price on the number of units that consumers want to buy. Answer: FALSE Diff: 1 Type: TF Page Ref: 38-46 Skill: Recall Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 34) Demand is a much more limited term than quantity demanded. Answer: FALSE Diff: 1 Type: TF Page Ref: 38-46 Skill: Recall Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 35) Quantity demanded is a much more limited term than demand. Answer: TRUE Diff: 1 Type: TF Page Ref: 38-46 Skill: Recall Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand.

36) Economists use the term demand to summarize the influences of factors other than price on the number of units that consumers want to buy. Answer: TRUE Diff: 1 Type: TF Page Ref: 38-46 Skill: Recall Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 37) A successful advertising campaign can affect your ability to pay for a product or service. Answer: FALSE Diff: 1 Type: TF Page Ref: 38-46 Skill: Recall Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 38) A successful advertising campaign can affect your willingness to pay for a product or service. Answer: TRUE Diff: 1 Type: TF Page Ref: 38-46 Skill: Recall Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 39) If the price of hamburgers at McDonald's rises, the demand for hamburgers at Wendy's increases because the products are substitutes. Answer: TRUE Diff: 2 Type: TF Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 40) If the price of hamburgers at McDonald's rises, the demand for french fries at McDonald's decreases because the products are complements. Answer: TRUE Diff: 2 Type: TF Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 41) If the price of hamburgers at McDonald's rises, the demand for french fries at McDonald's decreases because the products are substitutes. Answer: FALSE Diff: 2 Type: TF Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 90 Copyright © 2021 Pearson Canada Inc.

42) If the price of gasoline rises, the demand for automobiles decreases because the products are complements. Answer: TRUE Diff: 2 Type: TF Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 43) If the price of automobiles falls, the demand for bicycles decreases and the demand for gasoline increases. Answer: TRUE Diff: 2 Type: TF Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 44) Because drivers expect the price on Saturdays will be higher, they increase the demand for gasoline on Fridays. Answer: TRUE Diff: 2 Type: TF Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 45) Because drivers expect the price on Saturdays will be higher, they increase the quantity demanded of gasoline on Fridays. Answer: FALSE Diff: 2 Type: TF Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 46) If commodity traders expect the price of gold to rise tomorrow, they increase their demand for gold today. Answer: TRUE Diff: 3 Type: TF Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 47) If the minimum age for buying beer was lowered to 16, the increase in the number of buyers increases the quantity demanded of beer. Answer: FALSE Diff: 2 Type: TF Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 91 Copyright © 2021 Pearson Canada Inc.

48) If the minimum age for buying beer was lowered to 16, the increase in the number of buyers increases the demand for beer. Answer: TRUE Diff: 2 Type: TF Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 49) Economists perform controlled experiments in laboratories to deal with the problem of interdependence. Answer: FALSE Diff: 1 Type: TF Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 50) The law of demand works as long as nothing else besides the price of the product changes. Answer: TRUE Diff: 1 Type: TF Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 51) The economist's distinction between quantity demanded and demand is an attempt to copy a controlled experiment. Answer: TRUE Diff: 1 Type: TF Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 52) When income increases, the quantity demanded of inferior goods decreases. Answer: FALSE Diff: 1 Type: TF Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. 53) When income increases, the quantity demanded of normal goods increases. Answer: FALSE Diff: 1 Type: TF Page Ref: 38-46 Skill: Applied Objective: 2.4 Explain the difference between a change in quantity demanded and a change in demand, and identify five factors that change demand. Macroeconomics for Life: Smart Choices for All?, Updated 2e (Cohen) 92 Copyright © 2021 Pearson Canada Inc.

Chapter 3 Show Me the Money: The Law of Supply 3.1 What Does It Really Cost? Costs Are Opportunity Costs 1) For supply decisions, marginal A) cost is measured in dollars. B) cost is measured in the same units as it is for demand decisions. C) benefit is measured in dollars. D) benefit is measured in opportunity cost. E) benefit reflects the value of the best alternative activity. Answer: C Diff: 2 Type: MC Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 2) Marginal opportunity cost A) increases as you supply less. B) is constant when some inputs are less productive than others. C) is constant when some inputs are more productive than others. D) decreases as you supply more. E) increases as you supply more. Answer: E Diff: 2 Type: MC Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 3) To hire an input, a business owner must pay a price that A) covers the transportation cost of the input owner. B) reflects the business owner's lowest-cost alternative activity. C) matches the best opportunity cost of the input owner. D) gives the input owner enough money to buy the assets of the business. E) reflects the business owner's best alternative activity. Answer: C Diff: 1 Type: MC Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs.

4) As you shift your time away from alternative uses in order to work, A) you should stop attending class. B) the marginal cost of your time increases. C) you give up your least valuable alternatives last. D) the marginal cost of your time decreases. E) you give up your favourite alternatives first. Answer: B Diff: 1 Type: MC Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 5) As your hourly wage rises, your A) marginal opportunity cost of attending school increases. B) value of your best alternative decreases. C) marginal opportunity cost of attending school decreases. D) marginal benefit of attending school decreases. E) ability to concentrate decreases. Answer: A Diff: 1 Type: MC Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 6) People who cannot find work during a recession often enroll in school. An economic explanation is that attending school during a recession has a A) lower marginal benefit. B) higher marginal opportunity cost. C) marginal benefit equal to zero. D) marginal benefit that is less than the marginal opportunity cost. E) lower marginal opportunity cost. Answer: E Diff: 2 Type: MC Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 7) Julia grows roses and tulips in her greenhouse. When she grows more roses and fewer tulips, her marginal A) cost of growing roses increases. B) benefit of growing tulips decreases. C) cost of growing tulips increases. D) benefit of growing tulips increases. E) cost of growing roses decreases. Answer: A Diff: 2 Type: MC Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs.

8) Amber bakes muffins and cookies to sell at the market. If she bakes more cookies and fewer muffins, her marginal A) cost of baking muffins increases. B) cost of baking muffins decreases. C) benefit of baking muffins increases. D) cost of baking cookies decreases. E) benefit of baking cookies increases. Answer: B Diff: 2 Type: MC Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 9) Which statement is true? A) For demand, marginal benefit increases as you buy more. B) For supply, marginal benefit is measured in the opportunity cost of your time. C) For demand, marginal benefit is measured in dollars. D) For supply, marginal benefit is measured in dollars. E) For supply, marginal cost decreases as you supply more. Answer: D Diff: 2 Type: MC Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 10) Which statement is false? A) For demand, marginal benefit decreases as you buy more. B) For demand, marginal benefit is measured in the satisfaction you get. C) For demand, marginal cost is measured in dollars. D) For supply, marginal cost is measured in dollars. E) For supply, marginal cost increases as you supply more. Answer: D Diff: 2 Type: MC Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 11) The additional opportunity cost of increasing quantity supplied is called marginal cost. Answer: TRUE Diff: 1 Type: TF Page Ref: 52-54 Skill: Recall Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 12) The opportunity cost of any supply decision is the substitute products you could buy with the money you earn. Answer: FALSE Diff: 1 Type: TF Page Ref: 52-54 Skill: Recall Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 95 Copyright © 2021 Pearson Canada Inc.

13) Marginal cost increases as you increase quantity supplied. Answer: TRUE Diff: 1 Type: TF Page Ref: 52-54 Skill: Recall Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 14) All marginal costs are opportunity costs, but not all opportunity costs are marginal costs. Answer: FALSE Diff: 2 Type: TF Page Ref: 52-54 Skill: Recall Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 15) To hire or purchase inputs, a business must pay a price that matches the best opportunity cost of the input owner. Answer: TRUE Diff: 2 Type: TF Page Ref: 52-54 Skill: Recall Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 16) To hire or purchase inputs, a business must pay a price that matches the lowest opportunity cost of the input owner. Answer: FALSE Diff: 2 Type: TF Page Ref: 52-54 Skill: Recall Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 17) The real cost of any input is determined by the best alternative use of that input. Answer: TRUE Diff: 2 Type: TF Page Ref: 52-54 Skill: Recall Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 18) The opportunity cost of hiring your lazy brother who does nothing all day is zero. Answer: FALSE Diff: 2 Type: TF Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 19) The marginal benefit of a supply choice is measured in the opportunity cost of your time. Answer: FALSE Diff: 2 Type: TF Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs.

20) The marginal cost of a supply choice is measured in dollars. Answer: FALSE Diff: 2 Type: TF Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 21) The marginal cost of a supply choice is measured in the opportunity cost of your time. Answer: TRUE Diff: 2 Type: TF Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 22) For supply, marginal cost decreases as you supply more. Answer: FALSE Diff: 2 Type: TF Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 23) For supply, marginal cost increases as you supply more. Answer: TRUE Diff: 2 Type: TF Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 24) The marginal cost of the labour you supply includes the cost of commuting to your job. Answer: TRUE Diff: 2 Type: TF Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 25) The marginal cost of the labour you supply does not include the cost of commuting to your job. Answer: FALSE Diff: 2 Type: TF Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 26) Haley sold one of her watercolour paintings 5 years ago for $10,000, but hasn't sold another painting since. Painting kitchens for $20 an hour might be a smart choice for Haley. Answer: TRUE Diff: 3 Type: TF Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs.

27) Joanna is paid $50 an hour to DJ at Club Keynes on Friday and Saturday nights. The Club is closed all other nights. She also is paid $15 an hour to work at the library. The library lets her work as many hours as she wants. Club Karl wants to hire Joanna to DJ on Thursday nights. The marginal opportunity cost of hiring Joanna at Club Karl is $15 an hour. Answer: TRUE Diff: 2 Type: TF Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 28) Joanna is paid $50 an hour to DJ at Club Keynes on Friday and Saturday nights. The Club is closed all other nights. She also is paid $15 an hour to work at the library. The library lets her work as many hours as she wants. Club Karl wants to hire Joanna to DJ on Thursday nights. The marginal opportunity cost of hiring Joanna at Club Karl is $50 an hour. Answer: FALSE Diff: 2 Type: TF Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 29) A new gym opened up just minutes from Charu's condo. Previously, getting to the gym after school took over an hour! Charu's marginal opportunity cost of studying has increased. Answer: FALSE Diff: 2 Type: TF Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs. 30) A new gym opened up just minutes from Charu's condo. Previously, getting to the gym after school took over an hour! Charu's marginal opportunity cost of studying has decreased. Answer: TRUE Diff: 2 Type: TF Page Ref: 52-54 Skill: Applied Objective: 3.1 Explain why marginal costs are ultimately opportunity costs.

3.2 Forget It, It's History: Sunk Costs Don't Matter for Future Choices 1) Sunk costs A) reflect the best alternative use of your money. B) will eventually be refunded. C) arise from illegal use of inputs. D) include marginal opportunity costs. E) cannot be reversed. Answer: E Diff: 2 Type: MC Page Ref: 54-55 Skill: Recall Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 2) Examples of sunk costs include A) unanticipated future costs. B) pay-as-you-go phone service. C) marginal benefits. D) opportunity costs. E) long-term leases. Answer: E Diff: 1 Type: MC Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 3) Matthew bought a 1994 Honda Civic for $2,000. A friend offered him $500 for the car last week. Matthew has been offered a job in France. Driving an old Honda from Toronto to France is not possible. When calculating his opportunity costs, Matthew should include A) the $1,500 loss on the Honda. B) nothing, because this is a sunk cost. C) the $500 he could get from selling the Honda. D) the $2,000 he spent to buy the car. E) the cost of buying a similar car in France. Answer: C Diff: 3 Type: MC Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions.

4) Komal paid $800 for a night school class. She can still get a 75% refund if she drops out today. When deciding whether to drop out of school, Komal should consider the A) $600. B) $1,400. C) $0. D) $200. E) $800. Answer: A Diff: 2 Type: MC Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 5) Sunk costs are not part of opportunity costs. Answer: TRUE Diff: 2 Type: TF Page Ref: 54-55 Skill: Recall Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 6) Sunk costs are part of opportunity costs. Answer: FALSE Diff: 2 Type: TF Page Ref: 54-55 Skill: Recall Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 7) Sunk costs influence smart choices. Answer: FALSE Diff: 1 Type: TF Page Ref: 54-55 Skill: Recall Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 8) Sunk costs do not influence smart choices. Answer: TRUE Diff: 1 Type: TF Page Ref: 54-55 Skill: Recall Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 9) Sunk costs cannot be reversed. Answer: TRUE Diff: 1 Type: TF Page Ref: 54-55 Skill: Recall Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 100 Copyright © 2021 Pearson Canada Inc.

10) Season's tickets that cannot be resold are a sunk cost. Answer: TRUE Diff: 2 Type: TF Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 11) Buying a photo ID bus pass creates a sunk cost. Answer: TRUE Diff: 1 Type: TF Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 12) Before Andrew took a prestigious accounting job, he estimated that he would have to spend $10,000 on new suits. For a job with a less prestigious company he would only have to spend $2,000 on new suits. When making a smart choice between jobs, the $8,000 difference in clothing costs is irrelevant because it is a sunk cost. Answer: FALSE Diff: 3 Type: TF Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 13) When Francis decides about moving to take a job in Phoenix, his three-year contract with Rogers for cable TV in Toronto is not a relevant factor. Answer: TRUE Diff: 2 Type: TF Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 14) Haley spent 100 hours of her time and bought $500 in supplies to paint a picture. These costs are sunk costs. Answer: TRUE Diff: 2 Type: TF Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions.

15) Komal paid $800 for a night school class. She can still get a 75% refund of $600. The opportunity cost of dropping out of school includes the $200 in tuition that she can't get back. Answer: FALSE Diff: 2 Type: TF Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 16) Kiran paid Global TV $2,000 to run commercials for her business. Even though the commercials are over, her customers still mention them. While the commercials continue to generate new business, the $2,000 is a sunk cost. Answer: TRUE Diff: 2 Type: TF Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 17) Equipment originally bought for $4,000 which now has no resale value is a sunk cost. Answer: TRUE Diff: 2 Type: TF Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 18) Matthew bought a 1994 Honda Civic for $2,000. A friend offered him $500 for the car last week. Matthew has been offered a job in France. Driving an old Honda from Toronto to France is not possible. His opportunity costs of the job include the $1,500 he would lose on the Honda. Answer: FALSE Diff: 2 Type: TF Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 19) A sunk cost can be recovered if you make a smart choice. Answer: FALSE Diff: 2 Type: TF Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 20) You miss the flight to Hawaii, and the airline only gives you a credit for a future flight. The cost of your original ticket is a sunk cost. Answer: TRUE Diff: 2 Type: TF Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 102 Copyright © 2021 Pearson Canada Inc.

21) You miss the flight to Hawaii, and the airline only gives you a credit for a future flight. The cost of your original ticket is not a sunk cost because you can use the credit in the future. Answer: FALSE Diff: 2 Type: TF Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 22) Costco requires all customers to buy a one-time membership before they can shop. The membership fee is a sunk cost. Answer: TRUE Diff: 2 Type: TF Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 23) Costco requires all customers to buy a one-time membership before they can shop. The membership fee is not a sunk cost because the savings on Costco purchases are more than the membership fee. Answer: FALSE Diff: 2 Type: TF Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions. 24) You are sick of your "Save the Whales" tattoo, and are willing to pay to have it painfully removed. The cost of the original tattoo is a sunk cost. Answer: TRUE Diff: 2 Type: TF Page Ref: 54-55 Skill: Applied Objective: 3.2 Define sunk costs and explain why they do not influence smart, forward-looking decisions.

3.3 More For More Money: The Law of Supply 1) All inputs in a business are equally productive at all activities. As the business increases its output, marginal opportunity cost A) decreases but eventually increases. B) is constant. C) increases. D) increases but eventually decreases. E) decreases. Answer: B Diff: 2 Type: MC Page Ref: 55-63 Skill: Recall Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 2) All inputs in a business are not equally productive at all activities. As the business increases its output, marginal opportunity cost A) decreases but eventually increases. B) is constant. C) increases. D) increases but eventually decreases. E) decreases. Answer: C Diff: 2 Type: MC Page Ref: 55-63 Skill: Recall Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 3) As the price of a product or service rises, A) quantity demanded increases. B) demand increases. C) quantity supplied increases. D) supply increases. E) both demand and supply increase. Answer: C Diff: 2 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production.

4) As the price of a product or service falls, A) supply decreases. B) quantity supplied increases. C) both demand and supply decrease. D) quantity supplied decreases. E) supply increases. Answer: D Diff: 2 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 5) Lance runs a bicycle repair shop. His assistant demanded and received a wage raise. In response, Lance's supply of repair services decreases because A) the price of an input rises. B) his marginal opportunity costs fall. C) this is a cost-saving technological innovation. D) he expects that the price of repair services will fall in the future. E) the price of his repair service falls. Answer: A Diff: 2 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 6) Mariya runs a small cafe where she makes sandwiches and sells coffee. There isn't room for a second person so Mariya works alone. Mariya buys a new coffee machine that allows her to brew her coffee more cheaply. Mariya should A) make more sandwiches and sell more coffee. B) make fewer sandwiches and sell less coffee. C) make more sandwiches and sell less coffee. D) go back to the old coffee machine. E) make fewer sandwiches and sell more coffee. Answer: E Diff: 3 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production.

7) Mariya runs a small cafe where she makes sandwiches and sells coffee. There isn't room for a second person so Mariya works alone. Improved growing conditions lead to lower prices for the coffee beans that Mariya buys. Mariya should A) make fewer sandwiches and sell less coffee. B) make fewer sandwiches and sell more coffee. C) make more sandwiches and sell more coffee. D) make more sandwiches and sell less coffee. E) open a coffee bean plantation. Answer: B Diff: 3 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 8) Sadiq attends classes at the college and works at a CIBC bank. During exams, he cuts back on his work hours even though his wage remains the same. The explanation is that A) not all inputs are equally productive during exams. B) the marginal opportunity cost of his time is higher during exams. C) CIBC has a fall in the price of an input to production. D) Sadiq expects that CIBC will offer him more money in the future. E) Sadiq has implemented a cost-saving technology that only works during exams. Answer: B Diff: 3 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 9) Dimitry earns $10 an hour working at Costco. During the school term he works 20 hours a week. In the summer he works 50 hours a week even though his wage is still $10. The explanation is that A) there has been a fall in the price of a complementary product or service. B) the marginal opportunity cost of his time is higher during the summer. C) he expects his wage will be higher in the future. D) the marginal opportunity cost of his time is lower during the summer. E) the marginal benefit of the wage is higher in the summer. Answer: D Diff: 3 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production.

10) Market supply is the A) sum of the minimum prices that each business is willing to accept for each quantity supplied. B) sum of the quantities supplied by all businesses at each price. C) difference between the minimum amount each business is willing to accept and the market price. D) difference between the maximum amount each business is willing to accept and the market price. E) price that covers all opportunity costs of production. Answer: B Diff: 2 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 11) Figure 1.3.2 Monthly Production Possibilities for a Country Producing Only Hockey Sticks and Maple Leaves

Possibility

Hockey Sticks

Maple Leaves

According to the production possibilities in Figure 1.3.2, A) the opportunity cost of producing hockey sticks is constant as more hockey sticks are produced. B) a combination of 3 hockey sticks and 9 maples leaves is possible. C) a combination of 3 hockey sticks and 2 maple leaves is possible. D) the opportunity cost of producing hockey sticks increases as more hockey sticks are produced. E) the opportunity cost of producing hockey sticks decreases as more hockey sticks are produced. Answer: A Diff: 3 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production.

12) Figure 1.3.7 Monthly Production Possibilities for a Country Producing Only Butter and Guns

Possibility

Butter

Guns

13) Figure 1.3.3 Monthly Production Possibilities for a Country Producing Only Butter and Guns

Possibility

Butter

Guns

According to the production possibilities in Figure 1.3.3, A) a combination of 1 butter and 6 gun is possible. B) a combination of 4 butter and 0 guns is possible. C) the opportunity cost of producing guns increases as more guns are produced. D) the opportunity cost of producing guns decreases as more guns are produced. E) the opportunity cost of producing guns is constant as more guns are produced. Answer: E Diff: 3 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 14) Farmland can be used to produce either cattle or corn. If the price of cattle rises, the A) quantity supplied of corn increases. B) supply of corn increases. C) demand for cattle decreases. D) supply of corn decreases. E) quantity supplied of corn decreases. Answer: D Diff: 3 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production.

15) Farmland can be used to produce either cattle or corn. If the price of cattle falls, the A) quantity supplied of corn increases. B) supply of corn increases. C) demand for cattle increases. D) supply of corn decreases. E) quantity supplied of corn decreases. Answer: B Diff: 3 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 16) A market has 10 identical businesses. When the price is $50, one business's quantity supplied is 70 units and market supply is A) 700 units. B) 500 units. C) 3,500 units. D) 70 units. E) impossible to calculate without more information. Answer: A Diff: 2 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 17) The law of supply tells us that, if other factors do not change, as the A) price of gasoline falls, the quantity of gasoline supplied decreases. B) price of gasoline rises, the quantity of gasoline supplied decreases. C) supply of gasoline increases, the price of gasoline rises. D) cost of producing gasoline decreases, the supply of gasoline increases. E) cost of producing gasoline increases, the price of gasoline rises. Answer: A Diff: 2 Type: MC Page Ref: 55-63 Skill: Recall Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production.

18) A fall in the price of a product results in a decrease in quantity supplied. This illustrates A) the law of supply. B) the law of demand. C) a change in supply. D) an inferior good. E) technological improvement. Answer: A Diff: 1 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 19) A rise in the price of a service A) decreases demand for the service. B) increases the quantity supplied of the service. C) decreases demand for the service. D) increases the supply of the service. E) increases preferences for the service. Answer: B Diff: 1 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 20) Some producers are chatting over a beer. Which quotation refers to a change in quantity supplied? A) "Wage increases have forced us to raise our prices." B) "Our new, sophisticated equipment will enable us to undercut our competitors." C) "Raw material prices have sky-rocketed; we will have to pass the cost on to our customers." D) "We anticipate a big increase in demand. Our product price should rise, so we are planning for an increase in output." E) "New competitors in the industry are causing prices to fall." Answer: D Diff: 2 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production.

21) Some producers are chatting over a beer. Which quotation refers to a movement along a supply curve? A) "Wage increases have forced us to raise our prices." B) "Our new, sophisticated equipment will enable us to undercut our competitors." C) "Raw material prices have sky-rocketed; we will have to pass the cost on to our customers." D) "We anticipate a big increase in demand. Our product price should rise, so we are planning for an increase in output." E) "New competitors in the industry are causing prices to fall." Answer: D Diff: 2 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production.

Figure 3.3.1

22) The economy is at point b on the PPF in Figure 3.3.1. The opportunity cost of producing one more unit of X is A) 1 unit of Y. B) 20 units of X. C) 20 units of Y. D) 1 unit of X. E) 8 units of X. Answer: C Diff: 2 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 23) The economy is at point b on the PPF in Figure 3.3.1. The opportunity cost of moving to point a is A) 8 units of X. B) 20 units of Y. C) 30 units of Y. D) 6 units of X. E) 2 units of X. Answer: E Diff: 2 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 113 Copyright © 2021 Pearson Canada Inc.

24) The economy is at point a on the PPF in Figure 3.3.1. The opportunity cost of moving to point b is A) 50 units of Y. B) 20 units of Y. C) 30 units of Y. D) 6 units of X. E) 2 units of X. Answer: C Diff: 2 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 25) Which statement about the PPF in Figure 3.3.1 is false? A) Inputs are not equally productive in all activities. B) Points inside the frontier represent unemployed inputs. C) Starting at point a, an increase in the production of good Y will shift the frontier out. D) The opportunity cost of producing good Y increases as production of Y increases. E) Shifts in preferences for good X or good Y will not shift the frontier. Answer: C Diff: 3 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 26) Which statement about the PPF in Figure 3.3.1 is true? A) Inputs are equally productive in all activities. B) Points inside the frontier represent impossible combinations of good X and good Y. C) The opportunity cost of producing good X decreases as production of X increases. D) The opportunity cost of producing good Y increases as production of Y increases. E) Changes in consumer preferences for good X or good Y will shift the PPF. Answer: D Diff: 3 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production.

27) You read a A) marginal cost curve up and over. B) marginal cost curve over and down. C) supply curve up and over. D) supply curve as the minimum price businesses will accept. E) marginal cost curve as the maximum price businesses will accept. Answer: A Diff: 2 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 28) Which statements are true? 1 2 3 4

Read a supply curve up and over. Read a marginal cost curve up and over. Read a supply curve over and down. Read a marginal cost curve over and down.

A) 3 only B) 1 and 2 C) 1 and 4 D) 2 and 3 E) 2 and 4 Answer: D Diff: 1 Type: MC Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 29) Which statements are true? 1 2 3 4

Read a supply curve over and down. Read a marginal cost curve over and down. Read a supply curve up and over. Read a marginal cost curve up and over.

A) 3 only B) 1 and 2 C) 1 and 4 D) 2 and 3 E) 2 and 4 Answer: C Diff: 1 Type: MC Page Ref: 55-63 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 115 Copyright © 2021 Pearson Canada Inc.

30) If the price of a product or service rises, quantity supplied increases. Answer: TRUE Diff: 1 Type: TF Page Ref: 55-63 Skill: Recall Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 31) If the price of a product or service rises, supply increases. Answer: FALSE Diff: 1 Type: TF Page Ref: 55-63 Skill: Recall Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 32) When increasing output, marginal opportunity costs increase because inputs are not equally productive in all activities. Answer: TRUE Diff: 1 Type: TF Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 33) When decreasing output, marginal opportunity costs increase because inputs are not equally productive in all activities. Answer: FALSE Diff: 1 Type: TF Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 34) For a business to be willing to increase its quantity supplied, rising prices are necessary to cover higher marginal opportunity costs of production. Answer: TRUE Diff: 2 Type: TF Page Ref: 55-63 Skill: Recall Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 35) When inputs are not equally productive in all activities, marginal opportunity costs are constant. Answer: FALSE Diff: 2 Type: TF Page Ref: 55-63 Skill: Recall Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 116 Copyright © 2021 Pearson Canada Inc.

36) When inputs are equally productive in all activities, marginal opportunity costs are constant. Answer: TRUE Diff: 2 Type: TF Page Ref: 55-63 Skill: Recall Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 37) Haley works painting kitchens. In her free time, she paints watercolour paintings that sell for $1,000. If the price of her paintings rises to $1,200, it would be a smart choice for Haley to spend less time painting kitchens. Answer: TRUE Diff: 2 Type: TF Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 38) Haley works painting kitchens. In her free time, she paints watercolour paintings that sell for $1,000. If the price of her paintings falls to $800, it would be a smart choice for Haley to spend less time painting kitchens. Answer: FALSE Diff: 2 Type: TF Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 39) Heather earns $15 an hour as a server at the Snug Harbor Restaurant. If her manager offers her $20 an hour, it would be a smart decision to spend more time working. Answer: TRUE Diff: 1 Type: TF Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 40) Farm land around a city is often sold to developers to build houses. These sales are smart choices by land owners because housing prices are rising more rapidly than the prices of farm products. Answer: TRUE Diff: 2 Type: TF Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production.

41) Farm land around a city is often sold to developers to build houses. These sales must not be smart choices by land owners because fertile land is not being used to grow crops. Answer: FALSE Diff: 2 Type: TF Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 42) Ontario tobacco growers recently ripped out tobacco plants and replaced them with peanut vines. This illustrates the law of supply. Answer: TRUE Diff: 2 Type: TF Page Ref: 55-63 Skill: Applied Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 43) The law of supply says that when price rises, quantity supplied decreases. Answer: FALSE Diff: 1 Type: TF Page Ref: 55-63 Skill: Recall Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 44) The law of supply says that when price rises, quantity supplied increases. Answer: TRUE Diff: 1 Type: TF Page Ref: 55-63 Skill: Recall Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 45) The law of supply says that when price rises, supply decreases. Answer: FALSE Diff: 1 Type: TF Page Ref: 55-63 Skill: Recall Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production. 46) The law of supply states that when price rises, supply increases. Answer: FALSE Diff: 1 Type: TF Page Ref: 55-63 Skill: Recall Objective: 3.3 Explain the law of supply and describe the roles of higher profits and higher marginal opportunity costs of production.

47) Rising prices increase quantity supplied because of higher profits and the need to cover increasing marginal opportunity costs. Answer: TRUE Diff: 2 Type: TF Page Ref: 55-63 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 48) The law of supply works because of the availability of substitutes. Answer: FALSE Diff: 2 Type: TF Page Ref: 55-63 Skill: Applied Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 49) Quantity supplied is the amount you actually plan to supply at a given price. Answer: TRUE Diff: 1 Type: TF Page Ref: 55-63 Skill: Recall Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 50) Quantity supplied is the sum of the supplies of all businesses willing to produce a particular product or service. Answer: FALSE Diff: 1 Type: TF Page Ref: 55-63 Skill: Recall Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay. 51) Market supply is the sum of the supplies of all businesses willing to produce a particular product or service. Answer: TRUE Diff: 1 Type: TF Page Ref: 55-63 Skill: Recall Objective: 2.3 Explain the law of demand and describe the roles of substitutes and willingness and ability to pay.

3.4 Changing the Bottom Line: What Can Change Supply? 1) When sellers expect a higher future price, then today's A) supply decreases. B) demand decreases. C) quantity supplied decreases. D) quantity supplied increases. E) supply increases. Answer: A Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 2) When sellers expect a higher future price, then today's A) supply curve shifts leftward. B) demand curve shifts leftward. C) quantity supplied decreases. D) quantity supplied increases. E) supply curve shifts rightward. Answer: A Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 3) When a new technology lowers the cost of production, the A) quantity supplied decreases. B) demand increases. C) quantity supplied increases. D) supply decreases. E) supply increases. Answer: E Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply.

4) When a new technology lowers the cost of production, the A) quantity supplied decreases. B) demand curve shifts rightward. C) quantity supplied increases. D) supply curve shifts leftward. E) supply curve shifts rightward. Answer: E Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 5) When input prices rise and increase the cost of production, the A) quantity supplied increases. B) demand increases. C) supply increases. D) supply decreases. E) quantity supplied decreases. Answer: D Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 6) When input prices rise and increase the cost of production, the A) quantity supplied increases. B) demand curve shifts rightward. C) supply curve shifts rightward. D) supply curve shifts leftward. E) quantity supplied decreases. Answer: D Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply.

7) Popeye's Parlour supplies both piercing and tattoo services. Higher prices for piercings cause Popeye's A) supply of tattoos to decrease. B) quantity supplied of tattoos to increase. C) supply of tattoos to increase. D) quantity supplied of tattoos to decrease. E) quantity demanded of tattoos to increase. Answer: A Diff: 3 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 8) Popeye's Parlour supplies both piercing and tattoo services. Higher prices for piercings cause Popeye's A) supply curve of tattoos to shift leftward. B) quantity supplied of tattoos to increase. C) supply curve of tattoos to shift rightward. D) quantity supplied of tattoos to decrease. E) quantity demanded of tattoos to increase. Answer: A Diff: 3 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 9) Supply increases from all of the following except A) the introduction of a cost-saving technology. B) a rise in input prices. C) an increase in the number of businesses selling. D) a fall in the price of a related product or service in production. E) an expectation that future prices will be lower. Answer: B Diff: 2 Type: MC Page Ref: 64-70 Skill: Recall Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply.

10) The supply curve shifts rightward from all of the following except A) the introduction of a cost-saving technology. B) a rise in input prices. C) an increase in the number of businesses selling. D) a fall in the price of a related product or service in production. E) an expectation that future prices will be lower. Answer: B Diff: 2 Type: MC Page Ref: 64-70 Skill: Recall Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 11) Supply decreases from all of the following except A) a decrease in the number of businesses selling. B) an expectation that future prices will be higher. C) a rise in input prices. D) the introduction of a cost-saving technology. E) an increase in the wages paid to employees. Answer: D Diff: 2 Type: MC Page Ref: 64-70 Skill: Recall Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 12) The supply curve shifts leftward from all of the following except A) a decrease in the number of businesses selling. B) an expectation that future prices will be higher. C) a rise in input prices. D) the introduction of a cost-saving technology. E) an increase in the wages paid to employees. Answer: D Diff: 2 Type: MC Page Ref: 64-70 Skill: Recall Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 13) Aluminum producers use large amounts of electricity. When the price of electricity rises, A) the supply of aluminum increases. B) the supply of aluminum decreases. C) both demand and supply increase. D) the demand for aluminum increases. E) the demand for aluminum decreases. Answer: B Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 123 Copyright © 2021 Pearson Canada Inc.

14) Aluminum producers use large amounts of electricity. When the price of electricity rises, A) the supply curve of aluminum shifts rightward. B) the supply curve of aluminum shifts leftward. C) both the demand and supply curves shift rightward. D) the demand curve for aluminum shifts rightward. E) the demand curve for aluminum shifts leftward. Answer: B Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 15) Oil is used to produce rubber boots. When the price of oil falls, A) both the demand and supply of rubber boots increase. B) the supply of rubber boots decreases. C) the supply of rubber boots increases. D) the demand for rubber boots increases. E) the demand for rubber boots decreases. Answer: C Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 16) Oil is used to produce rubber boots. When the price of oil falls, A) both the demand curve and supply curves of rubber boots shift rightward. B) the supply curve of rubber boots shifts leftward. C) the supply curve of rubber boots shifts rightward. D) the demand curve for rubber boots shifts rightward. E) the demand curve for rubber boots shifts leftward. Answer: C Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply.

17) The introduction of ATMs - automated teller machines - led Scotiabank to open additional bank branches with ATMs. An economist suggests this is because A) demand decreased. B) input prices are higher. C) the marginal opportunity cost of banking increased. D) quantity demanded decreased. E) a cost-saving technology was introduced. Answer: E Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 18) Rogers Cable provides internet and cable television services in the Toronto area. These are related services that Rogers delivers over the same cables. Competition from satellite television providers has driven down the price for cable television. Rogers will A) increase their quantity supplied of internet services. B) decrease their demand for cable services. C) increase their supply of cable services. D) increase their supply of internet services. E) decrease their supply of internet services. Answer: D Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 19) When security guards at the airport negotiate a higher wage, the cost of operating the airport increases. Managers at the airport should A) increase the supply of airport services. B) decrease the quantity supplied of airport services. C) increase the quantity supplied of airport services. D) decrease the supply of airport services. E) increase the quantity demanded of airport services. Answer: D Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply.

20) A decrease in the wages of farm workers who harvest coffee beans A) increases the quantity supplied of coffee. B) increases the supply of coffee. C) decreases the supply of coffee. D) decreases the quantity supplied of coffee. E) increases the demand for coffee. Answer: B Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 21) A decrease in the wages of farm workers who harvest coffee beans A) increases the quantity supplied of coffee. B) shifts the supply curve of coffee rightward. C) shifts the supply curve of coffee leftward. D) decreases the quantity supplied of coffee. E) shifts the demand curve for coffee rightward. Answer: B Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 22) A technological change that lowers the cost of producing pencils A) increases the quantity supplied of pencils. B) increases the supply of pencils. C) decreases the supply of pencils. D) decreases the quantity supplied of pencils. E) increases the demand for pencils. Answer: B Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 23) A technological change that lowers the cost of producing pencils A) increases the quantity supplied of pencils. B) shifts the supply curve of pencils rightward. C) shifts the supply curve of pencils leftward. D) decreases the quantity supplied of pencils. E) shifts the demand curve for pencils rightward. Answer: B Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 126 Copyright © 2021 Pearson Canada Inc.

24) If a rise in the price of product A causes the supply of product B to decrease, then A) A and B are substitutes for consumers. B) A and B complements for consumers. C) A and B are related products for businesses. D) A and B are unrelated products for businesses. E) none of the above are true. Answer: C Diff: 3 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 25) If a rise in the price of product A causes the supply curve of product B to shift leftward, then A) A and B are substitutes for consumers. B) A and B complements for consumers. C) A and B are related products for businesses. D) A and B are unrelated products for businesses. E) none of the above are true. Answer: C Diff: 3 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 26) If the same inputs can be used to produce two different outputs, the outputs are A) substitutes for consumers. B) complements for consumers. C) related products for businesses. D) unrelated products for businesses. E) normal goods. Answer: C Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply.

27) Turnips are an inferior good. A rise in the price of turnips, all other factors remaining the same, causes A) a decrease in the demand for turnips. B) an increase in the demand for turnips. C) a decrease in the supply of turnips. D) an increase in the supply of turnips. E) none of the above. Answer: E Diff: 3 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 28) Turnips are an inferior good. A rise in the price of turnips, all other factors remaining the same, causes A) the demand curve for turnips to shift leftward. B) the demand curve for turnips to shift rightward. C) the supply curve of turnips to shift leftward. D) the supply curve of turnips to shift rightward. E) none of the above. Answer: E Diff: 3 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 29) Turnips are an inferior good. A rise in the price of turnips, all other factors remaining the same, A) increases the quantity demanded of turnips. B) decreases the demand for turnips. C) decreases the quantity supplied of turnips. D) increases the supply of turnips. E) increases the quantity supplied of turnips. Answer: E Diff: 3 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply.

30) Turnips are an inferior good. A rise in the price of turnips, all other factors remaining the same, A) increases the quantity demanded of turnips. B) shifts the demand curve for turnips leftward. C) decreases the quantity supplied of turnips. D) shifts the supply curve of turnips rightward. E) increases the quantity supplied of turnips. Answer: E Diff: 3 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 31) A change in the supply of bananas is caused by a change in A) preferences for bananas. B) income. C) the price of bananas. D) the price of a related product for banana growers. E) the number of customers for bananas. Answer: D Diff: 3 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 32) Some producers are chatting over a beer. Which quotation refers to an increase in supply? A) "Wage increases have forced us to raise our prices." B) "Our new, sophisticated equipment will enable us to undercut our competitors." C) "Raw material prices have sky-rocketed; we will have to pass the cost on to our customers." D) "We anticipate a big increase in demand. Our product price should rise, so we are planning for an increase in output." E) "Some competing businesses are leaving the industry and prices are rising." Answer: B Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply.

33) Some producers are chatting over a beer. Which quotation refers to a rightward shift of the supply curve? A) "Wage increases have forced us to raise our prices." B) "Our new, sophisticated equipment will enable us to undercut our competitors." C) "Raw material prices have sky-rocketed; we will have to pass the cost on to our customers." D) "We anticipate a big increase in demand. Our product price should rise, so we are planning for an increase in output." E) "Some competing businesses are leaving the industry and prices are rising." Answer: B Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 34) Some producers are chatting over a beer. Which quotation refers to a leftward shift of the supply curve? A) "Wage increases have forced us to raise our prices." B) "Our new, sophisticated equipment will enable us to undercut our competitors." C) "Raw material prices have fallen; we will pass the savings on to our customers." D) "We anticipate a big increase in demand. Our product price should rise, so we are planning for an increase in output." E) "We anticipate a big decrease in demand. Our product price should fall, so we are planning for a decrease in output." Answer: A Diff: 2 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 35) Which "other factors" are not held constant along a supply curve? A) the environment B) the expected future price C) the number of businesses D) the price of the product itself E) all of the above are not held constant Answer: D Diff: 1 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply.

36) Which "other factors" are not held constant along a supply curve? A) the technology B) the price of inputs C) the number of businesses D) the price of the product itself E) all of the above are not held constant Answer: D Diff: 1 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 37) Which "other factors" are held constant along a supply curve? A) the environment B) the expected future price C) the number of businesses D) the price of inputs E) all of the above are held constant Answer: E Diff: 1 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 38) Which "other factors" are held constant along a supply curve? A) income B) preferences C) the number of consumers D) the price of a related product or service E) all of the above are held constant Answer: D Diff: 1 Type: MC Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 39) If sellers expect a higher price in the future, they increase quantity supplied today. Answer: FALSE Diff: 2 Type: TF Page Ref: 64-70 Skill: Recall Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply.

40) If the price of an input falls, sellers decrease quantity supplied. Answer: FALSE Diff: 1 Type: TF Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 41) If the price of an input falls, sellers increase supply. Answer: TRUE Diff: 1 Type: TF Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 42) An improvement in technology increases quantity supplied. Answer: FALSE Diff: 1 Type: TF Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 43) An improvement in technology increases supply. Answer: TRUE Diff: 1 Type: TF Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 44) Popeye's Parlour supplies both piercing and tattoo services. Higher prices for piercings causes Popeye's to increase the supply of tattoos. Answer: FALSE Diff: 2 Type: TF Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 45) Popeye's Parlour supplies both piercing and tattoo services. Higher prices for piercings causes Popeye's to decrease the supply of tattoos. Answer: TRUE Diff: 2 Type: TF Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply.

46) Popeye's Parlour supplies both piercing and tattoo services. Higher prices for piercings causes Popeye's to increase the quantity supplied of piercings. Answer: TRUE Diff: 2 Type: TF Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 47) An increased number of businesses increases supply. Answer: TRUE Diff: 2 Type: TF Page Ref: 64-70 Skill: Recall Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 48) An increased number of businesses increases quantity supplied. Answer: FALSE Diff: 2 Type: TF Page Ref: 64-70 Skill: Recall Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 49) When bus drivers at the transit commission negotiate a higher wage, we see less frequent bus service; a decrease in quantity supplied. Answer: FALSE Diff: 2 Type: TF Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 50) Corn and bacon are related products; you can't grow corn and raise pigs on the same land. If the price of corn rises, smart farmers supply less bacon. Answer: TRUE Diff: 2 Type: TF Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 51) Clinton owns several watercolour portraits purchased from a local artist. The artist's health isn't good, so he is not selling any of these paintings now. Clinton's strategy, though somewhat cold-blooded, is consistent with the law of supply. Answer: TRUE Diff: 2 Type: TF Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 133 Copyright © 2021 Pearson Canada Inc.

52) Lower interest rates reduce the cost of borrowing to buy inputs. If no other factors change, smart businesses increase their supply of outputs when interest rates are low. Answer: TRUE Diff: 2 Type: TF Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 53) Electric utilities offer discounts to businesses who produce their product or service during off-peak times of the day. This fall in input prices increases supply by these businesses. Answer: TRUE Diff: 1 Type: TF Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 54) The law of supply works as long as nothing else besides the price of the product changes. Answer: TRUE Diff: 1 Type: TF Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 55) The economist's distinction between quantity supplied and supply is an attempt to copy a controlled experiment. Answer: TRUE Diff: 1 Type: TF Page Ref: 64-70 Skill: Applied Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 56) Economists use the term quantity supplied to summarize all of the influences on a business's willingness to produce a particular product or service. Answer: FALSE Diff: 1 Type: TF Page Ref: 64-70 Skill: Recall Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 57) Economists use the term supply to summarize all of the influences on a business's willingness to sell a particular product or service. Answer: TRUE Diff: 1 Type: TF Page Ref: 64-70 Skill: Recall Objective: 3.4 Explain the difference between a change in quantity supplied and a change in supply, and list six factors that change supply. 134 Copyright © 2021 Pearson Canada Inc.

Macroeconomics for Life: Smart Choices for All?, Updated 2e (Cohen) Chapter 4 Coordinating Smart Choices: Demand and Supply 4.1 What's a Market? 1) Voluntary exchange A) requires disinterested consumers. B) can make some people worse off. C) is a zero-sum game. D) is mutually beneficial. E) is now illegal in Europe. Answer: D Diff: 2 Type: MC Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 2) For exchange to be voluntary, price must be less than the A) opportunity cost of the buyer. B) marginal benefit of the buyer. C) minimum amount the seller is willing to accept. D) opportunity cost of the seller. E) marginal benefit of the seller. Answer: B Diff: 2 Type: MC Page Ref: 78-79 Skill: Applied Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 3) For exchange to be voluntary, price must be more than the A) marginal benefit of the seller. B) opportunity cost of the buyer. C) opportunity cost of the seller. D) maximum amount the buyer is willing to pay. E) marginal benefit of the buyer. Answer: C Diff: 2 Type: MC Page Ref: 78-79 Skill: Applied Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange.

4) Property rights A) are easy to implement in large countries. B) were recently eliminated in Australia. C) are only important in the city. D) are legally enforceable guarantees of ownership. E) are not important in the market. Answer: D Diff: 1 Type: MC Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 5) Property rights A) provide incentives for selling. B) are part of the rules of the game for markets to work. C) are enforced by government. D) are a prerequisite for anything to be produced. E) are all of the above. Answer: E Diff: 2 Type: MC Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 6) Supporters of "free markets" believe that A) the government has no role to play in the economy. B) competition between buyers is all that is needed for voluntary exchange. C) voluntary exchange is a zero-sum game. D) the government has an important role in enforcing property rights. E) competition between sellers is all that is needed for voluntary exchange. Answer: D Diff: 2 Type: MC Page Ref: 78-79 Skill: Applied Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 7) In Canada, we define property to include everything except A) money. B) land. C) buildings. D) music. E) people. Answer: E Diff: 1 Type: MC Page Ref: 78-79 Skill: Applied Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange.

8) A market is defined as A) a process. B) interactions between buyers and sellers. C) a process of competing bids and offers. D) negotiations between buyers and sellers resulting in exchange. E) all of the above. Answer: E Diff: 2 Type: MC Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 9) A market is defined as a A) physical or virtual place. B) thing. C) process. D) place where sellers take advantage of buyers. E) place where buyers take advantage of sellers. Answer: C Diff: 2 Type: MC Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 10) Which statement about markets is false? A) buyers compete with sellers B) buyers cooperate with sellers C) buyers compete with other buyers D) sellers compete with other sellers E) sellers cooperate with buyers Answer: A Diff: 2 Type: MC Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 11) Which statement about markets is false? A) sellers compete with other sellers B) buyers cooperate with sellers C) buyers compete with other buyers D) sellers cooperate with other sellers E) sellers cooperate with buyers Answer: D Diff: 2 Type: MC Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange.

12) Which statement about markets is true? A) buyers compete with sellers B) buyers cooperate with other buyers C) buyers compete with other buyers D) sellers cooperate with other sellers E) sellers compete with buyers Answer: C Diff: 2 Type: MC Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 13) Which statement about markets is true? A) buyers compete with sellers B) sellers cooperate with buyers C) buyers cooperate with other buyers D) sellers cooperate with other sellers E) sellers compete with buyers Answer: B Diff: 2 Type: MC Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 14) Which statement about markets is true? A) sellers compete with other sellers B) sellers cooperate with buyers C) buyers compete with other buyers D) buyers cooperate with sellers E) all of the above statements are true Answer: E Diff: 2 Type: MC Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange.

15) Apu Nahasapeemapetilon opens an outdoor iced cappuccino stand in order to sell coffee to neighbours. Apu's product is unique enough that he has some choice about what price to charge. Based the information above, which statement is true? A) If customers are allowed to steal the iced cappuccinos without paying, this would still be a market. B) The price should cover what it costs to make the iced cappuccinos, but not the cost of Apu's time. C) If Apu sells no iced cappuccinos, his price must be less than the marginal benefit of any of his customers. D) If Apu sells no iced cappuccinos, his price must be greater than the marginal benefit of any of his customers. E) If Apu moved his stand indoors, it would no longer be a market. Answer: D Diff: 2 Type: MC Page Ref: 78-79 Skill: Applied Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 16) A market is a process - the interactions between buyers and sellers. Answer: TRUE Diff: 1 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 17) A market is defined as a place where trades occur. Answer: FALSE Diff: 1 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 18) All markets involve negotiations between buyers and sellers that result in exchange. Answer: TRUE Diff: 1 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 19) Fixed prices in markets eliminate competition between buyers. Answer: FALSE Diff: 2 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 20) If all sellers in a market charge the same price, that eliminates competition between sellers. Answer: FALSE Diff: 2 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 139 Copyright © 2021 Pearson Canada Inc.

21) Voluntary exchange is competitive at heart. Answer: FALSE Diff: 2 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 22) For exchange to be voluntary the price must be greater than both the marginal opportunity cost of the seller and the marginal benefit of the buyer. Answer: FALSE Diff: 1 Type: TF Page Ref: 78-79 Skill: Applied Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 23) For exchange to be voluntary the price must be greater than the marginal opportunity cost of the seller and less than the marginal benefit of the buyer. Answer: TRUE Diff: 1 Type: TF Page Ref: 78-79 Skill: Applied Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 24) Property rights are legally enforceable guarantees of ownership. Answer: TRUE Diff: 2 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 25) Property rights are a prerequisite for anything to be produced. Answer: TRUE Diff: 2 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 26) Without property rights there would be no incentive to produce and sell products. Answer: TRUE Diff: 2 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 27) Voluntary exchange is a zero-sum game. Answer: FALSE Diff: 2 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange.

28) Copyrights and patents are legally enforceable guarantees to the owners of physical property. Answer: FALSE Diff: 2 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 29) Sellers compete against buyers in the marketplace. Answer: FALSE Diff: 2 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 30) When concert tickets go on sale, potential buyers compete on a first-come, first-get basis. Answer: TRUE Diff: 1 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 31) In a voluntary exchange, the price must at least be equal to the minimum amount the seller is willing to accept. Answer: TRUE Diff: 2 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 32) In a voluntary exchange, the price must at least be equal to the maximum amount the buyer is willing to pay. Answer: FALSE Diff: 2 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 33) In a voluntary exchange, the price must be more than the marginal benefit of the buyer. Answer: FALSE Diff: 2 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 34) In a voluntary exchange, the price must be more than the opportunity cost of the buyer. Answer: FALSE Diff: 2 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange.

35) In a voluntary exchange, the price must be more than the opportunity cost of the seller. Answer: TRUE Diff: 2 Type: TF Page Ref: 78-79 Skill: Recall Objective: 4.1 Describe what a market is and the necessary rules for voluntary exchange. 4.2 Where Do Prices Come From? Price Signals From Combining Demand and Supply 1) In a market economy, A) prices are set by businesses alone. B) businesses adjust prices more often than quantities. C) prices are determined by the interaction of demand and supply. D) consumers must buy at the prices businesses set. E) the government determines prices. Answer: C Diff: 2 Type: MC Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices. 2) The miracle of markets is that A) markets coordinate smart choices of consumers and businesses without any role for government. B) businesses are free to set any prices they choose. C) consumers and businesses learn about each others' personal wants and production capabilities. D) the products and services we want are produced as a byproduct of individual decisions made by complete strangers. E) scarcity is eliminated by the interaction of demand and supply in markets with appropriate property rights. Answer: D Diff: 2 Type: MC Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices. 3) The miracle of markets occurs A) because government enforces property rights. B) because prices serve as signals to consumers and businesses for smart choices. C) when consumers and businesses make self-interested smart choices based on prices. D) as a byproduct of individual decisions made by complete strangers. E) because all of the above are true. Answer: E Diff: 2 Type: MC Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices.

4) Which is not a quantity adjustment? A) Ford asks its assembly plant workers to work overtime. B) Leon's Furniture eliminates the HST on furniture sales. C) PBS orders extra DVD copies of Downton Abbey. D) Ontario Hydro lays off half of the workers in its nuclear plants. E) Apple builds up inventories of iPads before selling a new model. Answer: B Diff: 2 Type: MC Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices. 5) When the price is above the market-clearing price, A) the market-clearing price rises. B) rising inventories cause the price to fall. C) falling inventories cause the price to fall. D) falling inventories cause the price to rise. E) rising inventories cause the price to rise. Answer: B Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 6) When the price is below the market-clearing price, A) the market-clearing price falls. B) rising inventories cause the price to fall. C) falling inventories cause the price to fall. D) falling inventories cause the price to rise. E) rising inventories cause the price to rise. Answer: D Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 7) When price is too high, we see A) excess supply. B) shortages. C) frustrated buyers. D) long lineups. E) falling inventories. Answer: A Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices.

8) When price is too low, we see A) excess supply. B) shortages. C) unsold products. D) rising inventories. E) frustrated sellers. Answer: B Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 9) Rising prices for a product A) create incentives for consumers to find cheaper substitutes. B) eliminate shortages. C) create incentives for businesses to produce more. D) decrease quantity demanded of the product. E) do all of the above. Answer: E Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 10) Falling prices for a product A) create incentives for consumers to buy more, switching from more expensive substitutes. B) eliminate surpluses. C) create incentives for businesses to produce less. D) decrease quantity supplied of the product. E) do all of the above. Answer: E Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 11) Rising prices for a service A) create incentives for consumers to buy more, switching from more expensive substitutes. B) eliminate surpluses. C) create incentives for businesses to produce less. D) decrease quantity demanded of the service. E) do all of the above. Answer: D Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices.

12) Falling prices for a service A) create incentives for consumers to find cheaper substitutes. B) eliminate shortages. C) decrease quantity demanded of the service. D) decrease supply of the service. E) do none of the above. Answer: E Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 13) Rising prices for a service A) create incentives for consumers to buy more, switching from more expensive substitutes. B) eliminate surpluses. C) create incentives for businesses to produce less. D) increase supply of the service. E) do none of the above. Answer: E Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 14) Falling prices for a service A) create incentives for consumers to find cheaper substitutes. B) eliminate shortages. C) decrease quantity supplied of the service. D) create incentives for businesses to produce more. E) do all of the above. Answer: C Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 15) If workers demand a wage above the market-clearing wage, we observe A) unemployment. B) an excess supply of jobs. C) a shortage of workers. D) unions. E) an excess demand for workers. Answer: A Diff: 3 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices.

Figure 4.2.1 Market Demand and Supply for Pet Rocks Price

Quantity Demanded

Quantity Supplied

$1 $2 $3 $4 $5 $6 $7 $8

900 800 600 500 420 350 320 300

100 200 420 500 580 640 680 700

16) Look at Figure 4.2.1. At a price of $3, A) the market is in equilibrium. B) there is a surplus of 180. C) there is a shortage of 180. D) there is pressure for the price to fall. E) inventories increase by 180. Answer: C Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 17) Look at Figure 4.2.1. There is a shortage if the price is A) $7. B) $4. C) $5. D) below $4. E) above $4. Answer: D Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 18) Look at Figure 4.2.1. There is a surplus if the price is A) $2. B) $3. C) above $4. D) below $4. E) $4. Answer: C Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 146 Copyright © 2021 Pearson Canada Inc.

19) How do price adjustments eliminate a surplus? A) As price rises, quantity demanded decreases and quantity supplied increases. B) As price rises, quantity demanded increases and quantity supplied decreases. C) As price falls, quantity demanded decreases and quantity supplied increases. D) As price falls, quantity demanded increases and quantity supplied decreases. E) None of the above are true. Answer: D Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 20) How do price adjustments eliminate a shortage? A) As price rises, quantity demanded decreases and quantity supplied increases. B) As price rises, quantity demanded increases and quantity supplied decreases. C) As price falls, quantity demanded decreases and quantity supplied increases. D) As price falls, quantity demanded increases and quantity supplied decreases. E) As price falls, quantity demanded increases and quantity supplied increases. Answer: A Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 21) A shortage is the amount by which quantity A) demanded exceeds quantity supplied. B) supplied exceeds quantity demanded. C) demanded increases when the price rises. D) demanded exceeds the equilibrium quantity. E) supplied exceeds the equilibrium quantity. Answer: A Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 22) A surplus is the amount by which quantity A) demanded exceeds quantity supplied. B) supplied exceeds quantity demanded. C) supplied increases when the price falls. D) demanded exceeds the equilibrium quantity. E) supplied exceeds the equilibrium quantity. Answer: B Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices.

23) A shortage creates pressure for the A) price to fall. B) price to sit still. C) price to rise. D) quantity demanded to increase. E) quantity supplied to decrease. Answer: C Diff: 1 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 24)

Figure 4.2.2 The Market for Robotic Rubber Ducks Price

Quantity Demanded

Quantity Supplied

$ 40 $ 50 $ 60 $ 70 $ 80 $ 90 $100

500 450 400 350 300 250 200

300 350 400 450 500 550 600

Look at Figure 4.2.2. If the price is set at $80, there is a A) shortage of 200 and price will rise. B) shortage of 200 and demand will decrease. C) surplus of 200 and demand will increase. D) surplus of 200 and supply will decrease. E) surplus of 200 and price will fall. Answer: E Diff: 2 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices.

25) Look at Figure 4.2.3. At a price of $12 there is a A) surplus of 20. B) shortage of 20. C) surplus of 10. D) surplus of 40. E) shortage of 8. Answer: A Diff: 1 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 26) Look at Figure 4.2.3. At a price of $12, how many units are sold in the market? A) 20 units B) 30 units C) 40 units D) zero units E) none of the above Answer: A Diff: 1 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices.

27) Look at Figure 4.2.3. At a price of $8 there is A) a surplus of 20. B) a shortage of 20. C) a surplus of 10. D) a shortage of 10. E) none of the above. Answer: E Diff: 1 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 28) Look at Figure 4.2.3. At a price of $4, how many units are sold in the market? A) 20 units B) 30 units C) 40 units D) zero units E) none of the above Answer: A Diff: 1 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 29) Look at Figure 4.2.3. At a price of $4 there is a A) surplus of 20. B) shortage of 20. C) surplus of 10. D) surplus of 40. E) shortage of 40. Answer: B Diff: 1 Type: MC Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 30) Prices are the outcome of a market process of competing bids and offers. Answer: TRUE Diff: 1 Type: TF Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices. 31) Without appropriately defined property rights, markets fail. Answer: TRUE Diff: 1 Type: TF Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices.

32) When the price is too low, shortages cause the price to fall further. Answer: FALSE Diff: 2 Type: TF Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices. 33) When the price is too high, inventories increase. Answer: TRUE Diff: 2 Type: TF Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices. 34) In markets with shortages, businesses have incentives to increase quantity supplied as long as price exceeds marginal costs. Answer: TRUE Diff: 2 Type: TF Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices. 35) When inventories are rising, businesses have incentives to decrease quantity supplied because price is less than marginal benefits. Answer: FALSE Diff: 2 Type: TF Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 36) Businesses adjust prices more frequently than they adjust quantities. Answer: FALSE Diff: 2 Type: TF Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices. 37) Businesses adjust quantities more frequently than they adjust prices. Answer: TRUE Diff: 2 Type: TF Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices. 38) When inventories increase, it signals businesses to lower the price. Answer: TRUE Diff: 1 Type: TF Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices.

39) When inventories decrease, it signals businesses to lower the price. Answer: FALSE Diff: 1 Type: TF Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 40) There is a surplus when quantity supplied exceeds quantity demanded. Answer: TRUE Diff: 1 Type: TF Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices. 41) There is a shortage when quantity supplied exceeds quantity demanded. Answer: FALSE Diff: 1 Type: TF Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices. 42) Falling prices provide incentives for businesses to decrease supply and for consumers to increase demand. Answer: FALSE Diff: 2 Type: TF Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices. 43) Falling prices provide incentives for businesses to decrease quantity supplied and for consumers to increase quantity demanded. Answer: TRUE Diff: 2 Type: TF Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices. 44) Rising prices provide incentives for businesses to decrease quantity supplied and for consumers to increase quantity demanded. Answer: FALSE Diff: 2 Type: TF Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices. 45) Rising prices provide incentives for businesses to increase supply and for consumers to decrease demand. Answer: FALSE Diff: 2 Type: TF Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices.

46) Shortages create incentives for businesses to make quantity adjustments even when prices don't change. Answer: TRUE Diff: 1 Type: TF Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices. 47) The miracle of markets eliminates scarcity through the interaction of demand and supply. Answer: FALSE Diff: 1 Type: TF Page Ref: 80-84 Skill: Recall Objective: 4.2 Explain how shortages and surpluses affect prices. 48) In trying to increases sales, Sears offers to pay the HST consumers usually have to pay. Sears is making a quantity adjustment, not a price adjustment. Answer: FALSE Diff: 1 Type: TF Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices. 49) Markets eliminate surpluses through falling prices, which increase quantity demanded and decrease quantity supplied. Answer: TRUE Diff: 1 Type: TF Page Ref: 80-84 Skill: Applied Objective: 4.2 Explain how shortages and surpluses affect prices.

4.3 When Prices Sit Still: Market-Clearing or Equilibrium Prices 1) At the equilibrium price, business inventories are A) unstable. B) stable. C) zero. D) growing. E) shrinking. Answer: B Diff: 3 Type: MC Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 2) The famous concept of an invisible hand was introduced by A) Smith and Marshall. B) Smith and Wesson. C) Adam Smith. D) Adam West. E) Alfred Pennyworth. Answer: C Diff: 1 Type: MC Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 3) At the equilibrium price, A) sellers are frustrated and buyers are happy. B) exchange is involuntary. C) neither sellers nor buyers are frustrated. D) both sellers and buyers are frustrated. E) sellers are happy and buyers are frustrated. Answer: C Diff: 2 Type: MC Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied.

4) Price signals in markets A) allow uninterested buyers to participate. B) eliminate incentives. C) lead to irrational decision-making. D) create incentives. E) are the essence of economic socialism. Answer: D Diff: 2 Type: MC Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 5) Surpluses are eliminated by A) allowing price to fall. B) increasing quantity supplied. C) decreasing quantity demanded. D) allowing price to rise. E) frightening consumers. Answer: A Diff: 1 Type: MC Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 6) Shortages are eliminated by A) increasing quantity demanded. B) allowing price to fall. C) clever advertising campaigns. D) allowing price to rise. E) decreasing quantity supplied. Answer: D Diff: 1 Type: MC Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 7) The price at which there are no shortages and no surpluses is called the A) maximal price. B) equestrian price. C) most frequently traded price. D) minimal price. E) market-clearing price. Answer: E Diff: 2 Type: MC Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 155 Copyright © 2021 Pearson Canada Inc.

8) When Andrew buys purple boxer shorts at Nia's store for $20, A) Andrew's marginal benefits must be at least $20. B) Nia's marginal opportunity costs must greater than $20. C) Nia's marginal benefits from the $20 must be less than from the boxer shorts. D) Andrew's marginal opportunity costs must be greater than $20. E) this is an involuntary exchange because Andrew wouldn't be caught dead in purple boxer shorts. Answer: A Diff: 2 Type: MC Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 9) When Ophelia voluntarily buys a cup of tea from Tim Horton's for $1.25, A) the seller's opportunity costs must be less than $1.25. B) the seller's marginal benefits from $1.25 must be less than from the tea. C) Ophelia's marginal benefits must be less than $1.25. D) she is not making a smart choice. E) Ophelia's opportunity costs must be greater than $1.25. Answer: A Diff: 3 Type: MC Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied.

Figure 4.2.1 Market Demand and Supply for Pet Rocks Price

Quantity Demanded

Quantity Supplied

$1 $2 $3 $4 $5 $6 $7 $8

900 800 600 500 420 350 320 300

100 200 420 500 580 640 680 700

10) In Figure 4.2.1, the equilibrium price is A) $7. B) $4. C) $5. D) $3. E) $1. Answer: B Diff: 1 Type: MC Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 11) In Figure 4.2.1, the quantity bought and sold at the equilibrium price is A) 200. B) 180. C) 420. D) 500. E) none of the above. Answer: D Diff: 1 Type: MC Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied.

12) If the market for Twinkies is in equilibrium, then A) Twinkies must be a normal good. B) businesses would like to sell more at the current price. C) consumers would like to buy more at the current price. D) there is a surplus. E) the quantity demanded equals the quantity supplied. Answer: E Diff: 2 Type: MC Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 13) Market-clearing prices A) are equilibrium prices. B) equalize quantity demanded and quantity supplied. C) have no tendency to change. D) eliminate frustrated sellers. E) do all of the above. Answer: E Diff: 2 Type: MC Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 14) Market-clearing prices A) are prices that sit still. B) eliminate frustrated buyers. C) result when smart choices are coordinated. D) balance the forces of competition and cooperation. E) do all of the above. Answer: E Diff: 2 Type: MC Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 15) Market-clearing prices A) are set by the visible hand of government. B) scare away all consumers from the market. C) scare away all businesses from the market. D) balance the forces of competition and cooperation. E) do all of the above. Answer: D Diff: 2 Type: MC Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 158 Copyright © 2021 Pearson Canada Inc.

16)

Figure 4.2.2 The Market for Robotic Rubber Ducks Price

Quantity Demanded

Quantity Supplied

$ 40 $ 50 $ 60 $ 70 $ 80 $ 90 $100

500 450 400 350 300 250 200

300 350 400 450 500 550 600

Look at Figure 4.2.2. The equilibrium price is $________ and the equilibrium quantity is ________ rubber ducks. A) 80; 500 B) 60; 400 C) 50; 450 D) 50; 350 E) 80; 300 Answer: B Diff: 1 Type: MC Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied.

Figure 4.3.1 Market for Espresso Shots Price

Quantity Demanded

Quantity Supplied

$0.70 $0.80 $0.90 $1.00 $1.10 $1.20 $1.30 $1.40 $1.50

1,200 1,100 1,000 900 800 700 600 500 400

0 200 400 600 800 1,000 1,200 1,400 1,600

17) Look at Figure 4.3.1. The equilibrium price is $________ and the equilibrium quantity is ________ espresso shots. A) 1.30; 1,200 B) 0.90; 1,000 C) 1.10; 900 D) 1.10; 800 E) 1.00; 800 Answer: D Diff: 1 Type: MC Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 18) Look at Figure 4.3.1. If the price is set at $0.80 per espresso shot, there is a(n) ________ leading to a price ________. A) shortage; rise B) shortage; fall C) surplus; rise D) surplus; fall E) equilibrium; rise Answer: A Diff: 2 Type: MC Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied.

19) Look at Figure 4.3.1. If the price is set at $1.30 per espresso shot, there is a(n) ________ leading to a price ________. A) shortage; rise B) shortage; fall C) surplus; rise D) surplus; fall E) equilibrium; rise Answer: D Diff: 2 Type: MC Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 20) At the market-clearing price, both sellers and buyers end up frustrated. Answer: FALSE Diff: 2 Type: TF Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 21) At the market-clearing price, everyone who makes a voluntary exchange is better off. Answer: TRUE Diff: 2 Type: TF Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 22) At the equilibrium price, the forces of cooperation and competition are in balance. Answer: TRUE Diff: 1 Type: TF Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 23) The concept of the visible hand was introduced by Adam Smith. Answer: FALSE Diff: 1 Type: TF Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 24) At the equilibrium price, business inventories do not grow or shrink. Answer: TRUE Diff: 2 Type: TF Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 161 Copyright © 2021 Pearson Canada Inc.

25) If the price of gasoline were too low there are large lineups at the gas pumps. Answer: TRUE Diff: 1 Type: TF Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 26) When wages are above equilibrium levels, there is an excess supply of workers in the form of unemployment. Answer: TRUE Diff: 2 Type: TF Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 27) There is a shortage when quantity demanded exceeds quantity supplied. Answer: TRUE Diff: 2 Type: TF Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 28) There is a shortage when quantity supplied exceeds quantity demanded. Answer: FALSE Diff: 2 Type: TF Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 29) Long lineups to buy a coffee on campus are a signal that the coffee price is too low. Answer: TRUE Diff: 2 Type: TF Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 30) Market-clearing prices scare away all consumers and businesses from the market. Answer: FALSE Diff: 1 Type: TF Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied.

31) At market-clearing prices, neither consumers nor businesses are kicking themselves. Answer: TRUE Diff: 1 Type: TF Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 32) Markets produce the products and services we want as the unintended consequence of selfinterested choices. Answer: TRUE Diff: 2 Type: TF Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 33) When a market is in equilibrium, businesses would still like to sell more at the marketclearing price. Answer: FALSE Diff: 1 Type: TF Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 34) When a market is in equilibrium, consumers who are not willing to pay the market-clearing price have not made a smart choice. Answer: FALSE Diff: 2 Type: TF Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 35) When a market is in equilibrium, businesses that are not willing to supply products or services at the market-clearing price have not made a smart choice. Answer: FALSE Diff: 2 Type: TF Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 36) When a market is in equilibrium, consumers who are not willing to pay the market-clearing price will spend their money elsewhere. Answer: TRUE Diff: 2 Type: TF Page Ref: 85-86 Skill: Recall Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 163 Copyright © 2021 Pearson Canada Inc.

37) When a market is in equilibrium, the market-clearing quantity bought and sold equals the quantity supplied at the equilibrium price. Answer: TRUE Diff: 2 Type: TF Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied. 38) When a market is in equilibrium, the market-clearing quantity bought and sold equals the quantity demanded at the equilibrium price. Answer: TRUE Diff: 2 Type: TF Page Ref: 85-86 Skill: Applied Objective: 4.3 Identify how market-clearing or equilibrium prices equalize quantity demanded and quantity supplied.

4.4 Moving Targets: What Happens When Demand and Supply Change? Figure 4.2.2 The Market for Robotic Rubber Ducks Price

Quantity Demanded

Quantity Supplied

$ 40 $ 50 $ 60 $ 70 $ 80 $ 90 $100

500 450 400 350 300 250 200

300 350 400 450 500 550 600

1) Look at Table 4.2.2. Consumers learn that rubber ducks wear out batteries quickly. As a result, demand decreases by 100 rubber ducks at each price. The new equilibrium price is $________ and the new equilibrium quantity is ________ rubber ducks. A) 70; 450 B) 70; 350 C) 50; 450 D) 50; 350 E) 60; 400 Answer: D Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 2) Look at Table 4.2.2. Input prices rise, and supply decreases by 100 rubber ducks at each price. The new equilibrium price is $________ and the new equilibrium quantity is ________ rubber ducks. A) 70; 450 B) 70; 350 C) 50; 450 D) 50; 350 E) 60; 400 Answer: B Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities.

3) Look at Table 4.2.2. Consumers learn that the rubber ducks wear out batteries quickly. As a result, demand decreases by 100 rubber ducks at each price. At the same time, input prices rise and supply decreases by 100 rubber ducks at each price. The new equilibrium price is $________ and the new equilibrium quantity is ________ rubber ducks. A) 70; 450 B) 70; 350 C) 50; 450 D) 50; 350 E) 60; 300 Answer: E Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. Figure 4.3.1 Market for Espresso Shots Price

Quantity Demanded

Quantity Supplied

$0.70 $0.80 $0.90 $1.00 $1.10 $1.20 $1.30 $1.40 $1.50

1,200 1,100 1,000 900 800 700 600 500 400

0 200 400 600 800 1,000 1,200 1,400 1,600

4) Look at Table 4.3.1. Drought destroys many coffee plants, causing half of the espresso businesses to go out of business. This change is a A) decrease in demand. B) increase in demand. C) decrease in supply. D) increase in supply. E) decrease in quantity supplied. Answer: C Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities.

5) Look at Table 4.3.1. Drought destroys many coffee plants, causing half of the espresso businesses to go out of business. As a result, quantity supplied decreases by half at each price. The new equilibrium price is $________ and the new equilibrium quantity is ________ espresso shots. A) 1.30; 600 B) 1.50; 400 C) 0.90; 400 D) 1.20; 700 E) 1.30; 500 Answer: A Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 6) Rising prices for automobiles decrease the demand for A) bicycles and long lineups at the bicycle shops. B) gasoline and a fall in gas prices at the pump. C) public transportation and a fall in fares. D) public transportation and a rise in fares. E) motel rooms and a rise in the price we pay for motel rooms. Answer: B Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 7) When supply decreases, A) price falls with no change in quantity demanded. B) price rises and quantity demanded decreases. C) price falls and quantity demanded increases. D) demand decreases so that price remains the same. E) price rises and demand increases. Answer: B Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities.

8) When supply increases, A) price falls and demand decreases. B) price rises with no change in demand. C) price rises and quantity demanded decreases. D) price falls and quantity demanded increases. E) demand increases so that price remains the same. Answer: D Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 9) When demand increases, A) price rises and quantity supplied increases. B) price falls and quantity supplied decreases. C) price falls with no change in supply. D) supply increases so that price remains the same. E) supply decreases and price rises. Answer: A Diff: 1 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 10) When demand decreases, A) price falls and quantity supplied decreases. B) supply decreases so that price remains the same. C) price rises and quantity supplied decreases. D) price rises with no change in supply. E) supply increases so that price remains the same. Answer: A Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities.

11) Increasing the minimum age for buying beer means that the price of beer will ________ because ________. A) fall; beer is an inferior good B) rise; brewers will take advantage of the situation C) fall; there are fewer buyers in the beer market D) fall; there are fewer sellers in the beer market E) rise; not everyone drinks beer Answer: C Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 12) When the RCMP arrested several large marijuana dealers, economists predicted that the street price of marijuana would ________ because ________. A) rise; there are fewer sellers in the market B) fall; this is an illegal activity C) fall; the economy will go into a recession D) rise; there are more buyers in the market E) fall; selling drugs isn't a market-based activity Answer: A Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 13) The introduction of a cost-saving technology at the espresso bar causes the price of an espresso to A) fall, and demand decreases. B) fall, and quantity demanded increases. C) fall, and quantity demanded decreases. D) rise, and quantity demanded decreases. E) rise, and quantity demanded increases. Answer: B Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities.

14) Pizza Pizza developes a microwave pizza oven that cook a large pizza in 23 seconds. This cost-saving technology causes the price of pizza to A) rise, and quantity demanded decreases. B) rise, and quantity demanded increases. C) fall, and quantity demanded decreases. D) fall, and demand decreases. E) fall, and quantity demanded increases. Answer: E Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 15) If bus fares fall but fewer people are riding the bus, it is likely that A) the bus company is incompetent. B) demand decreased. C) supply decreased. D) demand increased. E) supply increased. Answer: B Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 16) If enrollment at your school increases even though tuition fees rise, it is likely that A) supply increased. B) supply decreased. C) demand increased. D) demand decreased. E) you go to a party school. Answer: C Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities.

17) If enrollment at your school decreases even though tuition fees fall, it is likely that A) your instructors are boring. B) demand decreased. C) demand increased. D) supply decreased. E) supply increased. Answer: B Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 18) If people eat more potato chips even though the price rises, it is likely that A) demand increased. B) supply increased. C) demand decreased. D) potato chips make you fat. E) supply decreased. Answer: A Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 19) If buyers expect the price of gasoline will be higher in the future, the price of gasoline today ________ and the quantity supplied today ________. A) falls; increases B) rises; decreases C) falls; is unaffected D) rises; increases E) falls; decreases Answer: D Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities.

20) If buyers expect the price of gasoline will be lower in the future, the price of gasoline today ________ and the quantity supplied today ________. A) falls; increases B) falls; decreases C) falls; is unaffected D) rises; increases E) rises; decreases Answer: B Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 21) If sellers expect the price of beef will rise in the future, the price of beef on today's market A) rises and quantity demanded decreases. B) falls and quantity supplied increases. C) falls and quantity demanded increases. D) rises and quantity supplied decreases. E) falls and quantity demanded decreases. Answer: A Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 22) If sellers expect the price of beef will fall in the future, the price of beef on today's market A) falls and quantity supplied increases. B) rises and quantity demanded decreases. C) rises and quantity demanded increases. D) rises and quantity supplied decreases. E) falls and quantity demanded increases. Answer: E Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities.

23) If consumers' incomes increase, the price of an inferior product A) falls and quantity supplied decreases. B) rises and quantity supplied increases. C) rises and quantity demanded decreases. D) rises and quantity demanded increases. E) falls and quantity supplied increases. Answer: A Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 24) If consumers' incomes decrease, the price of an inferior product A) falls and quantity demanded increases. B) rises and quantity supplied decreases. C) falls and quantity supplied increases. D) falls and quantity demanded decreases. E) rises and quantity supplied increases. Answer: E Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 25) If the price of Pepsi rises, the price of Coke ________ because ________. A) falls; Coke is a normal good B) rises; Coke and Pepsi are substitutes C) rises; Coke is an inferior good D) rises; Coke and Pepsi are complements E) falls; Coke and Pepsi are substitutes Answer: B Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 26) If the price of Pepsi falls, the price of Coke ________ because ________. A) falls; Coke and Pepsi are complements B) falls; Coke and Pepsi are substitutes C) falls; Coke is a normal good D) rises; Coke and Pepsi are substitutes E) rises; Coke is an inferior good Answer: B Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 173 Copyright © 2021 Pearson Canada Inc.

27) If the wages of workers at the Oakville Ford plant rise, the price of automobiles ________ because rising input prices ________. A) falls; increase supply B) rises; decrease supply C) rises; increase quantity supplied D) falls; increase demand E) rises; decrease demand Answer: B Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 28) Union leaders who want to avoid layoffs for their members sometimes negotiate lower wages during recessions. If the wages for unionized workers at bakeries fall, the price of bread falls because A) bread is an essential food. B) lower input prices decrease demand. C) this is a cost-saving technology. D) lower input prices increase supply. E) the lower wage was voluntary. Answer: D Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 29) Taxi operators must buy a medallion from the municipal government. If the price of these medallions rises, we expect the fares charged by taxi operators to ________ because ________. A) rise; higher input prices decrease supply B) rise; higher input price increase demand C) rise; there would be more taxis D) fall; taxi rides are a luxury service E) fall; passengers substitute bus rides Answer: A Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities.

30) As consumers become more health conscious, the price of potato chips A) rises because there are many tasty alternatives to chips. B) falls because supply decreases. C) falls because demand decreases. D) rises due to new cost-saving technologies. E) rises because demand decreases. Answer: C Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 31) The number of working mothers has increased dramatically. Based on this information alone, we can predict that the market for child care services has had a(n) A) increased demand. B) decreased demand. C) increased quantity demanded. D) decreased quantity supplied. E) increased supply. Answer: A Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 32) The price of a product rises if A) demand for the product decreases. B) supply of the product decreases. C) there is a surplus of the product. D) the price of a substitute product decreases. E) the product is an inferior good and income increases. Answer: B Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities.

33) The price of a product falls if A) there is a shortage of the product. B) demand for the product increases. C) there is a surplus of the product. D) supply of the product decreases. E) demand for the product does not change. Answer: C Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 34) The price of a product falls if A) demand for the product increases. B) supply of the product decreases. C) supply of the product increases. D) demand for the product remains constant. E) supply of the product remains constant. Answer: C Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 35) We observe a rise in the price of service A and an increase in the quantity of service A bought and sold. Which is a likely explanation? A) The law of demand is violated. B) The demand for A decreased. C) The demand for A increased. D) The supply of A increased. E) The supply of A decreased. Answer: C Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities.

36) We observe a rise in the price of serivce A and a decrease in the quantity of serivce A bought and sold. Which is a likely explanation? A) The law of supply is violated. B) The demand for A decreased. C) The demand for A increased. D) The supply of A increased. E) The supply of A decreased. Answer: E Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 37) We observe a fall in the price of service A and an increase in the quantity of service A bought and sold. Which is a likely explanation? A) The law of supply is violated. B) The demand for A decreased. C) The demand for A increased. D) The supply of A increased. E) The supply of A decreased. Answer: D Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 38) We observe a fall in the price of service A and a decrease in the quantity of service A bought and sold. Which is a likely explanation? A) The law of demand is violated. B) The demand for A decreased. C) The demand for A increased. D) The supply of A increased. E) The supply of A decreased. Answer: B Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities.

39) Crude oil is an important input in producing gasoline. If the price of crude oil rises, the A) price of gasoline rises due to increased demand. B) price of gasoline falls due to increased demand. C) price of gasoline rises due to decreased supply. D) equilibrium quantity of gasoline falls due to increased supply. E) equilibrium quantity of gasoline rises due to increased demand. Answer: C Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 40) If we observe a rise in the equilibrium price of product A, we know that either the demand for A has A) increased or the supply of A decreased or both. B) increased or the supply of A increased or both. C) decreased or the supply of A increased or both. D) decreased or the supply of A decreased or both. E) none of the above. Answer: A Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 41) If we observe a fall in the equilibrium price of product A, we know that either the demand for A has A) increased or the supply of A decreased or both. B) increased or the supply of A increased or both. C) decreased or the supply of A increased or both. D) decreased or the supply of A decreased or both. E) none of the above. Answer: C Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities.

42) Which event leads to a rise in the price of oranges? A) a rise in the price of apples B) a scientific discovery that oranges cause hair loss C) a decrease in income if oranges are a normal good D) good growing weather in Florida E) technological improvements in orange growing Answer: A Diff: 2 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 43) Coffee is a normal good. A decrease in income A) raises the price of coffee and increases the quantity demanded of coffee. B) raises the price of coffee and increases the quantity supplied of coffee. C) lowers the price of coffee and decreases the quantity demanded of coffee. D) lowers the price of coffee and decreases the quantity supplied of coffee. E) causes none of the above. Answer: D Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 44) An increase in the price of Pepsi (a substitute for coffee) A) raises the price of coffee and increases the quantity demanded of coffee. B) raises the price of coffee and increases the quantity supplied of coffee. C) lowers the price of coffee and decreases the quantity demanded of coffee. D) lowers the price of coffee and decreases the quantity supplied of coffee. E) causes none of the above. Answer: B Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities.

45) Farm land can be used to produce either cattle or corn. If the demand for cattle increases, then the A) demand for corn increases. B) supply of corn increases. C) demand for corn decreases. D) supply of corn decreases. E) cattle will eat all of the corn. Answer: D Diff: 3 Type: MC Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 46) When demand increases, price rises and quantity supplied increases. Answer: TRUE Diff: 2 Type: TF Page Ref: 87-95 Skill: Recall Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 47) When supply decreases, price rises and quantity demanded increases. Answer: FALSE Diff: 2 Type: TF Page Ref: 87-95 Skill: Recall Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 48) Prices rise if demand increases. Answer: TRUE Diff: 2 Type: TF Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 49) Prices rise if supply decreases. Answer: TRUE Diff: 2 Type: TF Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 50) Prices fall if supply increases. Answer: TRUE Diff: 2 Type: TF Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 180 Copyright © 2021 Pearson Canada Inc.

51) Prices fall if supply decreases. Answer: FALSE Diff: 2 Type: TF Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 52) When supply increases, price rises and quantity demanded increases. Answer: FALSE Diff: 2 Type: TF Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 53) When demand decreases, price falls and quantity supplied decreases. Answer: TRUE Diff: 2 Type: TF Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 54) When demand increases, price falls to eliminate the shortage. Answer: FALSE Diff: 2 Type: TF Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 55) When demand decreases, price falls to eliminate the shortage. Answer: FALSE Diff: 2 Type: TF Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 56) When consumers' incomes increase, the price of a normal product or service rises. Answer: TRUE Diff: 2 Type: TF Page Ref: 87-95 Skill: Recall Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities.

57) When consumers' incomes increase, the price of an inferior product or service rises. Answer: FALSE Diff: 2 Type: TF Page Ref: 87-95 Skill: Recall Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 58) If the price of gasoline rises, the price of automobiles should fall because gasoline and automobiles are complementary products. Answer: TRUE Diff: 2 Type: TF Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 59) If the price of gasoline rises, the price of automobiles should also rise because gasoline and automobiles are complementary products. Answer: FALSE Diff: 2 Type: TF Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 60) If the price of Pepsi rises, we expect the price of Coke to rise because the products are substitutes. Answer: TRUE Diff: 2 Type: TF Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 61) If the price of Pepsi rises, we expect the price of pizza to rise because Pepsi and pizza are complements. Answer: FALSE Diff: 2 Type: TF Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 62) The introduction of a cost-saving technology at the espresso bar should make the price of espressos fall. Answer: TRUE Diff: 2 Type: TF Page Ref: 87-95 Skill: Recall Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 182 Copyright © 2021 Pearson Canada Inc.

63) The introduction of a cost-saving technology in the Office of The Registrar should make tuition fees rise. Answer: FALSE Diff: 2 Type: TF Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 64) If the price of corn rises we expect a rise in the price of wheat because these crops are related products for farmers. Answer: TRUE Diff: 2 Type: TF Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities. 65) When the RCMP arrests a large number of marijuana dealers, we expect the street price of marijuana to rise. Answer: TRUE Diff: 2 Type: TF Page Ref: 87-95 Skill: Applied Objective: 4.4 Predict how changes in demand and supply affect equilibrium prices and quantities.

4.5 Getting More Than You Bargained For: Consumer Surplus, Producer Surplus, and Efficiency 1) A new car has a list price of $45,000. Harnit decided that he would pay no more than $42,000 for this car. He buys the car for $41,000. Harnit's consumer surplus is A) $45,000. B) $42,000. C) $4,000. D) $3,000. E) $1,000. Answer: E Diff: 2 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 2) Consumer surplus is the A) the difference between the maximum price consumers are willing and able to pay and the minimum price producers are willing to accept. B) the difference between the maximum price consumers are willing and able to pay and the price actually paid to producers. C) the difference between the amount a producer is willing to accept and the price actually received. D) the area under the marginal benefit curve. E) the total amount consumers paid for a product. Answer: B Diff: 2 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 3) Producer surplus is the A) the difference between the maximum price consumers are willing and able to pay and the minimum price producers are willing to accept. B) the difference between the maximum price consumers are willing and able to pay and the price actually paid to producers. C) the difference between the amount a producer is willing to accept and the price actually received. D) the area above the marginal cost curve. E) the total amount producers received for a product. Answer: C Diff: 2 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus.

4) Consumer surplus is the area A) under the marginal benefit curve but above the market price. B) under the marginal benefit curve but above the marginal cost curve. C) below the market price but above the marginal cost curve. D) under the marginal benefit curve. E) above the marginal cost curve. Answer: A Diff: 2 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 5) Producer surplus is the area A) under the marginal benefit curve but above the market price. B) under the marginal benefit curve but above the marginal cost curve. C) below the market price but above the marginal cost curve. D) under the marginal benefit curve. E) above the marginal cost curve. Answer: C Diff: 2 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 6) At an efficient market outcome, A) consumer surplus exceeds producer surplus. B) producer surplus exceeds consumer surplus. C) the sum of consumer surplus and producer surplus is maximized. D) marginal benefit is maximized. E) the sum of consumer surplus and producer surplus is minimized. Answer: C Diff: 1 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 7) At an efficient market outcome, A) deadweight loss is maximized. B) consumer surplus exceeds producer surplus. C) the total surplus is minimized. D) the total surplus is maximized. E) the sum of consumer surplus and producer surplus is minimized. Answer: D Diff: 1 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 185 Copyright © 2021 Pearson Canada Inc.

8) At an efficient market outcome, A) deadweight loss is zero. B) marginal benefit equals marginal cost at the efficient quantity. C) prices just cover all opportunity costs of production. D) total surplus is maximized. E) all of the above are true. Answer: E Diff: 1 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. Figure 4.5.1

9) Look at the demand curve in Figure 4.5.1. What is the maximum someone is willing to pay for the first unit of the product? A) $10 B) $9 C) $8 D) $5 E) $4 Answer: C Diff: 1 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus.

10) Look at the demand curve in Figure 4.5.1. If the price of the product is $4, what is the consumer surplus? A) $32.50 B) $25.00 C) $20.00 D) $12.50 E) none of the above Answer: D Diff: 3 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 11) Look at the demand curve in Figure 4.5.1. If the price of the product is $4, what is the consumer surplus from the 3rd unit? A) $0 B) $1 C) $2 D) $3 E) $4 Answer: C Diff: 2 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 12) Look at the demand curve in Figure 4.5.1. If the price of the product is $4, what is the consumer surplus from the 2nd unit? A) $7 B) $3 C) $4 D) $1 E) $10 Answer: B Diff: 2 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus.

Figure 4.5.2

13) Figure 4.5.2 shows marginal costs for Betsy's Butter business. If Betsy sells the 1st unit of butter for $6, what is her producer surplus on that unit? A) $4 B) $6 C) $9 D) $12 E) $7 Answer: A Diff: 2 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 14) Figure 4.5.2 shows marginal costs for Betsy's Butter business. If Betsy sells the third unit of butter for $6, what is her producer surplus on the 3rd unit? A) $3 B) $6 C) $5 D) $4 E) $2 Answer: E Diff: 1 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 15) At an efficient market outcome, A) total consumer surplus is zero. B) total producer surplus is zero. C) consumer surplus exceeds producer surplus by the greatest possible amount. D) producer surplus exceeds consumer surplus by the greatest possible amount. E) consumer surplus plus producer surplus is maximized. Answer: E Diff: 2 Type: MC Page Ref: 96-101 Skill: Recall Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus.

Figure 4.5.3

16) Look at Figure 4.5.3. If If quantity is 150, consumer surplus is area A) BCF. B) ACG. C) DCE. D) ACH. E) HCG. Answer: D Diff: 1 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 17) Look at Figure 4.5.3. If quantity is 150, producer surplus is area A) BCF. B) ACG. C) DCE. D) ACH. E) HCG. Answer: E Diff: 1 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus.

18) Look at Figure 4.5.3. If If quantity is 100, deadweight loss is area A) BCF. B) ACG. C) DCE. D) ACH. E) HCG. Answer: A Diff: 2 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 19) Look at Figure 4.5.3. If If quantity is 200, deadweight loss is area A) BCF. B) ACG. C) DCE. D) ACH. E) HCG. Answer: C Diff: 3 Type: MC Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 20) At the quantity of an efficient market outcome, marginal benefit equals marginal cost. Answer: TRUE Diff: 1 Type: TF Page Ref: 96-101 Skill: Recall Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 21) At the quantity of an efficient market outcome, marginal benefit is greater than marginal cost. Answer: FALSE Diff: 1 Type: TF Page Ref: 96-101 Skill: Recall Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 22) The concept of consumer surplus is easiest to see by reading the demand curve as a demand curve instead of as a marginal benefit curve. Answer: FALSE Diff: 1 Type: TF Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 190 Copyright © 2021 Pearson Canada Inc.

23) The concept of consumer surplus is easiest to see by reading the demand curve as a marginal benefit curve instead of as a demand curve. Answer: TRUE Diff: 1 Type: TF Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 24) The concept of consumer surplus is easiest to see by reading the supply curve as a marginal cost curve instead of as a supply curve. Answer: FALSE Diff: 1 Type: TF Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 25) The concept of producer surplus is easiest to see by reading the demand curve as a marginal benefit curve instead of as a demand curve. Answer: FALSE Diff: 1 Type: TF Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 26) The concept of producer surplus is easiest to see by reading the supply curve as a marginal cost curve instead of as a supply curve. Answer: TRUE Diff: 1 Type: TF Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 27) The concept of producer surplus is easiest to see by reading the supply curve as a supply curve instead of as a marginal cost curve. Answer: FALSE Diff: 1 Type: TF Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 28) Consumer surplus is the area under the marginal benefit curve but above the market price. Answer: TRUE Diff: 2 Type: TF Page Ref: 96-101 Skill: Recall Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 191 Copyright © 2021 Pearson Canada Inc.

29) Consumer surplus is the area under the market price but above the marginal benefit curve. Answer: FALSE Diff: 2 Type: TF Page Ref: 96-101 Skill: Recall Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 30) Producer surplus is the area under the marginal benefit curve but above the market price. Answer: FALSE Diff: 2 Type: TF Page Ref: 96-101 Skill: Recall Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 31) Producer surplus is the area below the market price but above the marginal cost curve. Answer: TRUE Diff: 2 Type: TF Page Ref: 96-101 Skill: Recall Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 32) Total surplus equals consumer surplus plus producer surplus. Answer: TRUE Diff: 2 Type: TF Page Ref: 96-101 Skill: Recall Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 33) Total surplus is at a maximum when deadweight loss is zero. Answer: TRUE Diff: 2 Type: TF Page Ref: 96-101 Skill: Recall Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 34) Consumer surplus is the difference between the amount a consumer is willing and able to pay, and the amount actually paid. Answer: TRUE Diff: 2 Type: TF Page Ref: 96-101 Skill: Recall Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus.

35) Producer surplus is the difference between the amount a producer is willing to accept, and the price actually received. Answer: TRUE Diff: 2 Type: TF Page Ref: 96-101 Skill: Recall Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 36) Consumer surplus is zero at an efficient market outcome. Answer: FALSE Diff: 2 Type: TF Page Ref: 96-101 Skill: Recall Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 37) Producer surplus is zero at an efficient market outcome. Answer: FALSE Diff: 1 Type: TF Page Ref: 96-101 Skill: Recall Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 38) Deadweight loss is zero at an efficient market outcome. Answer: TRUE Diff: 2 Type: TF Page Ref: 96-101 Skill: Recall Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 39) Deadweight loss is a loss to consumers and a gain to producers. Answer: FALSE Diff: 2 Type: TF Page Ref: 96-101 Skill: Recall Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. 40) If marginal cost is greater than marginal benefit at the current quantity, self-interest will lead to an increase in quantity. Answer: FALSE Diff: 2 Type: TF Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus.

41) If marginal benefit is greater than marginal cost at the current quantity, there are more mutually beneficial trades that can happen. Answer: TRUE Diff: 2 Type: TF Page Ref: 96-101 Skill: Applied Objective: 4.5 Explain the efficiency of markets using the concepts of consumer surplus and producer surplus. Macroeconomics for Life: Smart Choices for All?, Updated 2e (Cohen) Chapter 5 Are Your Smart Choices Smart for All? Macroeconomics and Microeconomics 5.1 Is the Whole Greater Than the Sum of the Parts? Reconciling Macroeconomics and Microeconomics 1) Macroeconomics looks at A) the performance of the Canadian economy. B) individual choices. C) choices made by business people. D) shopping. E) why you might work more hours after a pay raise. Answer: A Diff: 1 Type: MC Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 2) Macroeconomics looks at A) the global economy. B) individual choices. C) choices made by business people. D) shopping. E) why you might work more hours after a pay raise. Answer: A Diff: 1 Type: MC Page Ref: 4-11 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 3) Macroeconomics looks at A) the performance of the Canadian economy. B) individual choices. C) choices made by business people. D) shopping. E) why you might work more hours after a pay raise. Answer: A Diff: 1 Type: MC Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 194 Copyright © 2021 Pearson Canada Inc.

4) Macroeconomics looks at A) the global economy. B) the combined outcomes of all individual choices. C) the Canadian economy. D) money and the financial system. E) all of the above answers. Answer: E Diff: 1 Type: MC Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 5) The Great Depression of 1929 was worse than the Great Recession of 2009 because in 1929 there were no A) stock market crashes. B) government programs to help the unemployed. C) bank failures. D) government blunders. E) falling prices. Answer: B Diff: 1 Type: MC Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 6) Speculative bubbles that helped trigger the Great Depression and the Global Financial Crisis involve A) money. B) banks. C) expectations. D) all of the above. E) none of the above. Answer: D Diff: 1 Type: MC Page Ref: 108 - 114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 7) Which statement is false? A) Consumer spending is business income. B) Business spending is consumer income. C) If consumers and businesses both cut spending, everyone's incomes falls. D) If consumers and businesses both cut spending, employment increases. E) Falling wages decrease demand in output markets. Answer: D Diff: 2 Type: MC Page Ref: 108 -114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics.

8) Which statement is false? A) Consumer spending is business income. B) Business spending is consumer income. C) If consumers and businesses both increase spending, everyone's incomes falls. D) If consumers and businesses both increase spending, employment increases. E) Falling wages decrease demand in output markets. Answer: C Diff: 2 Type: MC Page Ref: 108 -114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 9) The fallacy of composition suggests A) all for one and one for all. B) the needs of the many outweigh the needs of the few. C) what is true for one is not true for all. D) what goes around, comes around. E) be true to your school. Answer: C Diff: 2 Type: MC Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 10) Input markets determine A) all prices. B) loans. C) outputs. D) incomes. E) connections. Answer: D Diff: 2 Type: MC Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 11) When everybody saves their money, aggregate savings decrease. This is an example of A) the Zero Sum Scenario. B) the Fallacy of Combination. C) the Kobayashi Maru Scenario. D) Say's Law. E) the Paradox of Thrift. Answer: E Diff: 2 Type: MC Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics.

12) The economist most associated with the "Yes - Markets Self-Adjust" view is A) J.B. Say. B) J.K. Rowling. C) J.M. Keynes. D) G.B. Shaw. E) A.C. Pigou. Answer: A Diff: 2 Type: MC Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 13) The economist most associated with the "No - Markets Fail Often" view is A) Joseph Stiglitz. B) John Maynard Keynes. C) George Costanza. D) Jean-Baptiste Say. E) James Tiberius Kirk. Answer: B Diff: 2 Type: MC Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 14) Say's Law states which of the following? A) What goes up must come down. B) In the long run, we are all dead. C) Supply creates its own demand. D) What is true for one is not true for all. E) The meek shall inherit the earth. Answer: C Diff: 2 Type: MC Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 15) According to the paradox of thrift, when everyone saves more, A) businesses raise prices. B) banks raise interest rates. C) government spend more. D) businesses lay off workers. E) households spend more. Answer: D Diff: 1 Type: MC Page Ref: 108 -114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics.

16) In the circular flow of economic life, which players are the main buyers in input markets? A) economists B) households C) governments D) banks E) businesses Answer: E Diff: 2 Type: MC Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 17) In the circular flow of economic life, which players are the main sellers in input markets? A) economists B) households C) governments D) banks E) businesses Answer: B Diff: 2 Type: MC Page Ref: 108 -114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 18) In the circular flow of economic life, which players are the main buyers in output markets? A) economists B) households C) governments D) banks E) businesses Answer: B Diff: 2 Type: MC Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 19) In the circular flow of economic life, which players are the main sellers in output markets? A) economists B) households C) governments D) banks E) businesses Answer: E Diff: 2 Type: MC Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics.

20) According to the "Yes - Markets Self-Adjust" view, A) macroeconomic outcomes are different from microeconomic outcomes. B) Say's Law is sometimes true but usually not. C) there are broken connections between input markets and output markets. D) supply creates its own demand. E) all of the above are true. Answer: D Diff: 1 Type: MC Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 21) According to the "No - Markets Fail Often" view, A) macroeconomic outcomes differ from microeconomic outcomes. B) Say's Law is sometimes true but usually not. C) there are broken connections between input markets and output markets. D) a short run focus is more important than the long run. E) all of the above are true. Answer: E Diff: 1 Type: MC Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 22) All prices are determined in output markets. Answer: FALSE Diff: 1 Type: TF Page Ref: 108 -114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 23) Output prices are determined in output markets. Answer: TRUE Diff: 1 Type: TF Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 24) Incomes are determined in output markets. Answer: FALSE Diff: 1 Type: TF Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 25) Incomes are determined in input markets. Answer: TRUE Diff: 1 Type: TF Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics.

26) Macroeconomics focuses on the individual smart choices of consumers and businesses. Answer: FALSE Diff: 1 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 27) Macroeconomics focuses on the combined market outcomes of all individual choices. Answer: TRUE Diff: 1 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 28) Microeconomics analyzes the performance of the whole Canadian economy and the global economy. Answer: FALSE Diff: 1 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 29) Macroeconomics analyzes the performance of the whole Canadian economy and the global economy. Answer: TRUE Diff: 1 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 30) The economist most associated with the view that markets are not quick to adjust is J.B. Say. Answer: FALSE Diff: 1 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 31) The economist most associated with the view that markets are quick to adjust is J.B. Say. Answer: TRUE Diff: 1 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 32) The economist most associated with the view that markets are quick to adjust is J.M. Keynes. Answer: FALSE Diff: 1 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics.

33) The economist most associated with the view that markets are not quick to adjust is J.M. Keynes. Answer: TRUE Diff: 1 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 34) Say's Law states, "What is true for one is not true for all." Answer: FALSE Diff: 1 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 35) Say's Law states, "What is true for one is true for all." Answer: FALSE Diff: 1 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 36) According to the fallacy of composition, "What is true for one is true for all." Answer: FALSE Diff: 1 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 37) According to the fallacy of composition, "What is true for one is not true for all." Answer: TRUE Diff: 1 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 38) Businesses are sellers in input markets. Answer: FALSE Diff: 1 Type: TF Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 39) Businesses are buyers in input markets. Answer: TRUE Diff: 1 Type: TF Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics.

40) Households are buyers in input markets. Answer: FALSE Diff: 1 Type: TF Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 41) Households are sellers in input markets. Answer: TRUE Diff: 1 Type: TF Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 42) Say's Law advises, "Be true to your school." Answer: FALSE Diff: 1 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 43) The paradox of thrift happens when many people save more and spend less, so businesses lower prices. Answer: FALSE Diff: 1 Type: TF Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 44) The paradox of thrift happens when many people save more and spend less, so employment and savings actually decrease. Answer: TRUE Diff: 2 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 45) Mortgages issued to people who cannot really afford houses are called variable rate mortgages. Answer: FALSE Diff: 1 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 46) Mortgages issued to people who cannot really afford houses are called sub-prime mortgages. Answer: TRUE Diff: 1 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics.

47) The Great Depression lasted for less than 24 months. Answer: FALSE Diff: 2 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 48) The effects of the Great Depression lasted over 10 years. Answer: TRUE Diff: 2 Type: TF Page Ref: 108-114 Skill: Recall Objective: 5.1 Explain how macroeconomics differs from microeconomics. 49) In the circular flow of economic life, the government cannot buy products in output markets. Answer: FALSE Diff: 2 Type: TF Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 50) In the circular flow of economic life, the government sets the rules of the game. Answer: TRUE Diff: 1 Type: TF Page Ref: 108-114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics. 51) In the circular flow of economic life, businesses set the rules of the game. Answer: FALSE Diff: 1 Type: TF Page Ref: 108 - 114 Skill: Applied Objective: 5.1 Explain how macroeconomics differs from microeconomics.

5.2 Should Government Be Hands-Off or Hands-On? Economics and Politics 1) Which Canadian political party is most likely to support a hands-off approach by government? A) Conservative Party of Canada B) Liberal Party of Canada C) Bloc Quebecois D) New Democratic Party E) Green Party Answer: A Diff: 2 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 2) Which Canadian political party is least likely to support a hands-on approach by government? A) Liberal Party of Canada B) Conservative Party of Canada C) Bloc Quebecois D) New Democratic Party E) Green Party Answer: B Diff: 2 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 3) There is market failure when market outcomes are A) inefficient. B) inequitable. C) fail to serve the public interest. D) all of the above. E) none of the above. Answer: D Diff: 2 Type: MC Page Ref: 115-119 Skill: Recall Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy.

4) The hands-off camp generally believes that A) government is part of the solution. B) socialism is better than capitalism. C) markets fail to quickly self-adjust. D) supply creates its own demand. E) macroeconomic and microeconomic outcomes are different. Answer: D Diff: 2 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 5) The hands-on camp generally believes that A) government is part of the problem. B) capitalism is better than socialism. C) markets quickly self-adjust. D) supply creates its own demand. E) macroeconomic and microeconomic outcomes are different. Answer: E Diff: 2 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 6) The hands-off camp generally believes that A) the world is ending in 2018. B) markets do not self-adjust. C) markets quickly self-adjust. D) demand creates its own supply. E) markets do not exist. Answer: C Diff: 1 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 7) The hands-on camp generally believes that A) market failure is worse than government failure. B) markets adjust quickly. C) external events are the major cause of business cycles. D) supply creates its own demand. E) demand creates its own supply. Answer: A Diff: 2 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 205 Copyright © 2021 Pearson Canada Inc.

8) The hands-on camp generally believes that A) government failure is worse than market failure. B) markets quickly self-adjust. C) that external events are the major cause of business cycles. D) that government failure causes business cycles. E) in the fallacy of composition. Answer: E Diff: 2 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 9) The hands-off camp generally believes that A) market failure is worse than government failure. B) markets fail to quickly self-adjust. C) external events are major causes of business cycles. D) macroeconomic and microeconomic outcomes are different. E) demand creates its own supply. Answer: C Diff: 2 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 10) The hands-off camp generally believes that A) supply creates its own demand. B) governments never fail. C) markets never fail. D) demand creates its own supply. E) connection failures between input and output markets cause business cycles. Answer: A Diff: 2 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy.

11) The hands-off camp generally believes that business cycles are caused by A) external events. B) banking. C) expectations. D) money. E) connection failures between input and output markets. Answer: A Diff: 2 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 12) The hands-off camp generally believes that business cycles are caused by A) government policy. B) banking. C) expectations. D) money. E) connection failures between input and output markets. Answer: A Diff: 2 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 13) The hands-on camp generally believes that business cycles are caused by A) irrational investors. B) banking. C) expectations. D) money. E) all of the above answers. Answer: E Diff: 2 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 14) The hands-on camp generally believes that business cycles are caused by A) government policy. B) government failure. C) expectations. D) external events E) economists. Answer: C Diff: 2 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 207 Copyright © 2021 Pearson Canada Inc.

15) The hands-on camp generally believes that business cycles are caused by A) government policy. B) government failure. C) Say's Law. D) external events E) connection failures between input and output markets. Answer: E Diff: 2 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 16) Macroeconomists agree A) that prices and markets adjust, but differ on how long it takes. B) that business cycles happen even without government failure. C) that there is some role for government, but differ on how big a role. D) on all of the above. E) on none of the above. Answer: D Diff: 2 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 17) Macroeconomists A) agree that prices and markets adjust. B) differ on how long it takes for prices and markets to adjust. C) agree that business cycles happen even without government failure. D) agree that there is some role for government. E) differ on how big a role government should play in economic policy. F) all of the above. Answer: F Diff: 2 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy.

18) There is government failure when A) policymakers are captured by special interest groups. B) a minority government is defeated in the House of Commons. C) government policy serves the public interest. D) economists lie to politicians. E) markets quickly self-adjust. Answer: A Diff: 2 Type: MC Page Ref: 115-119 Skill: Recall Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 19) There is government failure when A) policymakers are captured by special interest groups. B) policymakers make mistakes based on poor information. C) government policy fails to serves the public interest. D) lobbying and political pressure cause government to act for special interest groups. E) all of the above. Answer: E Diff: 2 Type: MC Page Ref: 115-119 Skill: Recall Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 20) Which outcome is not part of the fundamental macroeconomic question? A) a strong Canadian dollar B) stable prices C) low unemployment D) full employment E) steady growth in living standards Answer: A Diff: 2 Type: MC Page Ref: 115-119 Skill: Recall Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 21) Who said, "In the long run, we are all dead?" A) J.M. Keynes B) J.B. Say C) J.K. Rowling D) G.B. Shaw E) D. Vader Answer: A Diff: 1 Type: MC Page Ref: 115-119 Skill: Recall Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 209 Copyright © 2021 Pearson Canada Inc.

22) During the Global Financial Crisis, all of the following measures fell except A) housing prices. B) stock prices. C) unemployment. D) economic growth. E) asset prices. Answer: C Diff: 3 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 23) If J.B. Say were alive today and voted in Canadian elections, he would probably support the A) Conservative Party of Canada. B) Liberal Party. C) Bloc Quebecois. D) Green Party. E) New Democratic Party. Answer: A Diff: 2 Type: MC Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 24) J.B. Say would probably vote for the New Democratic Party in Canada. Answer: FALSE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 25) Price stability is not a desirable macroeconomic outcome. Answer: FALSE Diff: 1 Type: TF Page Ref: 115-119 Skill: Recall Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 26) Market failure happens when government fails to serve the market's interests. Answer: FALSE Diff: 1 Type: TF Page Ref: 115-119 Skill: Recall Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy.

27) Government failure can occur if policymakers make "honest mistakes." Answer: TRUE Diff: 1 Type: TF Page Ref: 115-119 Skill: Recall Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 28) Government failure can make business cycles worse. Answer: TRUE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 29) The hands-off camp believes that business cycles can be caused by government mistakes. Answer: TRUE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 30) The hands-on camp believes that business cycles are caused by normally functioning markets. Answer: TRUE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 31) The hands-off camp believes that business cycles are caused by normally functioning markets. Answer: FALSE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 32) The hands-on camp believes that markets do not quickly self-adjust. Answer: TRUE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy.

33) The hands-on camp believes that markets quickly self-adjust. Answer: FALSE Diff: 2 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 34) The hands-off camp believes that markets do not quickly self-adjust. Answer: FALSE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 35) The hands-off camp believes that markets quickly self-adjust. Answer: TRUE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 36) The hands-off camp believes that government failure is worse than market failure. Answer: TRUE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 37) The hands-on camp believes that government failure is worse than market failure. Answer: FALSE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 38) The hands-on camp believes that market failure is worse than government failure. Answer: TRUE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy.

39) The hands-off camp believes that market failure is worse than government failure. Answer: FALSE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 40) The Conservative Party of Canada (on the political right) believes that left alone, markets quickly self-adjust. Answer: TRUE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 41) The Conservative Party of Canada (on the political right) believes that government failure is worse than market failure. Answer: TRUE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 42) The New Democratic Party (on the political left) believes that government failure is worse than market failure. Answer: FALSE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 43) When everyone expects housing prices to rise, then housing prices will rise. Answer: TRUE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 44) J.M. Keynes wrote his book after the Great Depression started. Answer: TRUE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy.

45) Macroeconomists agree that prices and markets adjust, but differ on how long the adjustments take. Answer: TRUE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 46) Macroeconomists agree that there is some role for government, but differ on how big a role. Answer: TRUE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 47) The "Yes, Markets Self-Adjust" camp focuses on long-run growth, while the "No, Markets Fail Often" camp focuses on short-run business cycles. Answer: TRUE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy. 48) The "Yes, Markets Self-Adjust" camp focuses on short-run business cycles, while the "No, Markets Fail Often" camp focuses on long-run growth. Answer: FALSE Diff: 1 Type: TF Page Ref: 115-119 Skill: Applied Objective: 5.2 Describe the fundamental macroeconomic question and the hands-off and handson positions on government policy.

5.3 Adding Up Everyone's Choices: Macroeconomic Outcomes and Players 1) Economists call the final value of all products and services produced annually in a country, A) gross domestic product. B) total product. C) grand total product. D) industrial value of product. E) national production. Answer: A Diff: 1 Type: MC Page Ref: 120-122 Skill: Recall Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 2) An economy performs well if it has all of the following except A) low unemployment. B) high GDP. C) low inflation. D) high living standards. E) unpredictable inflation. Answer: E Diff: 1 Type: MC Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 3) Good outcomes for an economy include A) low GDP, high inflation and low unemployment. B) low GDP, low inflation, and low unemployment. C) high GDP, high inflation, and high unemployment. D) high GDP, low inflation, and low unemployment. E) high GDP, high inflation, and low unemployment. Answer: D Diff: 2 Type: MC Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes.

4) Higher GDP per person generally means A) higher living standards. B) lower prices. C) higher unemployment rates. D) an increasing population. E) a decreasing population. Answer: A Diff: 2 Type: MC Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 5) Lower GDP per person generally means A) lower unemployment rates. B) higher prices. C) lower living standards. D) an increasing population. E) a decreasing population. Answer: C Diff: 2 Type: MC Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 6) Inflation is a rise in the A) average level of all prices. B) value of money. C) number of people looking for work. D) value of savings. E) number of people employed. Answer: A Diff: 1 Type: MC Page Ref: 120-122 Skill: Recall Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes.

7) The group of macroeconomic players that makes the most choices about investment spending is A) businesses. B) consumers. C) government. D) the Bank of Canada and banking system. E) the rest of the world. Answer: A Diff: 1 Type: MC Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 8) The group of macroeconomic players that makes the most choices about setting interest rates is A) businesses. B) the Bank of Canada and banking system. C) government. D) consumers. E) the rest of the world. Answer: B Diff: 1 Type: MC Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 9) The group of macroeconomic players that chooses fiscal policy is A) businesses. B) the Bank of Canada and banking system. C) government. D) consumers. E) the rest of the world. Answer: C Diff: 1 Type: MC Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes.

10) The largest group of macroeconomic players that chooses whether or not to save is A) businesses. B) the Bank of Canada and banking system. C) government. D) consumers. E) the rest of the world. Answer: D Diff: 1 Type: MC Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 11) The group of macroeconomic players that chooses monetary policy is A) the rest of the world. B) government. C) businesses. D) consumers. E) the Bank of Canada. Answer: E Diff: 1 Type: MC Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 12) The largest group of macroeconomic players that chooses whether or not to hire Canadian workers is A) businesses. B) government. C) the Bank of Canada and banking system. D) consumers. E) the rest of the world. Answer: A Diff: 1 Type: MC Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes.

13) The largest group of macroeconomic players that chooses whether or not to spend on imported products and services is A) businesses. B) consumers. C) government. D) the rest of world. E) the Bank of Canada and banking system. Answer: B Diff: 1 Type: MC Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 14) Fiscal policy is chosen by A) the rest of the world. B) businesses. C) the Bank of Canada and banking system. D) government. E) consumers. Answer: D Diff: 1 Type: MC Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 15) Monetary policy is chosen by A) businesses. B) the rest of the world. C) consumers. D) government. E) the Bank of Canada. Answer: E Diff: 1 Type: MC Page Ref: 120 -122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes.

16) The group of macroeconomic players that makes the most choices about spending on Canadian exports is A) the rest of the world. B) businesses. C) government. D) the Bank of Canada and banking system. E) consumers. Answer: A Diff: 1 Type: MC Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 17) Fiscal policy includes government changes in A) interest rates. B) the supply of money. C) transfer payments. D) exports. E) imports. Answer: C Diff: 1 Type: MC Page Ref: 120-122 Skill: Recall Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 18) Fiscal policy includes government changes in A) interest rates. B) the supply of money. C) exports. D) taxes. E) imports. Answer: D Diff: 1 Type: MC Page Ref: 120-122 Skill: Recall Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes.

19) Fiscal policy includes government changes in A) interest rates. B) the supply of money. C) exports. D) imports. E) government purchases. Answer: E Diff: 1 Type: MC Page Ref: 120-122 Skill: Recall Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 20) Monetary policy includes changes in A) interest rates. B) taxes. C) exports. D) imports. E) government purchases. Answer: A Diff: 1 Type: MC Page Ref: 120-122 Skill: Recall Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 21) Monetary policy includes changes in A) transfer payments. B) the supply of money. C) exports. D) imports. E) government purchases. Answer: B Diff: 1 Type: MC Page Ref: 120-122 Skill: Recall Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 22) Gross domestic product is the value of all final products and services produced annually in a country. Answer: TRUE Diff: 1 Type: TF Page Ref: 120-122 Skill: Recall Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes.

23) The inflation rate is measured by the Consumer Price Index. Answer: TRUE Diff: 1 Type: TF Page Ref: 120-122 Skill: Recall Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 24) Unpredictable changes in inflation are good. Answer: FALSE Diff: 1 Type: TF Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 25) High and unpredictable inflation is good. Answer: FALSE Diff: 1 Type: TF Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 26) Low and predictable inflation is good. Answer: TRUE Diff: 1 Type: TF Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 27) Consumers can choose to spend or save their income. Answer: TRUE Diff: 1 Type: TF Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 28) A macroeconomic choice for consumers is whether to spend or save. Answer: TRUE Diff: 1 Type: TF Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes.

29) A macroeconomic choice for consumers is whether to buy products and services produced in Canada or imported from other countries. Answer: TRUE Diff: 1 Type: TF Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 30) A macroeconomic choice for consumers is whether to buy an iPhone or a Blackberry. Answer: FALSE Diff: 1 Type: TF Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 31) Rest-of-the-world players can invest in Canadian businesses. Answer: TRUE Diff: 1 Type: TF Page Ref: 120-122 Skill: Recall Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 32) Monetary policy involves changes in interest rates and the supply of money. Answer: TRUE Diff: 1 Type: TF Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 33) A macroeconomic choice for banks is whether to make loans or not. Answer: TRUE Diff: 1 Type: TF Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 34) When a consumer household buys shares in a Canadian business, this counts as investment spending. Answer: FALSE Diff: 1 Type: TF Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes.

35) Government fiscal policy involves changes in transfer payments. Answer: TRUE Diff: 1 Type: TF Page Ref: 120-122 Skill: Recall Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 36) Government fiscal policy involves changes in taxes. Answer: TRUE Diff: 1 Type: TF Page Ref: 120-122 Skill: Recall Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 37) Government fiscal policy involves changes in interest rates. Answer: FALSE Diff: 1 Type: TF Page Ref: 120-122 Skill: Recall Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 38) Government fiscal policy involves changes in the money supply. Answer: FALSE Diff: 1 Type: TF Page Ref: 120-122 Skill: Recall Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 39) Government conducts fiscal policy by changing interest rates. Answer: FALSE Diff: 1 Type: TF Page Ref: 120-122 Skill: Recall Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 40) The Bank of Canada is responsible for setting tax rates. Answer: FALSE Diff: 1 Type: TF Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes.

41) The Bank of Canada conducts monetary policy. Answer: TRUE Diff: 1 Type: TF Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 42) Business investment spending includes buying stocks and bonds. Answer: FALSE Diff: 1 Type: TF Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 43) A macroeconomic choice for businesses is whether to produce more pants or more boxer shorts. Answer: FALSE Diff: 1 Type: TF Page Ref: 120-122 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes. 44) A macroeconomic choice for businesses is whether or not to build new factories. Answer: TRUE Diff: 1 Type: TF Page Ref: 18-21 Skill: Applied Objective: 5.3 Identify three key economics outcomes and five macroeconomic players whose choices produce those outcomes.

5.4 Focusing on Your Future: Why You Should Think Like a Macroeconomist 1) Higher GDP per person usually means A) higher living standards. B) lower living standards. C) increasing population. D) decreasing population. E) none of the above answers. Answer: A Diff: 1 Type: MC Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 2) When unemployment is low, A) jobs are hard to find. B) workers compete against many other unemployed workers. C) employers have an advantage in bargaining over wages. D) workers have an advantage in bargaining over wages. E) employers can choose from a large number of applicants for a job. Answer: D Diff: 1 Type: MC Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 3) When unemployment is high, A) jobs are easy to find. B) employers compete against many other employers for new workers. C) employers have an advantage in bargaining over wages. D) workers have an advantage in bargaining over wages. E) workers can choose from a large number of available jobs. Answer: C Diff: 1 Type: MC Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist.

4) When unemployment is high, A) jobs are easy to find. B) employers compete against many other employers for new workers. C) workers compete against many other unemployed workers. D) workers have an advantage in bargaining over wages. E) workers can choose from a large number of available jobs. Answer: C Diff: 1 Type: MC Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 5) When unemployment is low, A) jobs are hard to find. B) employers compete against many other employers for new workers. C) workers compete against many other unemployed workers. D) employers have an advantage in bargaining over wages. E) employers can choose from a large number of applicants for a job. Answer: B Diff: 1 Type: MC Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 6) When there is inflation, A) average prices fall. B) the value of money rises. C) the purchasing power of your savings falls. D) the purchasing power of your savings rises. E) your standard of living falls if your income rises faster than the prices of what you buy. Answer: C Diff: 3 Type: MC Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 7) When there is inflation, A) average prices fall. B) the value of money falls. C) your standard of living rises if the prices of what you buy rise faster than your income. D) the purchasing power of your savings rises. E) your standard of living falls if your income rises faster than the prices of what you buy. Answer: B Diff: 3 Type: MC Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 227 Copyright © 2021 Pearson Canada Inc.

8) When there is inflation, A) average prices fall. B) the value of money rises. C) your standard of living rises if your income rises faster than the prices of what you buy. D) the purchasing power of your savings rises. E) your standard of living falls if your income rises faster than the prices of what you buy. Answer: C Diff: 3 Type: MC Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 9) A fall in the value of the Canadian dollar A) makes cross-border shopping a better bargain for Canadians. B) makes imported products less expensive. C) increases your income taxes. D) decreases your income taxes. E) increases Canadian exports. Answer: E Diff: 2 Type: MC Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 10) A fall in the value of the Canadian dollar A) makes cross-border shopping a better bargain for Canadians. B) makes imported products less expensive. C) increases your income taxes. D) decreases your income taxes. E) increases Canadian GDP. Answer: E Diff: 2 Type: MC Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist.

11) A rise in the value of the Canadian dollar A) creates jobs in exporting businesses. B) makes imported products more expensive. C) increases your income taxes. D) decreases your income taxes. E) decreases Canadian exports. Answer: E Diff: 2 Type: MC Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 12) A rise in the value of the Canadian dollar A) makes cross-border shopping a better bargain for Canadians. B) makes imported products more expensive. C) increases your income taxes. D) decreases your income taxes. E) increases Canadian GDP. Answer: A Diff: 2 Type: MC Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 13) Thinking like a macroeconomist means focusing on the connections between A) input markets and output markets. B) the banking system and the Canadian economy. C) expectations and the Canadian economy. D) the Canadian economy and the rest of the world. E) all of the above. Answer: E Diff: 1 Type: MC Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 14) Thinking like a macroeconomist means focusing on the connections between A) additional benefits and additional opportunity costs. B) competition and cooperation. C) marginal benefit and marginal cost. D) the Canadian economy and the rest of the world. E) none of the above. Answer: D Diff: 1 Type: MC Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 229 Copyright © 2021 Pearson Canada Inc.

15) Thinking like a macroeconomist means focusing on the connections between A) additional benefits and additional opportunity costs. B) competition and cooperation. C) marginal benefit and marginal cost. D) the banking system and the Canadian economy. E) none of the above. Answer: D Diff: 1 Type: MC Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 16) Thinking like a macroeconomist means focusing on the connections between A) input markets and output markets. B) competition and cooperation. C) marginal benefits and marginal costs. D) additional benefits and additional opportunity costs. E) none of the above. Answer: A Diff: 1 Type: MC Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 17) Higher GDP per person allows higher living standards. Answer: TRUE Diff: 1 Type: TF Page Ref: 123-125 Skill: Recall Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 18) Macroeconomics is about the combined outcome of individual choices. Answer: TRUE Diff: 1 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 19) Microeconomics is about the combined outcome of individual choices. Answer: FALSE Diff: 1 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist.

20) If your income rises faster than the prices of what you buy, your standard of living decreases. Answer: FALSE Diff: 2 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 21) If your income rises faster than the prices of what you buy, your standard of living increases. Answer: TRUE Diff: 2 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 22) If your income does not rise as fast as the prices of what you buy, your standard of living decreases. Answer: TRUE Diff: 2 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 23) If your income does not rise as fast as the prices of what you buy, your standard of living increases. Answer: FALSE Diff: 2 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 24) When unemployment is high, employers have an advantage in bargaining over wages. Answer: TRUE Diff: 1 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 25) When unemployment is high, workers have an advantage in bargaining over wages. Answer: FALSE Diff: 1 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist.

26) When unemployment is low, workers have an advantage in bargaining over wages. Answer: TRUE Diff: 1 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 27) When unemployment is low, employers have an advantage in bargaining over wages. Answer: FALSE Diff: 2 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 28) Unemployment tends to be inversely related to growth in GDP. Answer: TRUE Diff: 2 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 29) Unemployment tends to be positively related to growth in GDP. Answer: FALSE Diff: 2 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 30) When the total value of products and services produced goes up, unemployment decreases. Answer: TRUE Diff: 2 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 31) When the total value of products and services produced goes up, unemployment increases. Answer: FALSE Diff: 2 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist.

32) When GDP goes up, unemployment goes up. Answer: FALSE Diff: 2 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 33) When GDP goes up, unemployment goes down. Answer: TRUE Diff: 2 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 34) Understanding how interest rates are determined will help you decide what a good mortgage interest rate is. Answer: TRUE Diff: 1 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 35) Thinking like a macroeconomist means focusing on connections between input markets and output markets. Answer: TRUE Diff: 1 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 36) Thinking like a macroeconomist means focusing on connections between the banking system and the Canadian economy. Answer: TRUE Diff: 1 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 37) Thinking like a macroeconomist means focusing on connections between the Canadian economy and the rest of the world. Answer: TRUE Diff: 1 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist.

38) Thinking like a macroeconomist means focusing on connections between additional benefits and additional opportunity costs. Answer: FALSE Diff: 1 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 39) Thinking like a macroeconomist means focusing on connections between competition and cooperation. Answer: FALSE Diff: 1 Type: TF Page Ref: 123-125 Skill: Applied Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 40) In the icon for "No - Markets Fail Often," the hands of government hold the broken connections between input markets and output markets. Answer: TRUE Diff: 2 Type: TF Page Ref: 123-125 Skill: Recall Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 41) In the icon for "Yes - Markets Self-Adjust," the hands of government hold the broken connections between input markets and output markets. Answer: FALSE Diff: 2 Type: TF Page Ref: 123-125 Skill: Recall Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. 42) In the icon for "Yes - Markets Self-Adjust," the arms of government are crossed, representing the hands-off position. Answer: TRUE Diff: 2 Type: TF Page Ref: 123-125 Skill: Recall Objective: 5.4 Explain how macroeconomics affects your personal success and how you will benefit from thinking like a macroeconomist. Macroeconomics for Life: Smart Choices for All?, Updated 2e (Cohen) Chapter 6 Up Around the Circular Flow: GDP, Economic Growth, and Business Cycles 6.1 Higher Prices, More Stuff, or Both? Nominal GDP and Real GDP 1) The currency in Tinyland is called the Oscar. In 2015, nominal GDP was 600 Oscars. Real GDP was 500 constant Oscars. The population was 10 persons. The best measure of material 234 Copyright © 2021 Pearson Canada Inc.

well-being for 2015 is A) 5,000 constant Oscars per person. B) 60 constant Oscars per person. C) 50 constant Oscars per person. D) 600 Oscars. E) 500 constant Oscars. Answer: C Diff: 2 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 2) The gross domestic product of a country measures the final value of all products and services produced A) in a year. B) since the country began producing. C) per hour. D) since January 1, 2000. E) since January 1, 2002. Answer: A Diff: 1 Type: MC Page Ref: 132-136 Skill: Recall Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 3) Real GDP uses A) constant prices to value the quantities of product and services. B) constant quantities to value the prices of product and services. C) prices for several years to value the quantities of product and services. D) quantities for several years to value the prices of product and services. E) quantities but does not use prices. Answer: A Diff: 1 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards.

4) Matthew bought an new iPod Touch from a Canadian retailer for $240. It broke later that year. When he complained, the store gave him a new one but charged him a service fee of $60. These two events caused nominal GDP to increase by A) $240. B) $300. C) $180. D) $60. E) $0. Answer: B Diff: 2 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 5) Alex paid her brother Andy $50 to buy a bottle of Cherry Whiskey liquor. Andy spends $40 on the liquor and keeps the remaining $10 for himself. These events cause nominal GDP to increase by A) $60. B) $50. C) $10. D) $40. E) $0. Answer: D Diff: 2 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 6) Angela pays Jordan $800 to build a fence for her house. He spends $600 for wood and nails at Home Depot and builds the fence. These events cause nominal GDP to increase by A) $400. B) $1,400. C) $200. D) $600. E) $800. Answer: E Diff: 2 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards.

7) When nominal GDP is less than real GDP it means A) prices have risen since the year we use as a standard for constant prices. B) the population has increased. C) prices have fallen since the base year. D) the population has decreased. E) there is a mistake because nominal GDP can never be less than real GDP. Answer: C Diff: 2 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 8) When nominal GDP is greater than real GDP it means A) prices have risen since the year we use as a standard for constant prices. B) the population has increased. C) prices have fallen since the year we use as a standard for constant prices. D) the population has decreased. E) there is a mistake because nominal GDP can never be greater than real GDP. Answer: A Diff: 2 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 9) When real GDP increases, what could not have happened? A) rising prices B) increasing population C) falling prices D) decreasing population E) decreasing quantities produced Answer: E Diff: 2 Type: MC Page Ref: 132-136 Skill: Recall Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 10) When real GDP decreases, what could not have happened? A) rising prices B) increasing population C) falling prices D) decreasing population E) increasing quantities produced Answer: E Diff: 2 Type: MC Page Ref: 132-136 Skill: Recall Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 237 Copyright © 2021 Pearson Canada Inc.

11) Real GDP per person is calculated as A) real GDP divided by the number of people in the country. B) the number of people in the country divided by real GDP. C) nominal GDP per person divided by real GDP. D) real GDP per person divided by nominal GDP. E) real GDP multiplied by the number of people in the country. Answer: A Diff: 1 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 12) The best measure of a country's ability to meet the material needs of its citizens is A) nominal GDP per person minus real GDP per person. B) nominal GDP. C) nominal GDP per person. D) real GDP. E) real GDP per person. Answer: E Diff: 1 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 13) Nominal GDP in Canada includes A) illegally purchased products and services. B) purchases by Japanese tourists in Canada of product and services made in Canada. C) purchases by Canadian tourists in the U.S. of products and services made in New York. D) purchases of products and services produced in an earlier year. E) purchases of intermediate products such as wheat or flour. Answer: B Diff: 1 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards.

14) In 2015, the country of Adanac produced 20 kilos of apples and 30 kilos of bananas. Both fruit were used only for final consumption and nothing else was produced. In 2015, a kilo of apples sold for $5 while a kilo of bananas sold for $10. Adanac's nominal GDP in 2015 was A) $65. B) $50. C) $15. D) $400. E) $350. Answer: D Diff: 3 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 15) In 2015, the country of Adanac produced 20 kilos of apples and 30 kilos of bananas. Both fruit were used only for final consumption and nothing else was produced. In 2015, a kilo of apples sold for $10 while a kilo of bananas sold for $5. Adanac's nominal GDP in 2015 was A) $65. B) $50. C) $15. D) $400. E) $350. Answer: E Diff: 3 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 16) Which event increases Canada's nominal GDP? A) Andreas steals $200 worth of cosmetics from Shopper's Drug Mart. B) The Middletons sell a Nova Scotia cottage that has been in the family for six generations. C) Brad buys $240 of crack cocaine from Smokie Joe. D) Ian buys a 2009 Honda Civic for $3,000. E) A millionaire from Michigan buys $400 of fresh Ontario blueberries while on vacation in Canada. Answer: E Diff: 2 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards.

17) Which statement about nominal and real GDP is incorrect? A) Real GDP per person is a better measure of standard of living than nominal GDP per person. B) Nominal GDP includes products and services produced within a country's borders, no matter what the nationality of the business doing the producing. C) Real GDP is measured as a flow. D) Nominal GDP is measured as a flow. E) If nominal GDP is higher this year than last year, there must be positive economic growth. Answer: E Diff: 2 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 18) Which statement about nominal and real GDP is incorrect? A) Real GDP per person is a better measure of standard of living than nominal GDP per person. B) Nominal GDP includes products and services produced within a country's borders, no matter what the nationality of the business doing the producing. C) Real GDP is measured as a stock. D) Nominal GDP is measured as a flow. E) If real GDP is higher this year than last year, this indicates positive economic growth. Answer: C Diff: 2 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 19) Which statement about nominal and real GDP is incorrect? A) Real GDP per person is a better measure of standard of living than nominal GDP per person. B) Canadian real GDP includes products and services produced within Canada's borders, but only for Canadian-owned businesses. C) Real GDP is measured as a flow. D) Nominal GDP is measured as a flow. E) If real GDP is higher this year than last year, this indicates positive economic growth. Answer: B Diff: 2 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards.

20) Which statement about nominal and real GDP is incorrect? A) Real GDP per person is a better measure of standard of living than nominal GDP per person. B) Canadian real GDP includes products and services produced by Canadian-owned businesses, no matter where in the world they are located. C) Real GDP is measured as a flow. D) Nominal GDP is measured as a flow. E) If real GDP is higher this year than last year, this indicates positive economic growth. Answer: B Diff: 2 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 21) Which statement about nominal and real GDP is incorrect? A) Real GDP per person is a better measure of standard of living than nominal GDP per person. B) Real GDP includes products and services produced within a country's borders, no matter what the nationality of the business doing the producing. C) Nominal GDP per person is measured as a flow. D) If real GDP is higher this year than last year, the standard of living must have risen. E) If real GDP is higher this year than last year, there is economic growth. Answer: D Diff: 2 Type: MC Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 22) Real GDP is calculated by using the current year quantity and constant year price for each product and service. Answer: TRUE Diff: 1 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 23) Differences in nominal GDP between years can be due to either price changes or quantity changes. Answer: TRUE Diff: 1 Type: TF Page Ref: 132-136 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree.

24) Differences in real GDP between years can be due to either price changes or quantity changes. Answer: FALSE Diff: 1 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 25) Real GDP can never be less than nominal GDP. Answer: FALSE Diff: 2 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 26) Nominal GDP can never be less than real GDP. Answer: FALSE Diff: 2 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 27) Nominal GDP is measured as a flow. Answer: TRUE Diff: 1 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 28) Real GDP is measured as a stock. Answer: FALSE Diff: 1 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 29) Nominal GDP is measured as a flow, but real GDP, in constant dollars, is measured as a stock. Answer: FALSE Diff: 1 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards.

30) Increases in real GDP per person might be due to increases in the population. Answer: FALSE Diff: 2 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 31) Increases in real GDP per person might be due to decreases in the population. Answer: TRUE Diff: 2 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 32) If real GDP stays constant while the population increases, real GDP per person decreases. Answer: TRUE Diff: 2 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 33) If real GDP stays constant while the population increases, real GDP per person also increases. Answer: FALSE Diff: 2 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 34) Because Tim Horton's is a Canadian corporation, sales from Tim Horton's stores in the U.S. count as part of Canadian GDP. Answer: FALSE Diff: 2 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 35) Although Tim Horton's is a Canadian corporation, sales from Tim Horton's stores in the U.S. count as part of U.S. GDP. Answer: TRUE Diff: 2 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards.

36) Because Toyota is a Japanese corporation, Toyota cars produced in Ontario count as part of Japan's GDP. Answer: FALSE Diff: 2 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 37) Although Toyota is a Japanese corporation, Toyota cars produced in Ontario count as part of Canada's GDP. Answer: TRUE Diff: 2 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 38) Nominal GDP per person is the best measure of a country's material standard of living. Answer: FALSE Diff: 1 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 39) Real GDP per person is the best measure of a country's material standard of living. Answer: TRUE Diff: 1 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 40) Measured in constant U.S. dollars, country A's real GDP is much higher than country B's real GDP. Therefore, country A must be better off than country B. Answer: FALSE Diff: 2 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 41) Reginald Rothchild buys $200 of blueberries while on vacation in Canada. Because Reginald is from England, this amount will be included in nominal GDP for England, but not for Canada. Answer: FALSE Diff: 2 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards.

42) Reginald Rothchild buys $200 of blueberries while on vacation in Canada. Although Reginald is from England, this amount will be included in nominal GDP for Canada, not for England. Answer: TRUE Diff: 2 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 43) Smokie Joe, a known drug-dealer, buys a taco salad at Wendy's. This amount is not included in nominal GDP because everyone knows that Joe got his money illegally. Answer: FALSE Diff: 1 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 44) In 2015, the country of Adanac produced 20 kilos of apples and 30 kilos of bananas. Both fruits were used only for final consumption and nothing else was produced. In 2015, a kilo of apples sold for $5 and a kilo of bananas sold for $10. Adanac's nominal GDP in 2015 was $400. Answer: TRUE Diff: 3 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 45) In 2015, the country of Adanac produced 20 kilos of apples and 30 kilos of bananas. Both fruits were used only for final consumption and nothing else was produced. In 2015, a kilo of apples sold for $10 and a kilo of bananas sold for $5. Adanac's nominal GDP in 2015 was $400. Answer: FALSE Diff: 3 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 46) In 2015, the country of Adanac produced 20 kilos of apples and 30 kilos of bananas. Both fruits were used only for final consumption and nothing else was produced. In 2015, a kilo of apples sold for $5 and a kilo of bananas sold for $10. Adanac's nominal GDP in 2015 was $350. Answer: FALSE Diff: 3 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards.

47) In 2015, the country of Adanac produced 20 kilos of apples and 30 kilos of bananas. Both fruits were used only for final consumption and nothing else was produced. In 2015, a kilo of apples sold for $10 and a kilo of bananas sold for $5. Adanac's nominal GDP in 2015 was $350. Answer: TRUE Diff: 3 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 48) Angela pays her contractor $900 to build a fence at her house. The contractor spends $600 on wood and nails at the local Home Depot. These two sales increase nominal GDP by $1,500. Answer: FALSE Diff: 2 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards. 49) Angela pays her contractor $900 to build a fence at her house. The contractor spends $600 on wood and nails at the local Home Depot. These two sales increase nominal GDP by $900. Answer: TRUE Diff: 2 Type: TF Page Ref: 132-136 Skill: Applied Objective: 6.1 Differentiate nominal GDP, real GDP, and real GDP per person, and demonstrate how each relates to living standards.

6.2 How to Measure GDP: Value Added and the Enlarged Circular Flow 1) Gerry grows marijuana plants from his own seeds in the forest behind his house. He sells 20 kilograms of plants to Smokey Joe for $4,000. Joe spends $200 on baggies for packaging, and resells the marijuana on the street for $6,000. Gerry's value added is A) $4,000. B) $5,800. C) $6,000. D) $1,800. E) $10,200. Answer: A Diff: 2 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 2) Gerry grows marijuana plants from his own seeds in the forest behind his house. He sells 20 kilograms of plants to Smokey Joe for $4,000. Joe spends $200 on baggies for packaging, and resells the marijuana on the street for $6,000. Joe's value added is A) $2,000. B) $5,800. C) $6,000. D) $1,800. E) $10,200. Answer: D Diff: 2 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 3) Say's Law states A) spending on final products and services equals payments to input owners. B) net taxes equal government spending. C) supply creates its own demand. D) aggregate spending equals aggregate income. E) savings equals investment. Answer: C Diff: 1 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income.

4) Andrea pays Ted $900 to build a fence at her home. Ted spends $500 at Home Depot for wood and nails, pays his assistant $100 and keeps the remaining money. Ted's value added is A) $300. B) $400. C) $900. D) $500. E) $100. Answer: B Diff: 2 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 5) The government of Tinyland spends $25 on domestic products and services. Tax revenue is $60. Transfers payments are $20. Net taxes are A) $55. B) $15. C) $20. D) $25. E) $40. Answer: E Diff: 2 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 6) Consumer income is $200. If net taxes are $70 and consumers spend $80 on products and services, consumer savings is A) - $10. B) $10. C) $50. D) $120. E) $190. Answer: C Diff: 2 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income.

7) Net taxes are defined as taxes A) plus transfers. B) minus disposable income. C) plus disposable income. D) plus consumer spending. E) minus transfers. Answer: E Diff: 2 Type: MC Page Ref: 136-143 Skill: Recall Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 8) Which is consumption (C) spending? A) The Singh household buys a new car. B) The Rigid Steel Company buys a new car. C) The Rigid Steel Company buys a new computer. D) Welfare payments to single mothers. E) The CBC spends money on children's programs. Answer: A Diff: 1 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 9) Which is business investment (I) spending? A) The government builds a new office tower. B) The Hong household buys a new computer. C) The Rigid Steel Company sells pipe to Alaska. D) The Rigid Steel Company buys a pipe-cutting machine. E) Peter's Pizza Parlour sells an old oven to Betty's Bakery. Answer: D Diff: 2 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 10) Business investment (I) spending does not include Ford Motor Company A) building a new assembly factory. B) replacing worn-out production robots. C) buying new production robots. D) buying new assembly line motors. E) buying Canadian government bonds. Answer: E Diff: 2 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 249 Copyright © 2021 Pearson Canada Inc.

11) Aggregate spending equals A) C + I + G - X - IM B) C - I + G + X - IM C) C + I - G + X - IM D) C + I + G + X - IM E) C + I + G + X + IM Answer: D Diff: 2 Type: MC Page Ref: 136-143 Skill: Recall Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 12) Disposable income is A) income minus transfers minus taxes. B) income plus transfers minus taxes. C) income minus spending. D) spending plus transfers. E) taxes minus transfers. Answer: B Diff: 2 Type: MC Page Ref: 136-143 Skill: Recall Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 13) In Slugvia the domestic currency is the Drab. Aggregate income is 400 Drab. Consumer, business, and government spending on products and services are 300, 100, and 200 Drab respectively. Slugvia exports 500 Drab of products and services. Imports of products and services must be ________ Drab. A) 300 B) 400 C) 500 D) 600 E) 700 Answer: E Diff: 3 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income.

14) Savings by consumers equals A) income plus net taxes minus consumer spending. B) income minus net taxes minus consumer spending. C) income minus net taxes plus consumer spending. D) government spending minus net taxes. E) government spending plus net taxes. Answer: B Diff: 2 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 15) The difference between the value of a business's output and the value of intermediate products and services bought from other businesses equals A) net exports. B) net profits. C) net taxes. D) investment in inventories. E) inputs' incomes. Answer: E Diff: 3 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 16) A business sells its output for $2,000. It pays $1,100 in wages, $500 for material bought from other businesses, and has profits of $400. Its value added is A) is $400. B) is $1,100. C) is $1,500. D) is $1,600. E) depends on whether it produces intermediate products. Answer: C Diff: 3 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income.

17) Intermediate products and services are not counted in GDP because they A) reduce economic well-being. B) are not consumed in the current year. C) are only sold in input markets. D) would be double counted and overstate the value of GDP. E) are part of the underground economy. Answer: D Diff: 2 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 18) Which is a real flow from consumers to businesses? A) products and services B) inputs C) payments for products and services D) payments for inputs E) loans Answer: B Diff: 2 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 19) How much does the production of a kayak add to GDP if the shell costs $250, the paint costs $20, the finisher costs $35, the manufacturer sells it to the dealer for $500, and the dealer sells it to her customer for $800? A) $1,605 B) $1,300 C) $500 D) $305 E) $800 Answer: E Diff: 3 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income.

20) In calculating Canadian GDP, imports are subtracted from aggregate spending because A) some consumption spending is on imports. B) some business investment spending is on imports. C) some government spending is on imports. D) all of the above are true. E) none of the above are true. Answer: D Diff: 2 Type: MC Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 21) When The Olympic Bakery buys flour from a local miller, the amount is included in nominal GDP but is not included in real GDP. Answer: FALSE Diff: 2 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 22) The government of Tinyland spends $30 on domestic products and services. Tax revenue is $60 and transfer payments are $20. Net taxes equal $10. Answer: FALSE Diff: 2 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 23) The government of Tinyland spends $30 on domestic products and services. Tax revenue is $60 and transfer payments are $20. Net taxes equal $40. Answer: TRUE Diff: 2 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 24) Say's Law states that supply creates its own demand. Answer: TRUE Diff: 1 Type: TF Page Ref: 136-143 Skill: Recall Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income.

25) The sum of all value added equals the sum of all incomes. Answer: TRUE Diff: 1 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 26) The sum of all value added equals the sum of all final products and services produced. Answer: TRUE Diff: 1 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 27) The sum of all value added equals the value of all intermediate products and services. Answer: FALSE Diff: 2 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 28) The sum of all value added equals the value of all final products and services. Answer: TRUE Diff: 2 Type: TF Page Ref: 136-143 Skill: Recall Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 29) The value of all final products and services produced equals the sum of all inputs' incomes, except for profits. Answer: FALSE Diff: 1 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 30) Value added equals the value of output minus the value of intermediate products and services bought from other businesses. Answer: TRUE Diff: 1 Type: TF Page Ref: 136-143 Skill: Recall Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income.

31) Aggregate expenditure is $200. Consumers pay $70 in net taxes and spend $80 on products and services. Consumer savings is $50. Answer: TRUE Diff: 2 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 32) Aggregate expenditure is $200. Consumers pay $70 in net taxes and spend $80 on products and services. Disposable income is $50. Answer: FALSE Diff: 2 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 33) Aggregate expenditure is $200. Consumers pay $70 in net taxes and spend $80 on products and services. Disposable income is $130. Answer: TRUE Diff: 2 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 34) Disposable income equals aggregate income plus transfers minus taxes. Answer: TRUE Diff: 2 Type: TF Page Ref: 136-143 Skill: Recall Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 35) Disposable income equals aggregate income minus net taxes. Answer: TRUE Diff: 2 Type: TF Page Ref: 136-143 Skill: Recall Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 36) Disposable income equals aggregate income plus net taxes. Answer: FALSE Diff: 2 Type: TF Page Ref: 136-143 Skill: Recall Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income.

37) Government transfers are like negative taxes. Answer: TRUE Diff: 1 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 38) Imports must always equal exports. Answer: FALSE Diff: 2 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 39) In calculating Canadian GDP, imports are subtracted from aggregate spending because these products and services are produced in other countries. Answer: TRUE Diff: 1 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 40) GDP statisticians for Statistics Canada use a monthly survey of businesses to categorize products and services as intermediate or final. Answer: FALSE Diff: 2 Type: TF Page Ref: 136-143 Skill: Recall Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 41) A phone could be either an intermediate or a final product, depending on whether it is used by businesses or consumers. Answer: TRUE Diff: 2 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 42) Net exports are $20, consumption spending is $40, government spending is $10 and aggregate income is $100. Therefore, business investment spending is $30. Answer: TRUE Diff: 3 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income.

43) Government spending on transfer payments is included in economists' use of the letter G. Answer: FALSE Diff: 2 Type: TF Page Ref: 136-143 Skill: Recall Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 44) To calculate Canada's aggregate spending, imports (IM) are subtracted to cancel out the import spending that is included in the categories of consumption (C) and business investment spending (I). Answer: TRUE Diff: 2 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 45) In calculating Canadian GDP, imports are subtracted from aggregate spending because these products and services are bought by people who live in other countries. Answer: FALSE Diff: 2 Type: TF Page Ref: 136-143 Skill: Applied Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income. 46) Businesses usually need to borrow money for investment spending because it takes time before sales revenues flow from newly built factories. Answer: TRUE Diff: 2 Type: TF Page Ref: 136-143 Skill: Recall Objective: 6.2 Explain how to measure GDP using value added, and the equality of aggregate spending and aggregate income.

6.3 When Macroeconomic Dreams Come True: Potential GDP and Economic Growth 1) A macro production possibilities frontier shifts immediately from a change in A) the price of inputs. B) unemployment. C) preferences for consumer goods and capital goods. D) the quantity of inputs. E) all of the above. Answer: D Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 2) A macro production possibilities frontier shifts immediately from a change in A) the quality of inputs. B) the quantity of inputs. C) technology. D) all of the above. E) none of the above. Answer: D Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 3) Which does not shift a macro production possibilities frontier? A) increased human capital B) increased labour force participation rate C) technological change. D) increased quantity of land contributing to production. E) increased prices of inputs Answer: E Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 4) Which does not shift a macro production possibilities frontier? A) increased unemployment B) increased labour force participation rate C) increased entrepreneurship. D) increased quantity of land contributing to production. E) increased education Answer: A Diff: 3 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured.

5) Which shifts a macro production possibilities frontier outward? A) increased production of consumer goods B) decreased population C) increased quality of capital D) increased prices of inputs E) decreased prices of inputs Answer: A Diff: 3 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 6) Which shifts a macro production possibilities frontier outward? A) rising input prices B) falling input prices C) rising output prices D) falling output prices E) none of the above Answer: E Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 7) Which shifts a macro production possibilities frontier inward? A) rising input prices B) falling input prices C) rising output prices D) falling output prices E) none of the above Answer: E Diff: 3 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 8) A movement along a macro production possibilities frontier is caused by a change in A) the quality of inputs. B) the quantity of inputs. C) technological change. D) all of the above. E) none of the above. Answer: E Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured.

9) Technological change is represented on a macro production possibilities frontier (PPF) by a(n) A) movement along the PPF. B) movement from a point inside the PPF to a point on the PPF. C) point outside the PPF. D) point inside the PPF. E) outward shift of the PPF. Answer: E Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 10) Economic growth is represented on a macro production possibilities frontier (PPF) by a(n) A) movement along the PPF. B) movement from a point inside the PPF to a point on the PPF. C) point outside the PPF. D) point inside the PPF. E) outward shift of the PPF. Answer: E Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured.

Figure 6.3.1

11) Look at the macro production possibilities frontier in Figure 6.3.1. The statement that "unemployment wastes human resources" refers to a point like A) a. B) b. C) c. D) d. E) e. Answer: D Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 12) Look at the macro production possibilities frontier in Figure 6.3.1. Which current point leads to the most economic growth in the future? A) a B) b C) c D) d E) none of the above Answer: C Diff: 3 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured.

13) Real GDP per person has been growing at 3.5 percent per year in Canukistan. At this rate, how many years will it take real GDP per person to double? A) 20 B) 14 C) 5 D) 70 E) 35 Answer: A Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 14) Amazonia's growth rate of real GDP per person is 7 percent. How many years will it take for real GDP per person to double? A) 3.5 B) 7 C) 10 D) 14.3 E) impossible to calculate without more information Answer: C Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 15) Economic growth rates in industrialized countries were highest in which period? A) 1990 - 2010 B) 1970 - 1990 C) 1950 - 1970 D) 1930 - 1950 E) 1910 - 1930 Answer: C Diff: 2 Type: MC Page Ref: 144-155 Skill: Recall Objective: 6.3 Explain how economic growth occurs and how it is measured. 16) The quality of labour inputs increases through A) technological change. B) training and education. C) entrepeneurship. D) innovation, research and development. E) increases in labour force participation. Answer: B Diff: 1 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured.

17) In 2015, real GDP per person was $200. In 2016, real GDP per person increased to $250. The annual percentage change in real GDP per person is ________ percent. A) 15 B) 20 C) 25 D) 10 E) 50 Answer: C Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 18) Real GDP per person increased from $40 to $50 between 2014 and 2015. The annual percentage change in real GDP per person is ________ percent. A) 10 B) 20 C) 15 D) 25 E) 50 Answer: D Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 19) Increases in real GDP per person can come from A) gains from trade. B) increased labour force participation. C) increased productivity. D) technological change. E) all of the above. Answer: E Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 20) Construction of the Canadian Pacific Railway in the 1800's increased A) the quantity of land. B) human capital. C) the quality of entrepreneurship. D) the quantity of entrepreneurship. E) the quantity of labour. Answer: A Diff: 3 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured.

21) Productivity is usually measured by the A) quality of real GDP per hour of labour. B) quantity of real GDP per hour of labour. C) potential GDP per person. D) capital to labour ratio. E) labour force participation rate. Answer: B Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 22) Creative destruction improves living standards because A) human capital is creatively destroyed. B) labour force participation increases. C) innovation, research and development are destroyed. D) less productive business methods are destroyed. E) the stock of inputs doubles more quickly. Answer: D Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 23) In 2015, Adanac produced 20 kilos of apples and 30 kilos of bananas. Both fruits were used only for final consumption and nothing else was produced. In 2015, a kilo of apples sold for $5 while a kilo of bananas sold for $10. In 2016, Adanac produced only 10 kilos of apples but produced 40 kilos of bananas. Prices in 2016 were $6 per kilo of apples and $11 per kilo of bananas. The economic growth rate in real GDP between 2015 and 2016 was ________ percent. A) 50 B) 11 C) 25 D) 5.0 E) 12.5 Answer: E Diff: 3 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 24) Potential GDP per person in Canada can decrease by A) improved worker/management relations. B) on-the-job training programs. C) emigration out of Canada. D) bringing land not connected to markets into the circular flow. E) increased labour force participation. Answer: C Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 264 Copyright © 2021 Pearson Canada Inc.

25) In 2015, nominal GDP was $250 and real GDP was $200. In 2016, nominal GDP was $360 and real GDP was $240. What is the growth rate of real GDP between 2015 and 2016? A) 60% B) 40% C) 25% D) 20% E) none of the above answers Answer: D Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 26) Which is not a source of economic growth? A) immigration into Canada B) technological change C) better educated workers D) growing stock of capital equipment E) increasing stock market prices Answer: E Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 27) Which is not a source of economic growth? A) higher labour force participation rates B) technological change C) higher interest rates D) improvements in corporate organization E) more experienced workers Answer: C Diff: 2 Type: MC Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 28) A macro production possibilities frontier shifts when there is a change in the quantity of inputs. Answer: TRUE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured.

29) A macro production possibilities frontier shifts when there is a change in the price of inputs. Answer: FALSE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 30) A macro production possibilities frontier shifts when there is a change in the price of outputs. Answer: FALSE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 31) A macro production possibilities frontier shifts when there is a change in the technology. Answer: TRUE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 32) A macro production possibilities frontier shifts when there is a change in the unemployment rate. Answer: FALSE Diff: 2 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 33) A macro production possibilities frontier shifts when there is a change in the labour force participation rate. Answer: TRUE Diff: 2 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 34) Technological change is represented on a macro production possibilities frontier (PPF) by an outward shift of the PPF. Answer: TRUE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 35) Technological change is represented on a macro production possibilities frontier (PPF) by a movement from a point inside the PPF to a point on the PPF. Answer: FALSE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured.

36) Technological change is represented on a macro production possibilities frontier (PPF) by a movement along the PPF. Answer: FALSE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 37) Economic growth is represented on a macro production possibilities frontier (PPF) by an outward shift of the PPF. Answer: TRUE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 38) Economic growth is represented on a macro production possibilities frontier (PPF) by a movement from a point inside the PPF to a point on the PPF. Answer: FALSE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 39) Economic growth is represented on a macro production possibilities frontier (PPF) by a movement along the PPF. Answer: FALSE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 40) Sarah deposits $5,000 in a CIBC term deposit paying 3 percent per year. After 1 year her deposit is worth $5,003. Answer: FALSE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 41) Sarah deposits $5,000 in a CIBC term deposit paying 3 percent per year. After 1 year her deposit is worth $5,150. Answer: TRUE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 42) Economic growth is caused by increases in the quantity and quality of a country's outputs. Answer: FALSE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 267 Copyright © 2021 Pearson Canada Inc.

43) Economic growth is caused by increases in the quantity and quality of a country's inputs. Answer: TRUE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 44) At potential GDP, the smart choices of households and the smart choices of businesses are coordinated in each separate market. Answer: TRUE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 45) Over long periods of time, a growth rate of 2 percent per year is considered to be excellent. Answer: FALSE Diff: 2 Type: TF Page Ref: 144-155 Skill: Recall Objective: 6.3 Explain how economic growth occurs and how it is measured. 46) Over long periods of time, a growth rate of 3 percent per year is considered to be very good. Answer: TRUE Diff: 2 Type: TF Page Ref: 144-155 Skill: Recall Objective: 6.3 Explain how economic growth occurs and how it is measured. 47) If Canada has an annual average growth rate of 2 percent, and China has an annual growth rate of 5 percent, it will take Canada 21 more years than China to double real GDP per person. Answer: TRUE Diff: 3 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 48) It took far more hours of work to buy a movie ticket in the 1920s than it does today. Answer: FALSE Diff: 2 Type: TF Page Ref: 144-155 Skill: Recall Objective: 6.3 Explain how economic growth occurs and how it is measured. 49) The quality of labour inputs increases with increases in the labour force participation rate. Answer: FALSE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured.

50) The quantity of labour inputs increases with increases in the labour force participation rate. Answer: TRUE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 51) The quality of labour inputs increases through training and education. Answer: TRUE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 52) The quantity of labour inputs increases through training and education. Answer: FALSE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 53) If real GDP per person increases over a year from $50,000 to $60,000, the economic growth rate is 10 percent. Answer: FALSE Diff: 2 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 54) If real GDP per person increases over a year from $50,000 to $60,000, the economic growth rate is 20 percent. Answer: TRUE Diff: 2 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 55) In Olliestan the economic growth of real GDP per person averages 5 percent per year. The Rule of 70 suggests that real GDP per person will double in 5 years. Answer: FALSE Diff: 2 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 56) In Olliestan the economic growth of real GDP per person averages 5 percent per year. The Rule of 70 suggests that real GDP per person will double in 14 years. Answer: TRUE Diff: 2 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured.

57) Constructing more factories increases capital inputs. Answer: TRUE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 58) Once a country's borders are set, the quantity of land available as inputs does not change. Answer: FALSE Diff: 2 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 59) Once a country's borders are set, the quality of land available as inputs cannot change. Answer: FALSE Diff: 2 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 60) Even after a country's borders are set, the quantity of land available as inputs can change. Answer: TRUE Diff: 2 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 61) Even after a country's borders are set, the quality of land available as inputs can change. Answer: TRUE Diff: 2 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 62) The quantity of land available as inputs can increase by bringing land not connected to markets into the circular flow. Answer: TRUE Diff: 2 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 63) On-the-job training decreases human capital. Answer: FALSE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured.

64) On-the-job training increases human capital. Answer: TRUE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 65) The population of West Moreland is 200,000 persons. There are 180,000 persons in the labour force. The labour force participation rate is 90 percent. Answer: TRUE Diff: 3 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 66) The population of West Moreland is 200,000 persons. There are 180,000 persons in the labour force. The labour force participation rate is 36 percent. Answer: FALSE Diff: 3 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 67) Planners in Canukistan hope to double real GDP per person in 20 years. The Rule of 70 suggests that Canukistan needs an average growth rate of at least 3.5 percent per year. Answer: TRUE Diff: 3 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 68) The concept of creative destruction was introduced by Adam Smith. Answer: FALSE Diff: 1 Type: TF Page Ref: 144-155 Skill: Recall Objective: 6.3 Explain how economic growth occurs and how it is measured. 69) The concept of creative destruction was introduced by Joseph Schumpeter. Answer: TRUE Diff: 1 Type: TF Page Ref: 144-155 Skill: Recall Objective: 6.3 Explain how economic growth occurs and how it is measured. 70) According to the concept of creative destruction, businesses create innovations that destroy living standards. Answer: FALSE Diff: 1 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured.

71) Improvements in the quality of capital through innovation, research, and development are called technological change. Answer: TRUE Diff: 1 Type: TF Page Ref: 144-155 Skill: Recall Objective: 6.3 Explain how economic growth occurs and how it is measured. 72) Improvements in productivity from better management techniques are called technological change. Answer: FALSE Diff: 1 Type: TF Page Ref: 144-155 Skill: Recall Objective: 6.3 Explain how economic growth occurs and how it is measured. 73) The lowest possible annual growth rate is 0 percent. Answer: FALSE Diff: 2 Type: TF Page Ref: 144-155 Skill: Applied Objective: 6.3 Explain how economic growth occurs and how it is measured. 6.4 Boom and Bust: Business Cycles 1) In Beyonceland, real GDP fell continuously from $200 billion in 2015 to $160 billion in 2016. Potential GDP remained constant at $180 billion. Between 2015 and 2016, Beyonceland A) went from a peak to a trough. B) went from expansion to contraction. C) went from a deflationary gap to an inflationary gap. D) went from a positive output gap to a negative output gap. E) had a growth rate of -25 percent. Answer: D Diff: 3 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 2) In Beyonceland, real GDP fell continuously from $200 billion in 2015 to $160 billion in 2016. Potential GDP remained constant at $180 billion. Between 2015 and 2016, Beyonceland A) went from a peak to a trough. B) had a contraction but not a recession. C) went from a deflationary gap to an inflationary gap. D) went from a negative output gap to a positive output gap. E) had a growth rate of -20 percent. Answer: E Diff: 3 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 272 Copyright © 2021 Pearson Canada Inc.

3) In Beyonceland, real GDP fell continuously from $200 billion in 2015 to $160 billion in 2016. Potential GDP remained constant at $180 billion. Between 2015 and 2016, Beyonceland A) went from a peak to a trough. B) had a contraction but not a recession. C) went from an inflationary gap to a deflationary gap. D) went from a negative output gap to a positive output gap. E) had a growth rate of -25 percent. Answer: C Diff: 3 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 4) In Beyonceland, real GDP fell continuously from $200 billion in 2015 to $160 billion in 2016. Potential GDP remained constant at $180 billion. Between 2015 and 2016, Beyonceland A) went from a peak to a trough. B) had a contraction and a recession. C) went from a deflationary gap to an inflationary gap. D) went from a negative output gap to a positive output gap. E) had a growth rate of -25 percent. Answer: B Diff: 3 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 5) In Beyonceland, real GDP fell continuously from $200 billion in 2015 to $160 billion in 2016. Potential GDP remained constant at $180 billion. Between 2015 and 2016, Beyonceland A) had a growth rate of -20 percent. B) had a contraction and a recession. C) went from an inflationary gap to a deflationary gap. D) went from a positive output gap to a negative output gap. E) had all of the above. Answer: E Diff: 3 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers.

6) In Beyonceland, real GDP fell continuously from $200 billion in 2015 to $160 billion in 2016. Potential GDP remained constant at $180 billion. Between 2015 and 2016, Beyonceland A) had a growth rate of -25 percent. B) had a contraction but not a recession. C) went from a deflationary gap to an inflationary gap. D) went from a negative output gap to a positive output gap. E) had none of the above. Answer: E Diff: 3 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 7) In Gagaland, real GDP is $200 billion and potential GDP is $160 billion. Gagaland has a(n) A) inflationary gap of $40 billion. B) recessionary gap of $40 billion. C) growth rate of 40 percent. D) growth rate of 20 percent. E) growth rate of -25 percent. Answer: A Diff: 2 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 8) In Gagaland, real GDP is $200 billion and potential GDP is $160 billion. Gagaland has a(n) A) positive output gap of $40 billion. B) negative output gap of $40 billion. C) growth rate of 40 percent. D) growth rate of 20 percent. E) growth rate of -25 percent. Answer: A Diff: 2 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers.

9) In Gagaland, real GDP is $160 billion and potential GDP is $200 billion. Gagaland has a(n) A) inflationary gap of $40 billion. B) recessionary gap of $40 billion. C) growth rate of 40 percent. D) growth rate of 20 percent. E) growth rate of 25 percent. Answer: B Diff: 2 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 10) In Gagaland, real GDP is $160 billion and potential GDP is $200 billion. Gagaland has a(n) A) positive output gap of $40 billion. B) negative output gap of $40 billion. C) growth rate of 40 percent. D) growth rate of 20 percent. E) growth rate of 25 percent. Answer: B Diff: 2 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 11) Which word does not describe a phase of a business cycle? A) expansion B) retraction C) contraction D) peak E) trough Answer: B Diff: 1 Type: MC Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 12) Which word does not describe a phase of a business cycle? A) trough B) expansion C) contraction D) peak E) inflation Answer: E Diff: 1 Type: MC Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 275 Copyright © 2021 Pearson Canada Inc.

13) Which word does not describe a phase of a business cycle? A) trough B) expansion C) contraction D) peak E) stagflation Answer: E Diff: 1 Type: MC Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 14) Which word does not describe a phase of a business cycle? A) trough B) expansion C) contraction D) peak E) destruction Answer: E Diff: 1 Type: MC Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 15) During the most recent three quarters, real GDP decreased from $200 to $180 to $170. Economists describe this as a(n) A) concession. B) expansion. C) depression. D) recession. E) deflation. Answer: D Diff: 1 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers.

16) During the most recent three quarters, real GDP increased from $170 to $180 to $200. Economists describe this as a(n) A) inflation. B) expansion. C) contraction. D) recession. E) deflation. Answer: B Diff: 1 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 17) During the most recent three quarters, real GDP went from $200 to $180 to $180. Economists describe this as a(n) A) contraction. B) expansion. C) depression. D) recession. E) deflation. Answer: A Diff: 1 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 18) During the first three quarters of 2015, real GDP went from $200 to $220 to $180. Economists describe the second quarter of 2015 as a(n) A) contraction. B) inflation. C) peak. D) recession. E) trough. Answer: C Diff: 1 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers.

19) During the first three quarters of 2015, real GDP went from $220 to $200 to $280. Economists describe the second quarter of 2015 as a(n) A) deflation. B) inflation. C) peak. D) recession. E) trough. Answer: E Diff: 1 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 20) During the most recent three quarters, real GDP decreased from $200 to $180 to $170. The growth rate between the first quarter and the second quarter was ________ percent. A) -11 B) +11 C) +10 D) -10 E) -15 Answer: D Diff: 2 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 21) In 2015, Adanac produced 20 kilos of apples and 30 kilos of bananas. Both fruits were used exclusively for final consumption and nothing else was produced. In 2015, a kilo of apples sold for $5 while a kilo of bananas sold for $10. Using the same prices, economists estimate that potential GDP is $500. The output gap is A) - $400. B) + $400. C) - $100. D) + $100. E) - $200. Answer: C Diff: 3 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers.

22) In 2015, Adanac produced 20 kilos of apples and 30 kilos of bananas. Both fruits were used exclusively for final consumption and nothing else was produced. In 2015, a kilo of apples sold for $5 while a kilo of bananas sold for $10. Using the same prices, economists estimate that potential GDP is $300. The output gap is A) - $400. B) + $400. C) - $100. D) + $100. E) - $200. Answer: D Diff: 3 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 23) In 2015, Adanac produced 20 kilos of apples and 30 kilos of bananas. Both fruits were used exclusively for final consumption and nothing else was produced. In 2015, a kilo of apples sold for $5 while a kilo of bananas sold for $10. Using the same prices, economists estimate that potential GDP is $800. The output gap is A) - $400. B) + $400. C) - $100. D) + $100. E) - $200. Answer: A Diff: 3 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 24) In 2015, Adanac produced 20 kilos of apples and 30 kilos of bananas. Both fruits were used exclusively for final consumption and nothing else was produced. In 2015, a kilo of apples sold for $5 while a kilo of bananas sold for $10. Using the same prices, economists estimate that potential GDP is $600. The output gap is A) + $200. B) + $400. C) - $100. D) + $100. E) - $200. Answer: E Diff: 3 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers.

25) In 2015, Adanac produced 20 kilos of apples and 30 kilos of bananas. Both fruits were used exclusively for final consumption and nothing else was produced. In 2015, a kilo of apples sold for $5 while a kilo of bananas sold for $10. Using the same prices, economists estimate that potential GDP is $200. The output gap is A) + $200. B) + $400. C) - $100. D) + $100. E) - $200. Answer: A Diff: 3 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 26) An economy that experiences two or more consecutive quarters of increases in real GDP is experiencing a(n) A) expansion. B) peak. C) recession. D) depression. E) inflationary gap. Answer: A Diff: 2 Type: MC Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 27) An economy that experiences two or more consecutive quarters of increases in real GDP is experiencing A) a positive output gap. B) a negative output gap. C) economic growth. D) a peak. E) an inflationary gap. Answer: C Diff: 2 Type: MC Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers.

28) An economy that experiences two or more consecutive quarters of decreases in real GDP is experiencing a(n) A) positive output gap. B) a negative output gap. C) trough. D) recession. E) deflationary gap. Answer: D Diff: 2 Type: MC Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 29) An economy that experiences two or more consecutive quarters of decreases in real GDP is experiencing a(n) A) recession. B) trough. C) peak. D) expansion. E) deflation. Answer: A Diff: 2 Type: MC Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 30) There is an inflationary gap when A) real GDP is above potential GDP. B) potential GDP is above real GDP. C) real GDP per hour of labour is increasing. D) real GDP per person is increasing. E) potential GDP is increasing. Answer: A Diff: 2 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers.

31) In 2015, Adanac produced 20 kilos of apples and 30 kilos of bananas. Both fruits were used exclusively for final consumption and nothing else was produced. In 2015, a kilo of apples sold for $5 while a kilo of bananas sold for $10. In 2016, Adanac produced only 10 kilos of apples but produced 40 kilos of bananas. In 2016, prices were $6 per kilo of apples and $8 per kilo of bananas. Using 2015 prices, economists estimate that potential GDP is $500 in 2016. The output gap in 2016 is A) - $50. B) + $50. C) - $100. D) + $100. E) - $120. Answer: A Diff: 3 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 32) In 2015, Adanac produced 20 kilos of apples and 30 kilos of bananas. Both fruits were used exclusively for final consumption and nothing else was produced. In 2015, a kilo of apples sold for $5 while a kilo of bananas sold for $10. In 2016, Adanac produced only 10 kilos of apples but produced 40 kilos of bananas. In 2016, prices were $6 per kilo of apples and $8 per kilo of bananas. Using 2015 prices, economists estimate that potential GDP is $400 in 2016. The output gap in 2016 is A) - $50. B) + $50. C) - $100. D) + $100. E) - $120. Answer: B Diff: 3 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 33) An output gap is A) negative during a recession. B) positive during a recession. C) negative if real GDP is above potential GDP. D) positive if real GDP is above potential GDP. E) positive during an expansion. Answer: D Diff: 3 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers.

34) An output gap is A) negative during a recession. B) positive during an recession. C) negative if real GDP is below potential GDP. D) positive if real GDP is below potential GDP. E) positive during an expansion. Answer: C Diff: 3 Type: MC Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 35) In the first quarter of 2009, real GDP was $1292 billion and potential GDP was $1331 billion (both measured in 2002 dollars). This was a recessionary gap. Answer: TRUE Diff: 1 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 36) Real GDP equals potential GDP when labour, capital, land/resources, and entrepreneurship are fully employed. Answer: TRUE Diff: 1 Type: TF Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 37) A recession is defined as two or more successive quarters of contraction of real GDP. Answer: TRUE Diff: 1 Type: TF Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 38) A depression is defined as two or more successive quarters of contraction of real GDP. Answer: FALSE Diff: 1 Type: TF Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers.

39) A depression is defined as three or more successive quarters of contraction of real GDP. Answer: FALSE Diff: 1 Type: TF Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 40) If real GDP is $200 billion but potential GDP is $160 billion, there is a recessionary gap of $40 billion. Answer: FALSE Diff: 2 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 41) If real GDP is $200 billion but potential GDP is $160 billion, there is an inflationary gap of $40 billion. Answer: TRUE Diff: 2 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 42) If real GDP is $200 billion but potential GDP is $160 billion, the output gap is + $40 billion. Answer: TRUE Diff: 2 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 43) If real GDP is $200 billion but potential GDP is $160 billion, the output gap is - $40 billion. Answer: FALSE Diff: 2 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 44) If real GDP is $200 billion but potential GDP is $260 billion, the output gap is + $60 billion. Answer: FALSE Diff: 2 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers.

45) If real GDP is $200 billion but potential GDP is $260 billion, there is a recessionary gap of $60 billion. Answer: TRUE Diff: 2 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 46) If real GDP is $200 billion but potential GDP is $260 billion, there is an inflationary gap of $60 billion. Answer: FALSE Diff: 2 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 47) If real GDP is $200 billion but potential GDP is $260 billion, the output gap is - $60 billion. Answer: TRUE Diff: 2 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 48) During the most recent three quarters, real GDP decreased from $200 to $180 to $170. This economy is experiencing a recession. Answer: TRUE Diff: 2 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 49) The lowest point of a contraction is called a recession. Answer: FALSE Diff: 1 Type: TF Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 50) The lowest point of a contraction is called a trough. Answer: TRUE Diff: 1 Type: TF Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers.

51) When real GDP is below potential GDP the economy is experiencing an inflationary gap. Answer: FALSE Diff: 1 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 52) Business cycles are fluctuations of potential GDP around real GDP. Answer: FALSE Diff: 1 Type: TF Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 53) Business cycles are fluctuations of real GDP around potential GDP. Answer: TRUE Diff: 1 Type: TF Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 54) If real GDP is $200 billion and the inflationary gap is $50 billion, potential GDP is $250 billion. Answer: FALSE Diff: 2 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 55) If real GDP is $200 billion and the inflationary gap is $50 billion, potential GDP is $150 billion. Answer: TRUE Diff: 2 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 56) Potential GDP is the same as full employment GDP. Answer: TRUE Diff: 1 Type: TF Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers.

57) The output gap is positive during a deflationary gap. Answer: FALSE Diff: 1 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 58) The output gap is negative during a deflationary gap. Answer: TRUE Diff: 1 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 59) The output gap is positive during an inflationary gap. Answer: TRUE Diff: 1 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 60) The output gap is negative during an inflationary gap. Answer: FALSE Diff: 1 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 61) In a recessionary gap, policymakers may try to increase real GDP. Answer: TRUE Diff: 1 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 62) An expansion is a period when real GDP is above potential GDP. Answer: FALSE Diff: 1 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers.

63) A contraction is a period when real GDP is below potential GDP. Answer: FALSE Diff: 1 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 64) The lowest point of a business cycle is called the trough of the contraction. Answer: TRUE Diff: 1 Type: TF Page Ref: 155-158 Skill: Recall Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 65) During an expansion, there could be an inflationary gap or a deflationary gap. Answer: TRUE Diff: 3 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers. 66) During a recession, there could be an inflationary gap or a deflationary gap. Answer: TRUE Diff: 3 Type: TF Page Ref: 155-158 Skill: Applied Objective: 6.4 Describe business cycles in terms of real GDP and output gaps as a target for policymakers.

6.5 My GDP is Bigger Than Yours: What's Wrong with GDP as a Measure of Well-Being? 1) If illegal activities were included in GDP calculations, the measured level of GDP would be A) higher. B) a perfect measure of well-being. C) unchanged. D) free from business cycles. E) lower. Answer: A Diff: 1 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 2) Real GDP is a limited measure of well-being because it ignores A) the banking system. B) the underground economy. C) the rest of the world. D) production that takes place outside the home. E) child support payments. Answer: B Diff: 1 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 3) When parents home-school their children they are engaged in A) leisure. B) illegal activity. C) non-market production. D) social justice. E) irrational behaviour. Answer: C Diff: 2 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 4) The underground economy does not include A) tax evasion. B) unreported tips. C) cross-border smuggling. D) subways and tunnels. E) illegal activities. Answer: D Diff: 2 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being.

5) A country with strict environmental standards probably has ________ real GDP and might have ________ well-being than other countries. A) higher; higher B) lower; lower C) higher; lower D) lower; higher E) well-being does not depend on environmental quality Answer: D Diff: 2 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 6) A country with an excellent and affordable system of government-financed health care probably has ________ real GDP and might have ________ well-being than other countries. A) higher; higher B) lower; lower C) lower; higher D) higher; lower E) well-being does not depend on affordable health care Answer: C Diff: 2 Type: MC Page Ref: 158-160 Skill: Recall Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 7) When a wealthy businesswoman marries her chauffeur and he continues to drive her around for free, they are engaged in A) tax avoidance. B) illicit activity. C) illegal activity. D) leisure. E) non-market production. Answer: E Diff: 2 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 8) Most Canadian provinces have 8 paid holidays per year. If the number of paid holidays increased, it is likely that real GDP would ________ and well-being would ________. A) increase; increase B) decrease; decrease C) decrease; increase D) increase; decrease E) well-being does not depend on leisure Answer: C Diff: 2 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 290 Copyright © 2021 Pearson Canada Inc.

9) The neighboring countries of Portavilla and Ura have the same real GDP per person. In Portavilla, the richest 20 percent of the population earns 40 percent of the income, while the poorest 20 percent of the population earns 10 percent of the income. In Ura, the richest 20 percent of the population earns 80 percent of the income, and the poorest 20 percent of the population earns only 5 percent of the income. These statistics suggest that A) income is distributed more equitably in Portavilla. B) the richest 20 percent of the population in Portavilla earns more than the richest 20 percent of the population in Ura. C) the poorest 20 percent of the population in Ura earn more than the richest 20 percent of the population in Portavilla. D) the poorest 20 percent of the population in Portavilla earns more than the richest 20 percent of the population in Portavilla. E) income is distributed more equitably in Ura. Answer: A Diff: 3 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 10) The United Nations Human Development Index is a measure of A) happiness. B) material standard of living. C) economic growth. D) labour force participation. E) well-being. Answer: E Diff: 2 Type: MC Page Ref: 158-160 Skill: Recall Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 11) Which is not a reason for GDP incorrectly measuring the quality of life? A) the underground economy B) non-market production C) leisure D) environmental damage E) net taxes Answer: E Diff: 1 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being.

12) The normal measurement of GDP overestimates economic well-being because it excludes A) spending on health. B) leisure time. C) the effects of pollution. D) non-market production. E) unreported home renovations. Answer: C Diff: 3 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 13) The normal measurement of GDP underestimates economic well-being because it excludes A) the underground economy. B) leisure time. C) non-market production. D) all of the above. E) non of the above. Answer: D Diff: 3 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 14) Which factor, if included in the measurement of a country's GDP, would have an unclear effect (up or down) on well-being, or quality of life? A) unreported legal productive activities B) unreported tips for restaurant servers C) non-market production D) political freedom E) environmental damage Answer: D Diff: 3 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 15) Which factor, if included in the measurement of a country's GDP, would have an unclear effect (up or down) on well-being, or quality of life? A) unreported legal productive activities B) unreported tips for restaurant servers C) non-market production D) social justice E) environmental damage Answer: D Diff: 3 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being.

16) Which factor, if included in the measurement of a country's GDP, would have an unclear effect (up or down) on well-being, or quality of life? A) unreported legal productive activities B) unreported tips for restaurant servers C) non-market production D) leisure E) environmental damage Answer: D Diff: 3 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 17) The normal measurement of GDP underestimates the total output in an economy because it excludes A) pollution. B) the underground economy. C) market production. D) leisure. E) political freedoms and social justice. Answer: B Diff: 2 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 18) The normal measurement of GDP underestimates the total output in an economy because it excludes A) pollution. B) social justice. C) non-market production. D) leisure. E) political freedoms. Answer: C Diff: 2 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 19) The underground economy is all economic activity that A) produces intermediate products and services. B) is not taxed. C) has negative social value. D) is legal but unreported, or is illegal. E) is conducted underground. Answer: D Diff: 2 Type: MC Page Ref: 158-160 Skill: Recall Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 293 Copyright © 2021 Pearson Canada Inc.

20) Suppose Angela falls in love with and then marries her regularly employed housekeeper, Tony. What effect must this have on GDP? A) GDP must stay the same. B) GDP must increase. C) It depends on whether he now works in the house free of charge, or whether she still pays him. D) GDP must decrease. E) GDP must decrease but then increase after the honeymoon is over. Answer: C Diff: 3 Type: MC Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 21) Real GDP is a better measure of economic well-being than real GDP per person. Answer: FALSE Diff: 1 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 22) Real GDP per person is a better measure of economic well-being than real GDP. Answer: TRUE Diff: 1 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 23) Marrying your pool boy and having him work for free reduces real GDP. Answer: TRUE Diff: 1 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 24) Real GDP underestimates well-being because it does not include the value of leisure time. Answer: TRUE Diff: 2 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 25) Real GDP overestimates well-being because it does not include the value of leisure time. Answer: FALSE Diff: 2 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being.

26) Non-market production includes household activities like cleaning, cooking and child care. Answer: TRUE Diff: 1 Type: TF Page Ref: 158-160 Skill: Recall Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 27) Patricia pays $100 to have her clothes dry-cleaned. This is an example of non-market production. Answer: FALSE Diff: 1 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 28) Legalizing marijuana will cause real GDP to increase. Answer: TRUE Diff: 2 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 29) Legalizing marijuana will cause real GDP to decrease. Answer: FALSE Diff: 2 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 30) Real GDP subtracts the costs of damage done to the environment. Answer: FALSE Diff: 2 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 31) Environmental damage increases well-being. Answer: FALSE Diff: 1 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 32) Inequalities in income distributions lower economic well-being. Answer: TRUE Diff: 1 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being.

33) The neighboring countries of Portavilla and Ura have the same real GDP per person but citizens of Ura enjoy 4 extra weeks a year of vacation. The level of well-being in Portavilla is lower than in Ura. Answer: TRUE Diff: 2 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 34) The neighboring countries of Portavilla and Ura have the same real GDP per person but citizens of Ura enjoy 4 extra weeks a year of vacation. The level of well-being in Portavilla is higher than in Ura. Answer: FALSE Diff: 2 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 35) When a high school teacher takes a leave of absence to home-school his children, real GDP decreases. Answer: TRUE Diff: 2 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 36) The Human Development Index (HDI) shows the same ranking of countries as does real GDP per person. Answer: FALSE Diff: 2 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 37) If underground economic activities were included in real GDP calculations, measured real GDP levels would be higher. Answer: TRUE Diff: 1 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 38) If two economies have the same real GDP per person, the quality of life must be the same in each economy. Answer: FALSE Diff: 1 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being.

39) The underground economy is all economic activities that have negative social value. Answer: FALSE Diff: 1 Type: TF Page Ref: 158-160 Skill: Applied Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 40) Economists estimate the size of the underground economy in Canada to be between 5 and 15 percent of GDP. Answer: TRUE Diff: 1 Type: TF Page Ref: 158-160 Skill: Recall Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 41) Economists estimate the size of the underground economy in Canada to be between 1 and 5 percent of GDP. Answer: FALSE Diff: 1 Type: TF Page Ref: 158-160 Skill: Recall Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 42) Despite limitations to GDP measurement, economists are comfortable using a country's growth rate of real GPD per person to judge economic progress over time. Answer: TRUE Diff: 2 Type: TF Page Ref: 158-160 Skill: Recall Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. 43) Because of limitations to GDP measurement, economists are not comfortable using a country's growth rate of real GPD per person to judge economic progress over time. Answer: FALSE Diff: 2 Type: TF Page Ref: 158-160 Skill: Recall Objective: 6.5 Identify five limitations of real GDP per person as a measure of well-being. Macroeconomics for Life: Smart Choices for All?, Updated 2e (Cohen) Chapter 7 Costs of (Not) Working and Living: Unemployment and Inflation 7.1 Who is Unemployed? Healthy and Unhealthy Types of Unemployment 1) The labour force includes A) Andrew, who is looking for a job. B) Britney, who quit her job to raise her new baby. C) Charles, who is retired. D) David, who is Britney's baby boy. E) Eve, who is a full time student. Answer: A Diff: 1 Type: MC Page Ref: 168-174 297 Copyright © 2021 Pearson Canada Inc.

Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 2) A person is counted as unemployed if she is A) not employed and is actively seeking work. B) retired. C) a full-time student. D) too young to work. E) at home because she gave up looking for a job. Answer: A Diff: 1 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 3) If a very small town has 20 people unemployed and 80 people employed, the unemployment rate is A) 25 percent. B) 20 percent. C) 40 percent. D) 33 percent. E) 60 percent. Answer: B Diff: 2 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment.

4) If a very small town has 25 people unemployed and 75 people employed, the unemployment rate is A) 25 percent. B) 20 percent. C) 40 percent. D) 33 percent. E) 50 percent. Answer: A Diff: 2 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 5) Unhealthy unemployment is A) frictional. B) natural. C) structural. D) cyclical. E) seasonal. Answer: D Diff: 2 Type: MC Page Ref: 168-174 Skill: Recall Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 6) Which type of unemployment is a healthy part of a changing economy, and also a problem that needs fixing? A) frictional B) natural C) structural D) cyclical E) seasonal Answer: C Diff: 2 Type: MC Page Ref: 168-174 Skill: Recall Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment.

7) Which type of unemployment is caused by international competition? A) frictional B) natural C) structural D) cyclical E) seasonal Answer: C Diff: 2 Type: MC Page Ref: 168-174 Skill: Recall Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 8) Which type of unemployment has a mismatch between workers' skills and the skills new jobs require? A) frictional B) natural C) structural D) cyclical E) seasonal Answer: C Diff: 2 Type: MC Page Ref: 168-174 Skill: Recall Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 9) Which type of unemployment is a problem that requires worker retraining? A) frictional B) natural C) seasonal D) cyclical E) structural Answer: E Diff: 2 Type: MC Page Ref: 168-174 Skill: Recall Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment.

10) Anyl graduated from high school and is travelling in Europe. Statistics Canada classifies him as A) underutilized. B) discouraged. C) unemployed. D) retired. E) not in the labour force. Answer: E Diff: 1 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 11) Heather is serving a six-month sentence in a West Vancouver jail. She had $2,000 in parking tickets in less than a year! When released, Heather is joining the Armed Forces for adventure. Statistics Canada classifies Heather as A) discouraged. B) not in the labour force. C) unemployed. D) underutilized. E) overutilized. Answer: B Diff: 2 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 12) Sylvia quit her job as a college teacher to maintain the family home and raise her six children. Her husband works as a doctor. Statistics Canada classifies Sylvia as A) underutilized. B) discouraged. C) not in the labour force. D) underappreciated. E) overutilized. Answer: C Diff: 2 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment.

13) Charles has a part-time job selling jeans at the Dixie Mall. Charles would rather work more hours, but he keeps busy making an army of super-hero robots in his father's garage. Statistics Canada classifies Charles as A) discouraging. B) unemployed. C) not in the labour force. D) discouraged. E) underutilized. Answer: E Diff: 2 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 14) Anka works part-time at Humber College and full-time at the University of Toronto. Statistics Canada classifies Anka as A) overemployed. B) underutilized. C) overutilized. D) employed. E) redundant. Answer: D Diff: 2 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 15) In a country with a population of 500 million, there are 300 million employed and 20 million unemployed. What is the labour force (in millions)? A) 500 B) 300 C) 20 D) 280 E) 320 Answer: E Diff: 2 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment.

16) In a country with a population of 20 million, there are 9 million employed and 1 million unemployed. What is the labour force (in millions)? A) 20 B) 10 C) 9 D) 8 E) 1 Answer: B Diff: 2 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 17) Who is cyclically unemployed? A) A Saskatchewan farmer who lost his farm and is unemployed until retrained. B) A Prince Edward Island fishery worker searching for a better job closer to home. C) A steelworker who is laid off but expects to be called back soon. D) An office worker who lost her job because of a general slowdown in economic activity. E) None of the above are cyclically unemployed. Answer: D Diff: 2 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 18) In a country with a population of 20 million, there are 8 million employed and 4 million unemployed. What is the unemployment rate? A) 20 percent B) 33.3 percent C) 50 percent D) 25 percent E) none of the above Answer: B Diff: 2 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment.

19) In a country with a population of 20 million, there are 8 million employed and 2 million unemployed. What is the unemployment rate? A) 2 percent B) 10 percent C) 20 percent D) 25 percent E) none of the above Answer: C Diff: 2 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 20) In a country with a labour force of 10 million, 8 million are employed. What is the unemployment rate? A) 20 percent B) 25 percent C) 40 percent D) 80 percent E) There is not enough information to calculate the unemployment rate. Answer: A Diff: 3 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 21) Unemployment caused by a permanent collapse of the East Coast fishery is A) cyclical unemployment. B) frictional unemployment. C) structural unemployment. D) discouraged unemployment. E) underutilized unemployment. Answer: C Diff: 2 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment.

22) When there are part-time workers who wish to work full-time, the official unemployment rate A) rises when these workers find full-time jobs. B) falls when these workers find full-time jobs. C) overstates the unemployment problem. D) understates the unemployment problem. E) counts these workers as discouraged. Answer: D Diff: 3 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 23) Which event(s) increase cyclical unemployment? A) Real GDP growth turns negative. B) Unemployment benefits increase. C) The pace of technological changes increases. D) Both job destruction and job creation increase. E) All of the above increase cyclical unemployment. Answer: A Diff: 3 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 24) Including discouraged workers in the official unemployment rate will A) not change the official unemployment rate. B) lower the official unemployment rate. C) raise the official unemployment rate. D) raise the natural rate of unemployment. E) raise the full employment rate. Answer: C Diff: 3 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment.

25) A country has a working-age population of 30 million, with 18 million employed and 2 million unemployed. 2 million of the employed are working part-time, and half of these persons wish to work full-time. The size of the labour force is A) 16 million. B) 18 million. C) 20 million. D) 22 million. E) 30 million. Answer: C Diff: 3 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 26) A country has a working-age population of 30 million, with 18 million employed and 2 million unemployed. 2 million of the employed are working part-time, and half of these persons wish to work full-time. The unemployment rate is A) 9.1 percent. B) 10 percent. C) 11.1 percent. D) 14.3 percent. E) 50 percent. Answer: B Diff: 3 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 27) A country has a working-age population of 30 million, with 18 million employed and 2 million unemployed. 2 million of the employed are working part-time, and half of these persons wish to work full-time. The labour force participation rate is A) 10 percent. B) 11.1 percent. C) 60 percent. D) 63.3 percent. E) 66.7 percent. Answer: E Diff: 3 Type: MC Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment.

28) Tiago graduated, but gave up looking for work. Tiago is considered to be unemployed. Answer: FALSE Diff: 1 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 29) Tiago graduated, and is actively looking for work. Tiago is considered to be unemployed. Answer: TRUE Diff: 1 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 30) After spending five months actively searching for employment, Scott gave up. Statistics Canada classifies Scott as disappointed. Answer: FALSE Diff: 1 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 31) Andrea is only 13 but she works as a lifeguard during the week and baby sits every weekend. Statistics Canada classifies Andrea as not part of the labour force. Answer: TRUE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 32) If your 13 year old brother works 20 hours each week at McDonald's, Statistics Canada counts him as employed. Answer: FALSE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 33) Homemakers are not part of the labour force. Answer: TRUE Diff: 1 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment.

34) Discouraged workers - those who gave up actively seeking employment - are considered to be unemployed. Answer: FALSE Diff: 1 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 35) Andrei has a PhD in animal magnetism but spends 20 hours a day driving a taxi in downtown Montreal. The official unemployment rate includes Andrei because he is underemployed. Answer: FALSE Diff: 1 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 36) Involuntary part-time employment is counted as unemployment. Answer: FALSE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 37) Involuntary part-time workers are counted in the labour underutilization rate. Answer: TRUE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 38) Discouraged workers are counted in the labour underutilization rate. Answer: TRUE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 39) Discouraged workers are counted in the official unemployment rate. Answer: FALSE Diff: 1 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment.

40) Unemployment rates in western Canada are usually higher than the national unemployment rate. Answer: FALSE Diff: 2 Type: TF Page Ref: 168-174 Skill: Recall Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 41) Unemployment rates in Atlantic Canada are usually higher than the national unemployment rate. Answer: TRUE Diff: 2 Type: TF Page Ref: 168-174 Skill: Recall Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 42) Seasonal unemployment is unhealthy unemployment. Answer: FALSE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 43) Frictional unemployment is not a problem that policymakers need to address. Answer: TRUE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 44) Frictional unemployment is a problem that policymakers need to address. Answer: FALSE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 45) Structural unemployment is not a problem that policymakers need to address. Answer: FALSE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment.

46) Structural unemployment is a problem that policymakers need to address. Answer: TRUE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 47) Structural unemployment can be caused by business innovations. Answer: TRUE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 48) Structural unemployment comes from a mismatch between the skills workers have the the skills new jobs require. Answer: TRUE Diff: 1 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 49) If you are not doing paid work, you are officially counted as unemployed. Answer: FALSE Diff: 1 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 50) When unemployed workers get discouraged and stop looking for work, the labour force participation rate falls. Answer: TRUE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 51) When unemployed workers get discouraged and stop looking for work, the labour force participation rate does not change. Answer: FALSE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment.

52) Cyclical unemployment arises from fluctuations over the business cycle. Answer: TRUE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 53) Cyclical unemployment increases during economic contractions. Answer: TRUE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 54) Cyclical unemployment increases during economic expansions. Answer: FALSE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 55) Cyclical unemployment decreases during economic contractions. Answer: FALSE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 56) Cyclical unemployment decreases during economic expansions. Answer: TRUE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment. 57) Structural unemployment arises from fluctuations over the business cycle. Answer: FALSE Diff: 2 Type: TF Page Ref: 168-174 Skill: Applied Objective: 7.1 Explain what the unemployment rate measures and misses, and identify four types of unemployment.

7.2 How Full Is "Full Employment?" The Natural Rate of Unemployment 1) When the economy is at full employment A) cyclical unemployment is zero. B) frictional unemployment is zero. C) seasonal unemployment is zero. D) structural unemployment is zero. E) sessional unemployment is zero. Answer: A Diff: 1 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 2) When the economy is at full employment A) cyclical unemployment is zero. B) frictional unemployment is zero. C) seasonal unemployment is zero. D) structural unemployment is zero. E) all forms of unemployment are zero. Answer: A Diff: 1 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 3) At full employment there is no A) natural unemployment. B) unemployment. C) cyclical unemployment. D) structural unemployment. E) frictional unemployment. Answer: C Diff: 1 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps.

4) The natural rate of unemployment is the A) rate where unemployment equals 0 percent. B) same as cyclical unemployment. C) rate where frictional unemployment equals 0 percent. D) rate where cyclical unemployment equals 0 percent. E) rate where frictional plus structural unemployment equals 0 percent. Answer: D Diff: 2 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 5) The natural rate of unemployment is A) the rate where unemployment equals 0 percent. B) same as cyclical unemployment. C) the rate where cyclical unemployment equals 0 percent. D) the rate where cyclical unemployment equals 6 percent. E) none of the above answers. Answer: C Diff: 2 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 6) The natural rate of unemployment does not include ________ unemployment. A) frictional B) cyclical C) healthy D) seasonal E) structural Answer: B Diff: 1 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps.

7) East Westfalia reported these unemployment rates for 2015: cyclical 3 percent, seasonal 2 percent, frictional 5 percent and structural 4 percent. The official unemployment rate is ________ percent. A) 10 B) 11 C) 14 D) 9 E) 3 Answer: C Diff: 2 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 8) East Westfalia reported these unemployment rates for 2015: cyclical 3 percent, seasonal 2 percent, frictional 5 percent and structural 4 percent. East Westfalia has a(n) A) full employment equilibrium. B) monetary squeeze. C) structural revolution. D) recessionary gap. E) inflationary gap. Answer: D Diff: 3 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 9) East Westfalia reported these unemployment rates for 2015: cyclical 3 percent, seasonal 2 percent, frictional 5 percent and structural 4 percent. East Westfalia's natural rate of unemployment is A) 14 percent. B) 12 percent. C) 11 percent. D) 9 percent. E) impossible to calculate without more information. Answer: C Diff: 2 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps.

10) Economists in Olliestan estimate the natural rate of unemployment is 7 percent. If the official unemployment rate is 9 percent, then A) cyclical unemployment is negative. B) real GDP is less than potential GDP. C) healthy unemployment is 2 percent. D) cyclical unemployment is 9 percent. E) real GDP is greater than potential GDP. Answer: B Diff: 2 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 11) Economists in Olliestan estimate the natural rate of unemployment is 7 percent. If the official unemployment rate is 9 percent, then A) cyclical unemployment is negative. B) there is a recessionary gap. C) healthy unemployment is 2 percent. D) cyclical unemployment is 9 percent. E) there is an inflationary gap. Answer: B Diff: 3 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 12) When cyclical unemployment is high, the economy is having A) a peak in the business cycle. B) an inflationary gap. C) a recession. D) less than normal structural unemployment. E) less than normal frictional unemployment. Answer: C Diff: 2 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps.

13) When cyclical unemployment is high, the economy is having A) a peak in the business cycle. B) real GDP greater than potential GDP. C) real GDP less than potential GDP. D) less than normal structural unemployment. E) less than normal frictional unemployment. Answer: C Diff: 2 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 14) When the economy has an inflationary gap, cyclical unemployment is probably A) healthy. B) negative. C) positive. D) zero. E) unethical. Answer: D Diff: 3 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 15) When the economy has a recessionary gap, cyclical unemployment is probably A) negative. B) impossible. C) zero. D) healthy. E) positive. Answer: E Diff: 3 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps.

16) Economists in Olliestan estimate the natural rate of unemployment is 7 percent. The table below lists unemployment rates from the Labour Force Survey for selected months. Month March April May

Structural 3% 3% 3%

Seasonal 1% 2% 1%

Frictional 2% 3% 1%

Cyclical 5% 3% 4%

During which months did Olliestan have a recessionary gap? A) March, April and May B) March and April, but not May C) April and May, not March D) Only March E) Only May Answer: A Diff: 3 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 17) When real GDP is above potential GDP, A) frictional unemployment is probably above normal levels. B) frictional unemployment is probably below normal levels. C) structural unemployment is probably above normal levels. D) cyclical unemployment is probably above normal levels. E) seasonal unemployment is probably above normal levels. Answer: B Diff: 3 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 18) If the economy is at full employment, then the A) entire working age population is employed. B) entire labour force is employed. C) only unemployment is frictional unemployment plus discouraged and involuntary part-time workers. D) official unemployment rate is less than 9 percent. E) only unemployment is frictional, structural, and seasonal unemployment. Answer: E Diff: 2 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps.

19) When real GDP A) equals potential GDP, the natural rate of unemployment equals zero. B) is above potential GDP, the unemployment rate is above the natural rate. C) is above potential GDP, there is cyclical unemployment. D) is below potential GDP, the unemployment rate is above the natural rate. E) is below potential GDP, there is cyclical unemployment. Answer: E Diff: 2 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 20) When real GDP A) equals potential GDP, the natural rate of unemployment equals zero. B) is above potential GDP, the unemployment rate is above the natural rate. C) is above potential GDP, there is less than normal frictional, structural, seasonal unemployment. D) is below potential GDP, the unemployment rate is below the natural rate of unemployment. E) equals potential GDP, frictional unemployment equals zero. Answer: C Diff: 2 Type: MC Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 21) East Westfalia reported these unemployment rates for 2015: cyclical 3 percent, seasonal 2 percent, frictional 4 percent, and structural 6 percent. The official unemployment rate is 15 percent. Answer: TRUE Diff: 2 Type: TF Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 22) The natural rate of unemployment does not include seasonal unemployment. Answer: FALSE Diff: 1 Type: TF Page Ref: 175-177 Skill: Recall Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 23) The natural rate of unemployment does not include cyclical unemployment. Answer: TRUE Diff: 1 Type: TF Page Ref: 175-177 Skill: Recall Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 318 Copyright © 2021 Pearson Canada Inc.

24) East Westfalia reported these unemployment rates for 2010: cyclical 3 percent, seasonal 2 percent, frictional 4 percent, and structural 6 percent. The official unemployment rate is 12 percent. Answer: FALSE Diff: 2 Type: TF Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 25) Commercial fishers who live in areas without fish are seasonally unemployed. Answer: FALSE Diff: 2 Type: TF Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 26) When unemployment is below the natural rate, the economy probably has an inflationary gap. Answer: TRUE Diff: 2 Type: TF Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 27) There must be cyclical unemployment during a recessionary gap. Answer: TRUE Diff: 1 Type: TF Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 28) When real GDP is below potential GDP, the unemployment rate is above the natural rate. Answer: TRUE Diff: 1 Type: TF Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 29) Economists in Olliestan estimate the natural rate of unemployment is 7 percent. If the official unemployment rate is 5 percent, cyclical unemployment is negative. Answer: FALSE Diff: 3 Type: TF Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps.

30) East Westfalia reported these unemployment rates for 2015: cyclical 4 percent, seasonal 2 percent, frictional 5 percent and structural 3 percent. East Westfalia has an inflationary gap. Answer: FALSE Diff: 3 Type: TF Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 31) When real GDP equals potential GDP, cyclical unemployment is zero. Answer: TRUE Diff: 1 Type: TF Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 32) When real GDP equals potential GDP, the natural rate of unemployment is zero percent. Answer: FALSE Diff: 2 Type: TF Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 33) Natural unemployment is part of the healthy functioning of a market economy. Answer: FALSE Diff: 1 Type: TF Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 34) The natural rate of unemployment includes unemployment from changes in technology that makes workers' skills obsolete. Answer: TRUE Diff: 2 Type: TF Page Ref: 175-177 Skill: Recall Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 35) The natural rate of unemployment includes unemployment due to a mismatch between the skills workers have and the skills new jobs require. Answer: TRUE Diff: 2 Type: TF Page Ref: 175-177 Skill: Recall Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps.

36) Real GDP can never be greater than potential GDP. Answer: FALSE Diff: 1 Type: TF Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 37) The official unemployment rate can fall below the natural rate of unemployment. Answer: TRUE Diff: 2 Type: TF Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 38) In a recessionary gap, frictional unemployment can temporarily fall below normal full employment levels. Answer: FALSE Diff: 2 Type: TF Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 39) All economists agree that the natural rate of unemployment is a constant number somewhere between 4 percent and 9 percent. Answer: FALSE Diff: 2 Type: TF Page Ref: 175-177 Skill: Recall Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 40) In an inflationary gap, cyclical unemployment is probably zero. Answer: TRUE Diff: 2 Type: TF Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps. 41) In an inflationary gap, the cyclical unemployment rate is negative. Answer: FALSE Diff: 2 Type: TF Page Ref: 175-177 Skill: Applied Objective: 7.2 Define the natural rate of unemployment and explain its connection to recessionary and inflationary output gaps.

7.3 Lightening Up Your Wallet: What is Inflation? 1) When the inflation rate is 3 percent and the nominal interest rate is 5 percent, the real interest rate is A) 2 percent. B) 8 percent. C) 0.6 percent. D) 1.6 percent. E) 7 percent. Answer: A Diff: 2 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 2) When the price level rises by 5 percent, products that cost $20 last year now cost A) $25. B) $21. C) $30. D) $100. E) $1. Answer: B Diff: 3 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 3) When the price level rises by 10 percent, products that cost $20 last year now cost A) $21. B) $25. C) $22. D) $200. E) $2. Answer: C Diff: 3 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates.

4) If the inflation rate is 10 percent, products that used to cost $50 cost ________ a year later. A) $60 B) $100 C) $51 D) $40 E) $55 Answer: E Diff: 3 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 5) If the inflation rate is 10 percent, products that used to cost $80 cost ________ a year later. A) $90 B) $88 C) $81 D) $70 E) $800 Answer: B Diff: 3 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 6) Inflation is a fall in the A) average price level. B) value of money. C) number of people looking for work. D) final value of all products and services produced. E) number of people employed. Answer: B Diff: 1 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 7) When the price level falls by 20 percent, products that used to cost $600 now cost A) $120. B) $580. C) $300. D) $500. E) $480. Answer: E Diff: 3 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 323 Copyright © 2021 Pearson Canada Inc.

8) During periods of deflation, the A) cost of living rises. B) value of housing falls. C) value of money falls. D) borrowers are better off than the lenders. E) value of housing rises. Answer: B Diff: 2 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 9) Consumers in Studentland buy Pizza and Pepsi — nothing else. Prices and quantities are shown in the table below. Year 2015 2016

Slices of Pizza Price per Slice Cans of Pepsi Price per Can 40 10 10 20 60 12 20 24

Spending in 2015 was A) 720. B) 1,000. C) 1,200. D) 600. E) 120. Answer: D Diff: 2 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates.

10) Consumers in Studentland buy Pizza and Pepsi — nothing else. Prices and quantities are shown in the table below. Year 2015 2016

Slices of Pizza Price per Slice Cans of Pepsi Price per Can 40 10 10 20 60 12 20 24

Spending in 2016 was A) 720. B) 1,000. C) 1,200. D) 600. E) 120. Answer: C Diff: 2 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 11) Consumers in Studentland buy Pizza and Pepsi — nothing else. Prices and quantities are shown in the table below. Year 2015 2016

Slices of Pizza Price per Slice Cans of Pepsi Price per Can 40 10 10 20 60 12 20 24

In 2016, the Consumer Price Index (using 2015 as base year when CPI = 100) was A) 167. B) 100. C) 150. D) 120. E) 200. Answer: D Diff: 3 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates.

12) Consumers in Studentland buy Pizza and Pepsi — nothing else. Prices and quantities are shown in the table below. Year 2015 2016

Slices of Pizza Price per Slice Cans of Pepsi Price per Can 40 10 10 20 60 12 20 24

The annual rate of inflation between 2015 and 2016 was A) 60 percent. B) 40 percent. C) 100 percent. D) 67 percent. E) 20 percent. Answer: E Diff: 3 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 13) Inflation A) hurts savers but benefits borrowers. B) hurts savers and borrowers. C) benefits savers and borrowers. D) benefits savers but hurts borrowers. E) has no effect on savers or borrowers. Answer: A Diff: 2 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 14) Deflation A) hurts borrowers and savers. B) hurts borrowers but benefits savers. C) benefits borrowers and savers. D) benefits borrowers but hurts savers. E) has no effect on savers or borrowers. Answer: B Diff: 2 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates.

15) The introduction of new products, like the iPhone A) makes the CPI fall. B) makes the CPI rise. C) does not affect the CPI. D) creates deflation. E) creates inflation. Answer: C Diff: 2 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 16) The introduction of new products, like the iPhone A) makes the CPI fall. B) makes the CPI rise. C) makes it difficult to use the CPI to compare the cost of living. D) creates deflation. E) creates inflation. Answer: C Diff: 2 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 17) Gina loans George $1,000. George agrees to pay her $1,100 next year. They both expect an inflation rate of 4 percent. At the end of the year, the inflation rate turns out to be only 3 percent. This unexpected change is A) good for George but bad for Gina. B) good for both George and Gina. C) bad for both Gina and George. D) good for Gina but bad for George. E) irrelevant, a deal is a deal. Answer: D Diff: 3 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates.

18) Gina loans George $1,000. George agrees to pay her $1,100 next year. They both expect an inflation rate of 4 percent. At the end of the year, the inflation rate turns out to be 5 percent. This unexpected change is A) good for George but bad for Gina. B) good for both George and Gina. C) bad for both Gina and George. D) good for Gina but bad for George. E) irrelevant, a deal is a deal. Answer: A Diff: 3 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 19) Business investment is A) discouraged by unpredictable inflation or by deflation. B) discouraged by unpredictable inflation but encouraged by deflation. C) encouraged by unpredictable inflation but discouraged by deflation. D) encouraged by unpredictable inflation or by deflation. E) unaffected by unpredictable inflation or by deflation. Answer: A Diff: 3 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 20) If a basket of products and services cost $200 in the base year and $450 in a later year, the Consumer Price Index (CPI) in the later year is A) 125. B) 225. C) 250. D) 300. E) 450. Answer: B Diff: 3 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates.

21) A basket of products and services cost $200 in the base year. If the Consumer Price Index (CPI) in the current year is 250, then the cost of the basket in the current year is A) $125. B) $250. C) $450. D) $500. E) none of the above answers. Answer: D Diff: 3 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 22) If the Consumer Price Index (CPI) was 150 at the end of 2010 and 165 at the end of 2011, what was the inflation rate for 2011? A) 65 percent B) 50 percent C) 15 percent D) 10 percent E) 9.1 percent Answer: D Diff: 3 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 23) A 5 percent increase in the Consumer Price Index (CPI) means a A) 5 percent increase in the cost of living. B) less than 5 percent increase in the cost of living because consumers substitute cheaper products for those whose prices rise. C) more than 5 percent increase in the cost of living because consumers substitute cheaper products for those whose prices rise. D) less than 5 percent increase in the cost of living because of falling quality of products over time. E) more than 5 percent increase in the cost of living because of the introduction of new products. Answer: B Diff: 3 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates.

24) Compared to the inflation rate calculated using the Consumer Price Index (CPI), the core inflation rate A) measures the prices of all products and services, not just those in the CPI basket. B) includes the volatile categories missing from the CPI basket. C) excludes the volatile categories from the CPI basket. D) is always lower. E) allows quantities to change in the basket of products and services. Answer: C Diff: 3 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 25) Compared to the inflation rate calculated using the Consumer Price Index (CPI), the core inflation rate A) measures the prices of all products and services, not just those in the CPI basket. B) allows quantities to change in the basket of products and services. C) is always higher. D) is always lower. E) is none of the above. Answer: E Diff: 3 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 26) A positive inflation rate means that average prices in the economy are A) positive. B) rising. C) falling. D) constant. E) zero. Answer: B Diff: 2 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates.

27) A negative inflation rate means that average prices in the economy are A) positive. B) rising. C) falling. D) constant. E) zero. Answer: C Diff: 2 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 28) A negative inflation rate, or deflation, means that the value of money in the economy is A) positive. B) falling. C) rising. D) constant. E) negative. Answer: C Diff: 2 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 29) A positive inflation rate means that the value of money in the economy is A) positive. B) falling. C) rising. D) constant. E) negative. Answer: B Diff: 2 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates.

30) The basket used to calculate the Consumer Price Index (CPI) assumes that over time consumers A) buy more products whose prices fall. B) buy fewer products whose prices rise. C) buy newly introduced products. D) buy the same quantities of products no matter how prices change. E) pay the same prices for products no matter how quantities change. Answer: D Diff: 2 Type: MC Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 31) When the price level falls by 20 percent, products that previously cost $60 now cost $48. Answer: TRUE Diff: 3 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 32) When the price level falls by 20 percent, products that previously cost $60 now cost $40. Answer: FALSE Diff: 3 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 33) When the price level rises by 20 percent, products that previously cost $60 now cost $80. Answer: FALSE Diff: 3 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 34) When the price level rises by 20 percent, products that previously cost $60 now cost $72. Answer: TRUE Diff: 3 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 35) When the price level falls by 50 percent, products that previously cost $600 now cost $300. Answer: TRUE Diff: 3 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 332 Copyright © 2021 Pearson Canada Inc.

36) When the price level rises by 10 percent, products that previously cost $50 now cost $60. Answer: FALSE Diff: 3 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 37) A fall in the average level of prices is called deflation. Answer: TRUE Diff: 1 Type: TF Page Ref: 177-185 Skill: Recall Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 38) A rise in the average level of prices is called deflation. Answer: FALSE Diff: 1 Type: TF Page Ref: 177-185 Skill: Recall Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 39) When there is deflation, the average value of money is rising. Answer: TRUE Diff: 2 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 40) When there is deflation, the value of money is falling. Answer: FALSE Diff: 2 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 41) Inflation is good for students with loans. Answer: TRUE Diff: 1 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates.

42) When there is deflation, the value of money is rising. Answer: TRUE Diff: 2 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 43) When there is deflation, the realized real interest rate is more than the nominal interest rate. Answer: TRUE Diff: 1 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 44) When there is inflation, the realized real interest rate is more than the nominal interest rate. Answer: FALSE Diff: 1 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 45) When there is deflation, the realized real interest rate is less than the nominal interest rate. Answer: FALSE Diff: 1 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 46) When there is inflation, the realized real interest rate is less than the nominal interest rate. Answer: TRUE Diff: 1 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 47) Inflation is a worry for people with fixed incomes, but a benefit for those with savings in the bank. Answer: FALSE Diff: 2 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates.

48) The value of the basket of products and services for the base year of the Consumer Price Index is always 100. Answer: TRUE Diff: 1 Type: TF Page Ref: 177-185 Skill: Recall Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 49) The formula for the inflation rate between two years is 100 times (CPI for current year minus CPI for previous year) divided by the CPI for the current year. Answer: FALSE Diff: 1 Type: TF Page Ref: 177-185 Skill: Recall Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 50) The formula for the inflation rate between two years is 100 times (CPI for current year minus CPI for previous year) divided by the CPI for the previous year. Answer: FALSE Diff: 1 Type: TF Page Ref: 177-185 Skill: Recall Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 51) The CPI keeps prices fixed to isolate changes in quantities. Answer: FALSE Diff: 1 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 52) The CPI keeps quantities fixed to isolate changes in prices. Answer: TRUE Diff: 2 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 53) Consumers will wait to buy during periods of inflation. Answer: FALSE Diff: 1 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates.

54) Consumers will wait to buy during periods of deflation. Answer: TRUE Diff: 1 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 55) When the real interest rate is 2 percent and the inflation rate is 5 percent, the nominal interest rate is 3 percent. Answer: FALSE Diff: 2 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 56) When the real interest rate is 2 percent and the inflation rate is 3 percent, the nominal interest rate is 5 percent. Answer: TRUE Diff: 2 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 57) Nominal interest rates can never be less than real interest rates. Answer: FALSE Diff: 2 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 58) Real interest rates are more important than nominal interest rates for making smart saving and investing decisions. Answer: TRUE Diff: 1 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 59) Nominal interest rates are more important than real interest rates for making smart saving and investing decisions. Answer: FALSE Diff: 1 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates.

60) Unpredictable prices, by creating opportunities for entrepreneurs to make profits, encourage business investment. Answer: FALSE Diff: 1 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 61) Economists, and the Bank of Canada, view predictable inflation rates between 1 and 3 percent as acceptable. Answer: TRUE Diff: 2 Type: TF Page Ref: 177-185 Skill: Recall Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 62) Inflation lowers the value of assets like houses. Answer: FALSE Diff: 1 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 63) Savers are better off when prices fall. Answer: TRUE Diff: 2 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 64) When expensive new products like the iPad are introduced, the CPI increases. Answer: FALSE Diff: 3 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 65) When consumers substitute to avoid rising prices, the official CPI increases more slowly. Answer: FALSE Diff: 3 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates.

66) Expectations of either inflation or deflation can create vicious spirals and damaging results for the economy. Answer: TRUE Diff: 2 Type: TF Page Ref: 177-185 Skill: Applied Objective: 7.3 Explain how the inflation rate is calculated, what it misses, and three problems inflation creates. 7.4 Inflation Starts with "M" The Quantity Theory of Money 1) The number of times that money changes hands each year is called A) the rate of inflation. B) the monetary base. C) average prices. D) the velocity of money. E) bribery. Answer: D Diff: 1 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 2) According to the quantity theory of money, increases in money lead to increases in A) average prices. B) velocity. C) potential GDP. D) real GDP. E) unemployment. Answer: A Diff: 1 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 3) According to the quantity theory of money, increases in money lead to increases in A) nominal GDP. B) velocity. C) potential GDP. D) real GDP. E) unemployment. Answer: A Diff: 2 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from.

4) According to the quantity theory of money, an increase in the quantity of money increases average prices, A) has no effect on real GDP, and decreases velocity. B) and increases both real GDP and velocity. C) decreases real GDP, and increases velocity. D) increases real GDP, and decreases velocity. E) and has no effect on real GDP or velocity. Answer: E Diff: 2 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 5) According to the quantity theory of money, an increase in the quantity of money A) increases average prices. B) increases velocity. C) increases real GDP. D) does all of the above. E) does none of the above. Answer: A Diff: 2 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 6) According to the quantity theory of money, an increase in the quantity of money A) increases average prices. B) does not change velocity. C) increases nominal GDP. D) does not change real GDP. E) does all of the above. Answer: E Diff: 2 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 7) If nominal GDP is 2,000 and the money supply is 80, what is the velocity of money? A) 50 B) 25 C) 4 D) 16 E) Cannot be calculated without more information. Answer: B Diff: 3 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from.

8) If nominal GDP is 4,000 and the money supply is 80, what is the velocity of money? A) 50 B) 25 C) 4 D) 16 E) Cannot be calculated without more information. Answer: A Diff: 3 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 9) If the velocity of money is 5, real GDP is 200 and the money supply is 120, what are average prices? A) 0.3 B) 12 C) 3.0 D) 1.2 E) 8.3 Answer: C Diff: 3 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 10) If average prices are 2, real GDP is $100 billion, and the quantity of money is $40 billion, what is the velocity of money? A) 2.5 B) 4.0 C) 5.0 D) 10.0 E) 50.0 Answer: C Diff: 3 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 11) The velocity of money is 5, real GDP is 100 and the money supply is 100. According to the quantity theory of money, a 20 percent increase in the money supply causes a A) 10 percent decrease in average prices. B) 10 percent increase in average prices. C) 5 percent decrease in real GDP. D) 20 percent decrease in velocity. E) 20 percent increase in average prices. Answer: E Diff: 3 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 340 Copyright © 2021 Pearson Canada Inc.

12) The velocity of money is 10, real GDP is 100 and the money supply is 100. According to the quantity theory of money, a 20 percent increase in the money supply causes a A) 10 percent decrease in average prices. B) 10 percent increase in average prices. C) 5 percent decrease in real GDP. D) 20 percent decrease in velocity. E) 20 percent increase in average prices. Answer: E Diff: 3 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 13) The velocity of money is 20, real GDP is 100 and the money supply is 100. According to the quantity theory of money, a 10 percent increase in the money supply causes a A) 10 percent decrease in average prices. B) 10 percent increase in average prices. C) 5 percent decrease in real GDP. D) 20 percent decrease in velocity. E) 20 percent increase in average prices. Answer: B Diff: 3 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 14) The velocity of money is 10, real GDP is 200 and the money supply is 100. According to the quantity theory of money, a 10 percent increase in the money supply causes a A) 10 percent decrease in average prices. B) 10 percent increase in average prices. C) 5 percent decrease in real GDP. D) 20 percent decrease in velocity. E) 20 percent increase in average prices. Answer: B Diff: 3 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 15) The quantity theory of money assumes that ________ are fixed. A) V and P B) P and M C) V and Q D) P and Q E) V and M Answer: C Diff: 1 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 341 Copyright © 2021 Pearson Canada Inc.

16) The quantity theory of money suggests that changes in prices are caused by changes in A) wages. B) real GDP. C) nominal GDP. D) velocity. E) money. Answer: E Diff: 1 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 17) According to the quantity theory of money, a decrease in the quantity of money causes A) both average prices and real GDP to decrease. B) average prices to decrease but nominal GDP to increase. C) both average prices and nominal GDP to increase. D) both average prices and nominal GDP to decrease. E) average prices to decrease but nominal GDP will stay constant. Answer: D Diff: 3 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 18) Which statement is most consistent with the quantity theory of money? A) expectations cause inflation B) rising oil prices cause inflation C) increases in wages cause inflation D) rising money supply causes inflation E) what goes around comes around Answer: D Diff: 1 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 19) Which statement about the quantity theory of money is false? A) There must be enough money, multiplied by velocity, to allow sales of nominal GDP. B) All inflation is directly caused by increases in the quantity of money. C) All inflation is accompanied by increases in the quantity of money. D) There must be enough money, multiplied by velocity, to allow sales of all final products and services produced. E) The quantity theory of money is behind the claim that "printing money causes inflation." Answer: B Diff: 2 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from.

20) The quantity theory of money begins with the equation containing the money supply (M), velocity of money (V), average prices (P) and real GDP (Q), and then assumes that A) M does not change when V changes. B) V does not change when Q changes. C) V is fixed and Q is fixed at potential GDP. D) V is fixed and Q is fixed at real GDP. E) V is fixed and Q is fixed at nominal GDP. Answer: C Diff: 2 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 21) Average prices in Canukada are 200, real GDP is 30, and the money supply is 500. An increase in the money supply to 600 leads to average prices of A) 250. B) 220. C) 300. D) 240. E) none of the above answers. Answer: D Diff: 3 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 22) Average prices in Canukada are 200, real GDP is 30, and the money supply is 500. An increase in the money supply to 700 leads to average prices of A) 250. B) 280. C) 300. D) 240. E) none of the above answers. Answer: B Diff: 3 Type: MC Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 23) The quantity theory of money states that A) P x Q = M x V B) P x M = Q x V C) P x V = Q x M D) P x V = P x V E) V = 5 Answer: A Diff: 2 Type: MC Page Ref: 185-189 Skill: Recall Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 343 Copyright © 2021 Pearson Canada Inc.

24) The velocity of money is 5. The quantity theory of money suggests that an 8 percent increase in the money supply results in a 40 percent increase in average prices. Answer: FALSE Diff: 1 Type: TF Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 25) The velocity of money is 5. The quantity theory of money suggests that an 8 percent increase in the money supply results in an 8 percent increase in average prices. Answer: TRUE Diff: 1 Type: TF Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 26) "Where does inflation come from?" is a macroeconomic question. Answer: TRUE Diff: 1 Type: TF Page Ref: 185-189 Skill: Recall Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 27) An economy only uses cash. If the quantity of money in the economy is $10,000, then aggregate spending is limited to $10,000. Answer: FALSE Diff: 1 Type: TF Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 28) Velocity of money is the number of times a unit of money changes hands during a year. Answer: TRUE Diff: 1 Type: TF Page Ref: 185-189 Skill: Recall Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 29) Velocity of money is the rate of inflation during a year. Answer: FALSE Diff: 1 Type: TF Page Ref: 185-189 Skill: Recall Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 30) An increase in the quantity of money causes inflation because consumers with more money bid against each other for unchanged quantities of products and services, pushing up prices. Answer: TRUE Diff: 1 Type: TF Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from.

31) An increase in the quantity of money causes inflation because businesses increase output to meet the demand from consumers with more money, pushing up nominal GDP. Answer: FALSE Diff: 1 Type: TF Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 32) The quantity theory of money states that M x V = P x Q. Answer: TRUE Diff: 1 Type: TF Page Ref: 185-189 Skill: Recall Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 33) The quantity theory of money states that P x Q = M x R. Answer: FALSE Diff: 1 Type: TF Page Ref: 185-189 Skill: Recall Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 34) If aggregate spending is 200 and the money supply is 80, then the velocity of money is 2.5. Answer: TRUE Diff: 2 Type: TF Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 35) If the velocity of money is 3, real GDP is 200 and the money supply is 120, then average prices are 5. Answer: FALSE Diff: 2 Type: TF Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 36) The quantity theory of money suggests that a 20 percent decrease in the money supply causes a 20 percent decrease in real GDP. Answer: FALSE Diff: 2 Type: TF Page Ref: 185-189 Skill: Recall Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 37) The quantity theory of money suggests that a 20 percent decrease in the money supply causes a 20 percent decrease in nominal GDP. Answer: TRUE Diff: 2 Type: TF Page Ref: 185-189 Skill: Recall Objective: 7.4 Use the quantity theory of money to explain where inflation comes from.

38) The quantity theory of money suggests that an 8 percent decrease in the money supply must be matched by an 8 percent increase in velocity. Answer: FALSE Diff: 1 Type: TF Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 39) If the velocity of money is 3, real GDP is 20 and the money supply is 120, then average prices are 18. Answer: TRUE Diff: 3 Type: TF Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 40) Average prices in Canukada are 200, real GDP is 300 and the money supply is 500. The quantity theory of money suggests that an increase in the money supply to 600 leads to average prices of 240. Answer: TRUE Diff: 3 Type: TF Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 41) The quantity theory of money suggests that inflation is caused by printing money. Answer: TRUE Diff: 1 Type: TF Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 42) Inflation is a persistent rise in the average velocity of money in the aggregate economy. Answer: FALSE Diff: 1 Type: TF Page Ref: 185-189 Skill: Recall Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 43) Inflation is a persistent rise in average of all prices in the aggregate economy. Answer: TRUE Diff: 1 Type: TF Page Ref: 185-189 Skill: Recall Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 44) The logic of the quantity theory of money can be described as "too much money chasing too few products and services." Answer: TRUE Diff: 1 Type: TF Page Ref: 185-189 Skill: Applied Objective: 7.4 Use the quantity theory of money to explain where inflation comes from. 346 Copyright © 2021 Pearson Canada Inc.

7.5 When Tim Horton's Pays $18 per Hour: Unemployment and Inflation Trade-offs 1) A.W. Phillips was born in A) New Zealand. B) Mexico. C) Chicago. D) England. E) Alberta. Answer: A Diff: 1 Type: MC Page Ref: 189-194 Skill: Recall Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 2) The Phillips Curve suggests an inverse relationship between A) velocity and unemployment. B) unemployment and inflation. C) the Consumer Price Index and the velocity of money. D) shoe size and IQ. E) velocity and inflation. Answer: B Diff: 1 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 3) The Phillips Curve identifies an inverse relationship. Another inverse relationship familiar to economics students is between A) wages paid and hours worked. B) money supply and average prices. C) price and quantity demanded. D) export spending and gross domestic product. E) price and quantity supplied. Answer: C Diff: 2 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations.

4) When there is stagflation, the relationship between inflation and unemployment is A) constant. B) non-existent. C) inverse. D) positive. E) negative. Answer: D Diff: 2 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 5) The Phillips Curve suggests that a government trying to reduce inflation must accept A) foreign aid. B) stagflation. C) increased costs. D) supply shocks. E) higher unemployment. Answer: E Diff: 2 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 6) The Phillips Curve is consistent with the story of ________ inflation. A) demand-pull B) demand-push C) cost-push D) cost-pull E) push-pull Answer: A Diff: 1 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 7) Stagflation is consistent with the story of ________ inflation. A) cost-pull B) cost-push C) demand-pull D) demand-push E) push-pull Answer: B Diff: 1 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 348 Copyright © 2021 Pearson Canada Inc.

8) Explanations of the 1973 breakdown of the Phillips Curve tradeoff include an organization called A) CUPE. B) CEGEP. C) OPEC. D) OCAP. E) ASCAP. Answer: C Diff: 1 Type: MC Page Ref: 189-194 Skill: Recall Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 9) The Phillips Curve suggests that governments can reduce unemployment by increasing A) taxes. B) the price of oil. C) unemployment insurance benefits. D) the money supply. E) wages. Answer: D Diff: 2 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 10) The main idea of the Phillips Curve is that the higher the A) inflation rate, the lower is stagflation. B) unemployment rate, the lower is stagflation. C) unemployment rate, the lower is real GDP. D) inflation rate, the lower is real GDP. E) unemployment rate, the lower is the inflation rate. Answer: E Diff: 2 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations.

11) Cost-push inflation can cause A) expansion. B) positive supply shocks. C) deflation. D) regulation. E) stagflation. Answer: E Diff: 2 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 12) Cost-push inflation is caused by A) expansion. B) positive supply shocks. C) contraction. D) regulation. E) negative supply shocks. Answer: E Diff: 2 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 13) Cost-push inflation is caused by A) positive demand shocks. B) positive supply shocks. C) negative demand shocks. D) negative supply shocks. E) Alberta. Answer: D Diff: 2 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 14) Demand-pull inflation is caused by A) positive demand shocks. B) positive supply shocks. C) negative demand shocks. D) negative supply shocks. E) Alberta. Answer: A Diff: 2 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 350 Copyright © 2021 Pearson Canada Inc.

15) Economists believed in a clear tradeoff between unemployment and inflation until A) A.W. Phillips' work. B) the 1950s. C) the 1960s. D) the 1970s. E) the Great Recession. Answer: D Diff: 2 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 16) If the Phillips Curve is always true, what could not happen? A) invention of the Phillips screwdriver B) stagnation C) stagflation D) deflation E) demand-pull inflation Answer: C Diff: 2 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 17) Which is not part of the story of downward demand-pull deflation? A) consumers have less income to spend B) demand for output decreases relative to supply C) businesses face shortages of inputs D) businesses have unsold products and services E) workers have difficulty getting raises Answer: C Diff: 3 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations.

18) Which is not part of the story of cost-push inflation? A) increasing costs push up output prices B) demand for output decreases relative to supply C) increasing quantity of money D) businesses have unsold products and services E) consumers have less income to spend Answer: B Diff: 3 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 19) The original Phillips Curve A) shows an immediate trade-off between inflation and unemployment. B) is a short-run relationship. C) assumes inflation expectations do not change over time. D) assumes the natural rate of employment does not change over time. E) does all of the above. Answer: E Diff: 3 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 20) The original Phillips Curve A) shows an immediate trade-off between inflation and unemployment. B) is a short-run relationship. C) can shift if inflation expectations change over time. D) can shift if the natural rate of employment changes over time. E) does all of the above. Answer: E Diff: 3 Type: MC Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 21) The original Phillips Curve shows an immediate inverse relationship between unemployment and the velocity of money. Answer: FALSE Diff: 1 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations.

22) The original Phillips Curve shows an immediate inverse relationship between unemployment and inflation. Answer: TRUE Diff: 1 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 23) The original Phillips Curve is consistent with a demand-pull story of inflation. Answer: TRUE Diff: 1 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 24) The original Phillips Curve is consistent with a demand-push story of inflation. Answer: FALSE Diff: 1 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 25) The cost-push story of inflation is not consistent with the original Phillips Curve. Answer: TRUE Diff: 2 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 26) The demand-pull story of inflation is not consistent with the original Phillips Curve. Answer: FALSE Diff: 2 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 27) The original Phillips Curve suggests it is unlikely to have high inflation at the same time as low unemployment. Answer: FALSE Diff: 1 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations.

28) The original Phillips Curve suggests it is unlikely to have high inflation at the same time as high unemployment. Answer: TRUE Diff: 1 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 29) The organization responsible for 1973 increases in the price of oil was OSAP. Answer: FALSE Diff: 1 Type: TF Page Ref: 189-194 Skill: Recall Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 30) Periods of low unemployment and high inflation are called stagflation. Answer: FALSE Diff: 1 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 31) Periods of high unemployment and high inflation are called stagflation. Answer: TRUE Diff: 1 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 32) Wages tend to fall, or at least not rise as fast, during recessions. Answer: TRUE Diff: 2 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 33) Rising energy prices are consistent with the cost-push story of inflation. Answer: TRUE Diff: 1 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations.

34) Overtime pay is consistent with the demand-pull story of inflation. Answer: TRUE Diff: 2 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 35) In a cost-push inflation, rising average prices are caused by positive supply shocks. Answer: FALSE Diff: 2 Type: TF Page Ref: 189-194 Skill: Recall Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 36) In a cost-push inflation, rising average prices are caused by negative supply shocks. Answer: TRUE Diff: 2 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 37) According to the original Phillips Curve, if there is an increase in the inflation rate, unemployment will decrease. Answer: TRUE Diff: 2 Type: TF Page Ref: 189-194 Skill: Recall Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 38) The original Phillips Curve trade-offs between inflation and unemployment become complicated over time if expectations change. Answer: TRUE Diff: 2 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 39) The original Phillips Curve trade-offs between inflation and unemployment become complicated over time if the natural rate of unemployment changes. Answer: TRUE Diff: 2 Type: TF Page Ref: 189-194 Skill: Recall Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations.

40) Supply shocks directly affect businesses' costs, prices, and supply. Answer: TRUE Diff: 2 Type: TF Page Ref: 189-194 Skill: Recall Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 41) Energy price increases are a positive supply shock. Answer: FALSE Diff: 1 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 42) Natural disasters are a positive supply shock. Answer: FALSE Diff: 1 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 43) Natural disasters are a negative supply shock. Answer: TRUE Diff: 1 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 44) Energy price increases are a negative supply shock. Answer: TRUE Diff: 1 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 45) When there is demand-pull inflation, cyclical unemployment is high. Answer: FALSE Diff: 2 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations.

46) Demand-pull inflation requires an accompanying increase in the quantity of money. Answer: TRUE Diff: 2 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. 47) Cost-push inflation requires an accompanying increase in the quantity of money. Answer: TRUE Diff: 2 Type: TF Page Ref: 189-194 Skill: Applied Objective: 7.5 Describe the Phillips Curve and its connections to demand-pull and cost-push inflations. Macroeconomics for Life: Smart Choices for All?, Updated 2e (Cohen) Chapter 8 Skating to Where the Puck Is Going: Aggregate Supply and Aggregate Demand 8.1 Macroeconomic Performance Targets: Potential GDP and Long-Run Aggregate Supply 1) The targets for a macro economy that performs well are A) stable prices. B) full employment. C) steady growth in living standards. D) all of the above. E) none of the above. Answer: D Diff: 1 Type: MC Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 2) Long-run aggregate supply represents the macroeconomic performance targets of A) economic growth and stable prices. B) economic growth and full employment. C) economic growth and potential GDP. D) full employment and potential GDP. E) stable prices and potential GDP. Answer: D Diff: 1 Type: MC Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 3) Which macroeconomic performance targets are not represented by long-run aggregate supply? A) economic growth and stable prices B) economic growth and full employment 357 Copyright © 2021 Pearson Canada Inc.

C) economic growth and potential GDP D) full employment and potential GDP E) stable prices and potential GDP Answer: A Diff: 1 Type: MC Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes.

4) The long run is a period of time A) when the economy is at potential GDP. B) when some input prices do not change. C) when the inflation rate is zero. D) longer than 1 year. E) longer than 10 years. Answer: A Diff: 2 Type: MC Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 5) The long run is a period of time A) when some input prices do not change. B) when all prices have adjusted to equilibrium. C) when the inflation rate is zero. D) longer than 1 year. E) longer than 10 years. Answer: B Diff: 2 Type: MC Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 6) The long run is a period of time when A) the economy is a full employment. B) all prices have adjusted to equilibrium prices. C) Adam Smith's invisible hand works well. D) the economy is at potential GDP. E) all of the above are true. Answer: E Diff: 1 Type: MC Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 7) The short run is a period of time when A) the economy is a full employment. B) all prices have adjusted to equilibrium prices. C) Adam Smith's invisible hand works well. D) the economy is at potential GDP. E) none of the above are true. Answer: E Diff: 2 Type: MC Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 359 Copyright © 2021 Pearson Canada Inc.

8) The short run is a period of time A) when all input prices have adjusted to clear markets. B) when all prices have adjusted to equilibrium prices. C) when some prices have not adjusted to clear markets. D) shorter than 10 years. E) shorter than 1 year. Answer: C Diff: 2 Type: MC Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 9) The short run is a period of time A) when all input prices have adjusted to clear markets. B) when all input and output prices have adjusted to equilibrium prices. C) when some input prices do not change. D) shorter than 10 years. E) shorter than 1 year. Answer: C Diff: 2 Type: MC Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 10) On the graph of the macro production possibilities frontier (PPF), inputs A) are on the horizontal axis and outputs are on the vertical axis. B) are on the vertical axis and outputs are on the horizontal axis. C) do not appear. D) increase as you move down along the PPF. E) increase as you move up along the PPF. Answer: C Diff: 2 Type: MC Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes.

11) Unemployment is represented by points 1 2 3 4

inside the macro PPF. outside the macro PPF. to the left of LAS. to the right of LAS.

A) 1 and 3 B) 1 and 4 C) 2 and 3 D) 2 and 4 E) 1 only Answer: A Diff: 1 Type: MC Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 12) Unemployment is represented by points 1 2 3 4 5 6

inside the macro PPF. outside the macro PPF. on the macro PPF. to the left of LAS. to the right of LAS. on LAS.

A) 1 and 4 B) 1 and 5 C) 2 and 4 D) 2 and 5 E) 3 and 6 Answer: A Diff: 1 Type: MC Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes.

13) Full employment is represented by points 1 2 3 4 5 6

inside the macro PPF. outside the macro PPF. on the macro PPF. to the left of LAS. to the right of LAS. on LAS.

A) 1 and 4 B) 1 and 5 C) 2 and 4 D) 2 and 5 E) 3 and 6 Answer: E Diff: 1 Type: MC Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 14) Potential GDP is represented by points 1 2 3 4 5 6

inside the macro PPF. outside the macro PPF. on the macro PPF. to the left of LAS. to the right of LAS. on LAS.

Figure 6.3.1

15) Look at the macro production possibilities frontier in Figure 6.3.1. Which point(s) correspond to points on the long-run aggregate supply (LAS) curve? A) a only B) b only C) a, b, c D) d only E) e only Answer: C Diff: 2 Type: MC Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 16) Look at the macro production possibilities frontier in Figure 6.3.1. Which point(s) represent unemployed inputs? A) a only B) b only C) a, b, c D) d only E) e only Answer: D Diff: 2 Type: MC Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 363 Copyright © 2021 Pearson Canada Inc.

17) Look at the macro production possibilities frontier in Figure 6.3.1. Which point(s) represent fully employed inputs? A) a only B) b only C) a, b, c D) d only E) e only Answer: C Diff: 2 Type: MC Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 18) Look at the macro production possibilities frontier in Figure 6.3.1. Which point(s) represent real GDP less than potential GDP? A) a only B) b only C) a, b, c D) d only E) e only Answer: D Diff: 2 Type: MC Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 19) Look at the macro production possibilities frontier in Figure 6.3.1. Which point(s) represent real GDP greater than potential GDP? A) a only B) b only C) a, b, c D) d only E) e only Answer: E Diff: 2 Type: MC Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes.

20) The long-run aggregate supply curve (LAS) is vertical because A) the quantity of potential real GDP does not change when the price level changes. B) real GDP can never be greater than potential GDP. C) businesses do not have any incentive to produce more than potential GDP. D) the price level does not change when the quantity of potential real GDP changes. E) potential GDP never changes. Answer: A Diff: 2 Type: MC Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 21) Long-run aggregate supply represents the macroeconomic performance targets of full employment and potential GDP. Answer: TRUE Diff: 2 Type: TF Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 22) Long-run aggregate supply represents the macroeconomic performance targets of potential GDP and stable prices. Answer: FALSE Diff: 2 Type: TF Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 23) Long-run aggregate supply represents the macroeconomic performance targets of economic growth and stable prices. Answer: FALSE Diff: 2 Type: TF Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 24) Long-run aggregate supply represents the macroeconomic performance targets of full employment and stable prices. Answer: FALSE Diff: 2 Type: TF Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes.

25) Long-run aggregate supply represents the macroeconomic performance targets of economic growth and full employment. Answer: FALSE Diff: 2 Type: TF Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 26) The long run is a period of time when some input prices do not change. Answer: FALSE Diff: 2 Type: TF Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 27) The long run is a period of time when all prices have adjusted to equilibrium prices. Answer: TRUE Diff: 2 Type: TF Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 28) The short run is a period of time when all prices have adjusted to equilibrium prices. Answer: FALSE Diff: 2 Type: TF Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 29) The long run is a period of time longer than 1 year. Answer: FALSE Diff: 1 Type: TF Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 30) The short run is a period of time shorter than 1 year. Answer: FALSE Diff: 1 Type: TF Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes.

31) The long run is a period of time longer than 10 years. Answer: FALSE Diff: 1 Type: TF Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 32) The short run is a period of time shorter than 10 years. Answer: FALSE Diff: 1 Type: TF Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 33) The long run is a period of time when the price level equals 100. Answer: FALSE Diff: 1 Type: TF Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 34) The long run is a period of time when the inflation rate equals zero. Answer: FALSE Diff: 1 Type: TF Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 35) The short run is a period of time when all prices have adjusted to equilibrium prices. Answer: FALSE Diff: 1 Type: TF Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 36) The short run is a period of time when some input prices do not change. Answer: TRUE Diff: 1 Type: TF Page Ref: 202-203 Skill: Recall Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes.

37) Inputs do not appear on the graph of the macro production possibilities frontier. Answer: TRUE Diff: 1 Type: TF Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 38) Inputs increase as you move down along the macro production possibilities frontier. Answer: FALSE Diff: 1 Type: TF Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 39) Inputs decrease as you move down along the macro production possibilities frontier. Answer: FALSE Diff: 1 Type: TF Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 40) Unemployment is represented by points on the macro production possibilities frontier. Answer: FALSE Diff: 1 Type: TF Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 41) Unemployment is represented by points inside the macro production possibilities frontier. Answer: TRUE Diff: 1 Type: TF Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 42) Unemployment is represented by points outside the macro production possibilities frontier. Answer: FALSE Diff: 1 Type: TF Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes.

43) The long-run aggregate supply curve (LAS) is a vertical line at potential GDP. Answer: TRUE Diff: 1 Type: TF Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 44) The long-run aggregate supply curve (LAS) is a horizontal line at potential GDP. Answer: FALSE Diff: 1 Type: TF Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 45) Full employment is represented by points on the long-run aggregate supply curve (LAS). Answer: TRUE Diff: 1 Type: TF Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 46) Full employment is represented by points on the macro production possibilities frontier. Answer: TRUE Diff: 1 Type: TF Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes. 47) Price stability is represented by points on the long-run aggregate supply curve (LAS). Answer: FALSE Diff: 1 Type: TF Page Ref: 202-203 Skill: Applied Objective: 8.1 Explain long-run aggregate supply and its relation to potential GDP and macroeconomic performance outcomes.

8.2 If You Plan and Build It . . . Short-Run Aggregate Supply 1) Government investments to improve the quality of public infrastructure like roads, transit and sewers A) decreases both long-run and short-run aggregate supply. B) increases aggregate quantity supplied. C) increases only long-run aggregate supply. D) increases both long-run and short-run aggregate supply. E) decreases aggregate quantity supplied. Answer: D Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 2) Government investments to improve the quality of public infrastructure like roads, transit and sewers A) shifts both LAS and SAS leftward. B) increases aggregate quantity supplied. C) shifts only LAS rightward. D) shifts both LAS and SAS rightward. E) decreases aggregate quantity supplied. Answer: D Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 3) Which is a supply plan to increase inputs? A) a worker's choice about how many hours to work each week. B) a father's choice to take a paying job or take care of the kids at home. C) a business's plan to increase output from its Hamilton, Ontario factory. D) a government plan to allow more logging on Crown land in British Columbia. E) a new government policy allowing more immigrants into Canada. Answer: E Diff: 3 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply.

4) Which is a supply plan to increase inputs? A) a government plan to allow more logging on Crown land in British Columbia. B) a snow-removal business's decision to buy another plow to expand capacity. C) a baby-boomer's decision not to retire but keep working. D) a shoe factory's choice to increase output from its factory in Manitoba. E) a worker's choice to accept more overtime shifts in order to pay off a big VISA bill. Answer: B Diff: 3 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 5) Which is a supply plan with existing inputs? A) a couple's decision to have more children. B) BlackBerry's decision to fund research and development for improved Blackberries. C) a restaurant's decision to extend closing time from 10 pm to midnight. D) a high school student's choice to go to college. E) Rogers Wireless training new employees to work at its outlets in Saskatoon. Answer: C Diff: 3 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 6) Which is a supply plan with existing inputs? A) an oil company's investment in new tar sands oil extraction technology. B) a baby-boomer's decision not to retire but keep working. C) a snow-removal business's decision to buy another plow to expand capacity. D) a shoe factory's plan to install new, improved robots in its factory in Manitoba. E) Toronto's plan to extend the subway system. Answer: B Diff: 3 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 7) Which is a negative supply shock? A) a lower world price for oil. B) a lower world price for copper. C) a drought on the Prairies that reduces wheat production. D) a scientific discovery that lowers costs for solar energy. E) all of the above are negative supply shocks. Answer: C Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 371 Copyright © 2021 Pearson Canada Inc.

8) According to the law of short-run aggregate supply, as the price level rises, short-run aggregate A) quantity supplied is not affected. B) supply decreases. C) quantity supplied decreases. D) supply increases. E) quantity supplied increases. Answer: E Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 9) Higher world oil prices A) decrease short-run aggregate supply. B) decrease aggregate demand. C) increase aggregate quantity demanded. D) increase short-run aggregate supply. E) increase aggregate quantity supplied. Answer: A Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 10) Higher world oil prices A) shift both SAS and LAS leftward. B) shift SAS leftward only. C) shift both SAS and LAS rightward. D) shift SAS rightward only. E) increase aggregate quantity supplied. Answer: B Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply.

11) Lower world coal prices A) shift both SAS and LAS leftward. B) shift SAS leftward only. C) shift both SAS and LAS rightward. D) shift SAS rightward only. E) decrease aggregate quantity supplied. Answer: D Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 12) Lower world coal prices A) decrease short-run aggregate supply. B) decrease aggregate quantity demanded. C) decrease aggregate quantity supplied. D) increase aggregate quantity supplied. E) increase short-run aggregate supply. Answer: E Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 13) The 2011 tsunami caused Japan's A) SAS and LAS curves to both shift leftward. B) SAS curve to shift leftward, but Japan's LAS curve was unchanged. C) SAS and LAS curves to both shift rightward. D) SAS curve to shift rightward, but Japan's LAS curve was unchanged. E) aggregate quantity supplied to decrease. Answer: A Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 14) Short-run aggregate supply increases if A) the price level falls. B) prices for resource inputs fall. C) prices for resource inputs rise. D) the price level rises. E) government transfer payments decrease. Answer: B Diff: 3 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 373 Copyright © 2021 Pearson Canada Inc.

15) Short-run aggregate supply decreases if A) the price level falls. B) prices for resource inputs fall. C) prices for resource inputs rise. D) the price level rises. E) government transfer payments decrease. Answer: C Diff: 3 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 16) Aggregate quantity supplied increases if A) the price level rises. B) prices for resource inputs fall. C) technology improves. D) the price level falls. E) prices for resource inputs rise. Answer: A Diff: 3 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 17) Aggregate quantity supplied decreases if A) the price level rises. B) prices for resource inputs fall. C) technology improves. D) the price level falls. E) prices for resource inputs rise. Answer: D Diff: 3 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply.

18) Which does not change Canada's short-run aggregate supply? A) Prince Edward Island is submerged by an offshore earthquake. B) Perfect weather all across Canada improves crop yields for all farmers. C) People around the country upgrade their human capital by reading Economics for Life. D) The Government of Canada passes new regulations reducing the imports of advanced Japanese robots by Canadian businesses. E) American consumers stop buying Canadian beef during an outbreak of Mad Cow Disease. Answer: E Diff: 3 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 19) Which changes Canada's short-run aggregate supply? A) the Government of Canada legalizes the cultivation of marijuana B) a senior citizen decides to keep working instead of retiring C) a working mother decides to quite her job and go back to school full-time D) American consumers stop buying Canadian beef during an outbreak of Mad Cow Disease E) Canadian manufacturers want to increase their sales as prices rise Answer: A Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 20) Increases in the quality of inputs that do not affect the quantity of those inputs, increase A) long-run aggregate supply but not short-run aggregate supply B) aggregate quantity supplied. C) both long-run aggregate supply and short-run aggregate supply. D) short-run aggregate supply but not long-run aggregate supply. E) both long-run aggregate supply and aggregate quantity supplied. Answer: C Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply.

21) Increases in the quality of inputs that do not affect the quantity of those inputs, A) shift LAS rightward but not SAS. B) increase aggregate quantity supplied. C) shift both LAS and SAS rightward. D) shift SAS rightward but not LAS. E) shift LAS rightward and increase aggregate quantity supplied. Answer: C Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 22) A rise in the price level A) increases short-run aggregate supply. B) decreases short-run aggregate supply. C) increases aggregate quantity supplied. D) decreases aggregate quantity supplied. E) decreases aggregate demand. Answer: C Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 23) A fall in the price level A) increases short-run aggregate supply. B) decreases short-run aggregate supply. C) increases aggregate quantity supplied. D) decreases aggregate quantity supplied. E) increases aggregate demand. Answer: D Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply.

24) What shifts the short-run aggregate supply (SAS) curve but not the long-run aggregate supply (LAS) curve? A) a change in input prices. B) a change in the quantity of capital. C) an improved technology. D) an increase in population. E) none of the above. Answer: A Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 25) Which media headline describes a shift of the SAS curve only? A) "Decreased consumer spending may lead to recession." B) "Increased consumer spending is expected to lead to inflation, with no change in real GDP." C) "Higher wage settlements may lead to inflation." D) "Faster growth may be due to more women entering the labour force." E) "Recent tornadoes destroyed factories in Edmonton and Calgary." Answer: C Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 26) Which media headline describes a rightward shift of the LAS curve? A) "Decreased consumer spending may lead to recession." B) "Increased consumer spending is expected to lead to inflation, with no change in real GDP." C) "Higher wage settlements may lead to inflation." D) "Faster growth may be due to more women entering the labour force." E) "Recent tornadoes destroyed factories in Edmonton and Calgary." Answer: D Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply.

27) Which media headline describes a leftward shift of the LAS curve? A) "Decreased consumer spending may lead to recession." B) "Increased consumer spending is expected to lead to inflation, with no change in real GDP." C) "Higher wage settlements may lead to inflation." D) "Faster growth may be due to more women entering the labour force." E) "Recent tornadoes destroyed factories in Edmonton and Calgary." Answer: E Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 28) The short-run aggregate supply (SAS) curve is the relationship between the quantity of real GDP that macroeconomic players plan to supply and the A) quantity of real GDP demanded. B) exchange rate. C) inflation rate. D) unemployment rate. E) price level. Answer: E Diff: 2 Type: MC Page Ref: 204-209 Skill: Recall Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 29) The short-run aggregate supply (SAS) curve shifts rightward if A) wage rates rise. B) aggregate demand increases. C) the population increases. D) input prices rise. E) the quantity of capital decreases. Answer: C Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply.

30) Suppose there is an increase in the quantity of capital. As a result, the SAS A) and the LAS curves both shift leftward. B) and the LAS curves both shift rightward. C) curve does not shift but the LAS curve shifts rightward. D) curve does not shift but the LAS curve shifts leftward. E) shifts rightward, but the LAS curve does not shift. Answer: B Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 31) A positive supply shock from improving technology shifts A) both the SAS and AD curves rightward. B) both the SAS and LAS curves leftward. C) the SAS curve rightward but leaves the LAS curve unchanged. D) the LAS curve rightward but leaves the SAS curve unchanged. E) both the SAS and LAS curves rightward. Answer: E Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 32) A negative supply shock from rising input prices shifts A) both the SAS and AD curves leftward. B) both the SAS and LAS curves leftward. C) the SAS curve leftward but leaves the LAS curve unchanged. D) the LAS curve leftward but leaves the SAS curve unchanged. E) both the SAS and LAS curves rightward. Answer: C Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 33) A positive supply shock from falling input prices shifts A) both the SAS and AD curves rightward. B) both the SAS and LAS curves leftward. C) the SAS curve rightward but leaves the LAS curve unchanged. D) the LAS curve rightward but leaves the SAS curve unchanged. E) both the SAS and LAS curves rightward. Answer: C Diff: 2 Type: MC Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 379 Copyright © 2021 Pearson Canada Inc.

34) A Federal Government program that gives ten-year work visas to international students graduating from Canadian colleges and universities increases short-run aggregate supply. Answer: TRUE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 35) Government can affect aggregate quantity supplied with changes in immigration policies. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 36) Government can affect both long-run and short-run aggregate supply with changes in labour market policies. Answer: TRUE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 37) Low prices in the domestic wheat market cause farmers to switch some sales to export markets. This decision reduces aggregate quantity supplied. Answer: FALSE Diff: 2 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 38) New policies by the government of British Columbia allowing the cultivation and export of marijuana increase short-run aggregate supply. Answer: TRUE Diff: 2 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 39) Reductions in government subsidies on electricity prices are a positive supply shock. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 380 Copyright © 2021 Pearson Canada Inc.

40) The law of short-run aggregate supply states that aggregate quantity supplied increases as the price level rises. Answer: TRUE Diff: 1 Type: TF Page Ref: 204-209 Skill: Recall Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 41) The law of short-run aggregate supply states that aggregate supply increases as the price level rises. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Recall Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 42) Prospecting for gold in northern Alberta is a business supply choice that increases aggregate quantity supplied. Answer: FALSE Diff: 2 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 43) Human capital decisions affect both long-run and short-run aggregate supply. Answer: TRUE Diff: 2 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 44) Changes in the quantity used of existing inputs affect aggregate quantity supplied, while changes in the quality of inputs affect both long-run and short-run aggregate supply. Answer: TRUE Diff: 2 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 45) Changes in supply plans for existing inputs affect aggregate quantity supplied. Answer: TRUE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply.

46) Supply plans to increase inputs affect both long-run and short-run aggregate supply. Answer: TRUE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 47) Supply plans to increase the quantity of inputs affect aggregate quantity supplied. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 48) Supply plans to increase the quality of inputs affect aggregate quantity supplied. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 49) A negative supply shock in macroeconomics is like a decrease in supply in microeconomics. Answer: TRUE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 50) A negative supply shock in macroeconomics is like a decrease in quantity supplied in microeconomics. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 51) A positive supply shock in macroeconomics is like an increase in quantity supplied in microeconomics. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply.

52) A positive supply shock in macroeconomics is like an increase in supply in microeconomics. Answer: TRUE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 53) A positive supply shock raises prices for resource inputs. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 54) An increase in the Consumer Price Index (CPI) means that there is economic growth. Answer: FALSE Diff: 2 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 55) An increase in the price level means that there is economic growth. Answer: FALSE Diff: 2 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 56) A lower world price for oil is a negative supply shock. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 57) A higher world price for oil is a negative supply shock. Answer: TRUE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply.

58) A drought that reduces wheat production is a negative supply shock. Answer: TRUE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 59) A drought that reduces wheat production is a positive supply shock. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 60) Rising input prices shift both SAS and LAS leftward. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 61) Rising input prices shift both SAS and LAS rightward. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 62) Rising input prices shift SAS leftward but leave LAS unchanged. Answer: TRUE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 63) Rising input prices shift SAS rightward but leave LAS unchanged. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply.

64) Falling input prices increase aggregate quantity supplied. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 65) Falling input prices increase short-run aggregate supply. Answer: TRUE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 66) Falling input prices decrease short-run aggregate supply. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 67) When the price level rises, aggregate quantity supplied increases. Answer: TRUE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 68) When the price level rises, short-run aggregate supply increases. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 69) When the price level falls, aggregate quantity supplied decreases. Answer: TRUE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply.

70) When the price level falls, short-run aggregate supply decreases. Answer: FALSE Diff: 1 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 71) Increases in the quality of inputs that do not affect the quantity of those inputs increase both long-run and short-run aggregate supply. Answer: TRUE Diff: 2 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 72) Increases in the quality of inputs that do not affect the quantity of those inputs increase longrun aggregate supply but not short-run aggregate supply. Answer: FALSE Diff: 2 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 73) Increases in the quality of inputs that do not affect the quantity of those inputs shift both LAS and SAS rightward. Answer: TRUE Diff: 2 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply. 74) Increases in the quality of inputs that do not affect the quantity of those inputs shift LAS rightward and increase aggregate quantity supplied. Answer: FALSE Diff: 2 Type: TF Page Ref: 204-209 Skill: Applied Objective: 8.2 Identify how macroeconomic players choose short-run aggregate supply plans and differentiate the choices and supply shocks that change aggregate supply.

8.3 . . . Will They Come and Buy It? Aggregate Demand 1) Planned spending on aggregate demand is calculated as A) C + I + G + X - IM B) C + I + G + X + IM C) C + I - G + X - IM D) I + G + X - IM E) IM - C - I - G - X Answer: A Diff: 1 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 2) If the government cuts taxes, this A) decreases short-run aggregate supply. B) decreases aggregate demand. C) increases aggregate quantity demanded. D) increases aggregate demand. E) increases aggregate quantity supplied. Answer: D Diff: 3 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 3) What can directly change aggregate demand and long-run aggregate supply? A) GDP in the rest of the world (R.O.W.). B) resource input prices. C) interest rates. D) value of the Canadian dollar. E) business investment. Answer: E Diff: 3 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand.

4) Which economic player does not affect aggregate demand in Canada? A) the Government of Canada. B) consumers. C) R.O.W. D) businesses. E) all of the above players affect aggregate demand in Canada. Answer: E Diff: 2 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 5) The most volatile component of aggregate demand is spending by A) R.O.W. B) businesses. C) consumers. D) governments. E) economists. Answer: B Diff: 2 Type: MC Page Ref: 210-218 Skill: Recall Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 6) According to the law of aggregate demand, as the price level rises, aggregate quantity demanded decreases because spending on Canadian products and services by ________ decreases. A) consumers B) governments C) R.O.W. D) businesses E) consumers and R.O.W. Answer: E Diff: 2 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand.

7) Net taxes are taxes net of A) income. B) government spending. C) consumer saving. D) transfer payments. E) import spending. Answer: D Diff: 2 Type: MC Page Ref: 210-218 Skill: Recall Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 8) Nori earns an income of $30,000, pays $10,000 in taxes and receives $5,000 in transfer payments. He saved $8,000 at Scotiabank. What is his disposable income? A) $22,000 B) $25,000 C) $20,000 D) $17,000 E) $15,000 Answer: B Diff: 2 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 9) Which does not increase aggregate demand? A) technological innovations. B) lower interest rates. C) consumers become more optimistic. D) lower value of Canadian dollar. E) lower income taxes. Answer: A Diff: 2 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand.

10) Which is not a positive demand shock? A) technological innovations. B) lower interest rates. C) consumers become more optimistic. D) lower value of Canadian dollar. E) lower income taxes. Answer: A Diff: 2 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 11) Which decreases aggregate demand? A) lower interest rates. B) lower value of Canadian dollar. C) higher income taxes. D) rising price level. E) rising input prices. Answer: C Diff: 2 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 12) Which is a negative demand shock? A) lower interest rates. B) lower value of Canadian dollar. C) higher income taxes. D) rising price level. E) rising input prices. Answer: C Diff: 2 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 13) Which increases aggregate demand? A) earthquake destruction. B) technological innovations. C) consumers become more optimistic. D) higher value of the Canadian dollar. E) higher interest rates. Answer: C Diff: 2 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 390 Copyright © 2021 Pearson Canada Inc.

14) Which is a positive demand shock? A) earthquake destruction. B) technological innovations. C) consumers become more optimistic. D) higher value of the Canadian dollar. E) higher interest rates. Answer: C Diff: 2 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 15) Canadian aggregate demand increases immediately when A) Honda Canada adds another shift of workers at its Ontario factory. B) Blue Jays baseball fans visit Boston to see a game. C) a Canadian high school student goes to Harvard. D) an economist at York University buys 6 cases of wine from Chile. E) Yankee baseball fans visit Toronto to see a game. Answer: E Diff: 2 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 16) Aggregate demand decreases when A) interest rates fall. B) consumers become more optimistic. C) government reduces net taxes. D) interest rates rise. E) government spending increases. Answer: D Diff: 3 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand.

17) There is a negative demand shock when A) interest rates fall. B) consumers become more optimistic. C) government reduces net taxes. D) interest rates rise. E) government spending increases. Answer: D Diff: 3 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 18) Aggregate demand increases if A) the price level falls. B) GDP in R.O.W. increases. C) the value of the Canadian dollar rises. D) the price level rises. E) interest rates rise. Answer: B Diff: 3 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 19) There is a positive demand shock when A) the price level falls. B) GDP in R.O.W. increases. C) the value of the Canadian dollar rises. D) the price level rises. E) interest rates rise. Answer: B Diff: 3 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 20) Aggregate quantity demanded increases if A) the price level rises. B) expectations become more optimistic. C) government taxes decrease. D) the price level falls. E) interest rates fall. Answer: D Diff: 3 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 392 Copyright © 2021 Pearson Canada Inc.

21) A rising price level A) increases aggregate demand. B) decreases aggregate quantity supplied. C) decreases aggregate quantity demanded. D) increases aggregate quantity demanded. E) decreases aggregate demand. Answer: C Diff: 3 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 22) Which statement is false? Investment spending A) increases when the price level falls. B) can often be postponed. C) is based on expectations of future prices and costs. D) can depend on borrowed money. E) is sensitive to changes in interest rates. Answer: A Diff: 3 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 23) A new government policy to build more public infrastructure like roads, transit and sewers A) decreases short-run aggregate supply. B) increases aggregate quantity demanded. C) decreases aggregate quantity demanded. D) increases aggregate demand. E) decreases aggregate demand. Answer: D Diff: 2 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand.

24) According to the law of aggregate demand, as the price level rises, aggregate A) quantity demanded does not change. B) demand decreases. C) quantity demanded decreases. D) demand increases. E) quantity demanded increases. Answer: C Diff: 2 Type: MC Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 25) The aggregate demand (AD) curve is the relationship between the quantity of real GDP that macroeconomic players plan to demand and the A) quantity of real GDP supplied. B) exchange rate. C) inflation rate. D) unemployment rate. E) price level. Answer: E Diff: 2 Type: MC Page Ref: 210-218 Skill: Recall Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 26) The most volatile component of aggregate demand is spending by R.O.W. Answer: FALSE Diff: 1 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 27) The most volatile component of aggregate demand is business investment spending. Answer: TRUE Diff: 1 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 28) When GDP in R.O.W. increases, Canadian aggregate demand increases. Answer: TRUE Diff: 1 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand.

29) When GDP in R.O.W. decreases, Canadian aggregate demand increases. Answer: FALSE Diff: 1 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 30) When the Canadian dollar rises in value, aggregate demand increases. Answer: FALSE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 31) When the Canadian dollar falls in value, aggregate demand increases. Answer: TRUE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 32) The macroeconomic law of demand is an example of the fallacy of composition. Answer: TRUE Diff: 1 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 33) The microeconomic law of demand is an example of the fallacy of composition. Answer: FALSE Diff: 1 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 34) As the price level in Canada rises, consumers switch to cheaper Canadian products and services. Answer: FALSE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand.

35) As the price level in Canada rises, the rest of the world (R.O.W.) buys fewer Canadian products and services. Answer: TRUE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 36) As the price level in Canada rises, Canadians rest of buys fewer products and services from R.O.W. Answer: FALSE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 37) An increase in interest rates decreases aggregate demand. Answer: TRUE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 38) An increase in interest rates is a positive demand shock. Answer: FALSE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 39) A rise in the price level decreases aggregate demand. Answer: FALSE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 40) A rise in the price level is a negative demand shock. Answer: FALSE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand.

41) A rise in the price level is a positive demand shock. Answer: FALSE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 42) A rise in the price level increases aggregate quantity demanded. Answer: FALSE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 43) A rise in the price level decreases aggregate quantity demanded. Answer: TRUE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 44) When a Canadian student loses $1,000 at a casino in Las Vegas, aggregate demand in Canada decreases. Answer: TRUE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 45) When an American loses $1,000 at Casino Rama in Ontario, aggregate demand in Canada is not affected. Answer: FALSE Diff: 2 Type: TF Page Ref: 210-218 Skill: Recall Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 46) The largest component of aggregate demand in Canada is spending by businesses. Answer: FALSE Diff: 2 Type: TF Page Ref: 210-218 Skill: Recall Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand.

47) The largest component of aggregate demand in Canada is consumer spending. Answer: TRUE Diff: 2 Type: TF Page Ref: 210-218 Skill: Recall Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 48) Aggregate demand increases when interest rates fall. Answer: TRUE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 49) Aggregate demand increases when interest rates rise. Answer: FALSE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 50) Aggregate demand increases when government decreases taxes. Answer: TRUE Diff: 3 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 51) Aggregate demand increases when government increases taxes. Answer: FALSE Diff: 3 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 52) Aggregate demand increases when the value of the Canadian dollar falls. Answer: TRUE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand.

53) Aggregate demand increases when the value of the Canadian dollar rises. Answer: FALSE Diff: 2 Type: TF Page Ref: 210-218 Skill: Applied Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 54) Government transfer payments are part of government spending (G). Answer: FALSE Diff: 3 Type: TF Page Ref: 210-218 Skill: Recall Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand. 55) The reasons behind the microeconomic law of demand and the macroeconomic law of demand are the same. Answer: FALSE Diff: 2 Type: TF Page Ref: 210-218 Skill: Recall Objective: 8.3 Explain the difference between a change in aggregate quantity demanded and a change in aggregate demand, and list five shocks that change aggregate demand.

8.4 Hit or Miss the Macroeconomic Performance Targets? The Aggregate Supply and Aggregate Demand Model 1) In long-run macroeconomic equilibrium A) the price level and aggregate demand are what suppliers expected. B) all spending plans are realized. C) consumers earn enough income to buy the products and services they planned to buy. D) no one is kicking himself. E) all of the above are true. Answer: E Diff: 1 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 2) In long-run macroeconomic equilibrium A) short-run aggregate supply (SAS) equals aggregate demand (AD). B) the price level is stable. C) real GDP equals potential GDP. D) Say's Law is true. E) all of the above are true. Answer: E Diff: 1 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 3) In short-run macroeconomic equilibrium A) short-run aggregate supply (SAS) equals aggregate demand (AD). B) the price level is stable. C) real GDP equals potential GDP. D) no one is kicking himself. E) all of the above are true. Answer: A Diff: 1 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation.

4) In the loanable funds market, which statement is false? A) The interest rate is the price of loanable funds. B) An increase in demand for loanable funds causes the interest rate to rise. C) An increase in consumer savings causes the interest rate to rise. D) A decrease in the interest rate causes business borrowing to rise. E) A decrease in the supply of loanable funds causes the interest rate to rise. Answer: C Diff: 2 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 5) In the loanable funds market, A) when interest rates are higher, businesses borrow more money for investment. B) when interest rates are higher, consumers borrow more money for mortgages. C) an increase in consumer savings causes the interest rate to rise. D) savers are the demanders, and borrowers are the suppliers. E) none of the above are true. Answer: E Diff: 3 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 6) In the loanable funds market, A) when interest rates are higher, businesses borrow more money for investment. B) when interest rates are higher, consumers borrow more money for mortgages. C) an increase in consumer savings causes the interest rate to rise. D) savers are the demanders, and borrowers are the suppliers. E) businesses do most of the borrowing to finance investment spending on new factories. Answer: E Diff: 3 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation.

7) When consumers save their income instead of spending it, A) Say's Law cannot be true. B) there must be a mismatch between short-run aggregate supply and aggregate demand. C) the interest rate in the loanable funds market can match business investment spending with consumer savings. D) there must be less economic growth. E) all of the above are true. Answer: C Diff: 3 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 8) When consumers save their income instead of spending it, A) Say's Law cannot be true. B) there must be a mismatch between short-run aggregate supply and aggregate demand. C) the interest rate in the loanable funds market can match business savings with consumer savings. D) the loanable funds market can rescue Say's Law. E) there must be less economic growth. Answer: D Diff: 3 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 9) When there is economic growth with rising living standards, A) business investment increases both LAS and SAS. B) business investment increases the quantity and quality of inputs. C) increased employment in new factories increases income, so AD increases. D) potential GDP is greater in the new long-run macroeconomic equilibrium. E) all of the above are true. Answer: E Diff: 2 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation.

10) Falling average prices and increased unemployment most likely come from A) a negative demand shock. B) a negative supply shock. C) a positive demand shock. D) a positive supply shock. E) lower exchange rates. Answer: A Diff: 2 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 11) Rising average prices and decreased unemployment most likely come from A) a negative demand shock. B) a negative supply shock. C) a positive demand shock. D) a positive supply shock. E) higher exchange rates. Answer: C Diff: 2 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 12) Rising average prices and increased unemployment most likely come from A) a negative demand shock. B) a negative supply shock. C) a positive demand shock. D) a positive supply shock. E) technological change. Answer: B Diff: 2 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 13) Falling average prices and continued full employment most likely come from A) a negative demand shock. B) a negative supply shock. C) a positive demand shock. D) a positive supply shock. E) OPEC Answer: D Diff: 2 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 403 Copyright © 2021 Pearson Canada Inc.

14) An inflationary gap most likely comes from A) a negative demand shock. B) a negative supply shock. C) a positive demand shock. D) a positive supply shock. E) OPEC. Answer: C Diff: 2 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 15) A recessionary gap most likely comes from A) a negative demand shock. B) a negative supply shock. C) a positive demand shock. D) a positive supply shock. E) OPEC. Answer: A Diff: 2 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 16) Stagflation most likely comes from A) a negative demand shock. B) a negative supply shock. C) a positive demand shock. D) a positive supply shock. E) the North American Free Trade Agreement (NAFTA). Answer: B Diff: 2 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 17) The Global Financial Crisis of 2008 was caused by A) a negative demand shock. B) a negative supply shock. C) a positive demand shock. D) a positive supply shock. E) the Wicked Witch of the West. Answer: A Diff: 2 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 404 Copyright © 2021 Pearson Canada Inc.

18) The OPEC oil price shocks of the 1970s were example of A) negative demand shocks. B) negative supply shocks. C) positive demand shocks. D) positive supply shocks. E) what happens from listening to too much ABBA. Answer: B Diff: 2 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 19) The technology boom of the late 1990s was an example of A) a negative demand shock. B) a negative supply shock. C) a positive demand shock. D) a positive supply shock. E) what happens from drinking too much kool aid. Answer: D Diff: 2 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 20) Say's Law can still apply to an equilibrium over time with increasing inputs, with the participation of A) Revenue Canada. B) R.O.W. C) the Minister of Finance. D) the banking system. E) the Supreme Court of Canada. Answer: D Diff: 1 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation.

21) A negative demand shock causes A) rising average prices. B) increased real GDP. C) increased unemployment. D) an inflationary gap. E) none of the above. Answer: C Diff: 3 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 22) A positive demand shock causes A) falling average prices. B) decreased real GDP. C) increased unemployment. D) a deflationary gap. E) none of the above. Answer: E Diff: 3 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 23) A positive supply shock causes A) falling average prices. B) decreased real GDP. C) increased unemployment. D) stagflation. E) none of the above. Answer: A Diff: 3 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 24) A negative supply shock causes A) falling average prices. B) increased real GDP. C) decreased unemployment. D) stagflation. E) none of the above. Answer: D Diff: 3 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 406 Copyright © 2021 Pearson Canada Inc.

25) Falling average prices and higher unemployment most likely come from A) investor pessimism. B) investor optimism. C) lower exchange rates. D) lower interest rates. E) lower income tax rates. Answer: A Diff: 3 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 26) Rising average prices and lower unemployment most likely come from A) higher interest rates. B) lower income tax rates. C) increases in the value of the Canadian dollar. D) improved technologies. E) investor pessimism. Answer: B Diff: 3 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 27) Falling average prices and lower unemployment most likely come from A) negative demand shocks. B) increased consumer confidence. C) improved technologies. D) negative supply shocks. E) higher interest rates. Answer: C Diff: 3 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation.

28) A negative aggregate demand shock results in A) decreased GDP, decreased unemployment and rising prices. B) increased GDP, increased unemployment and falling prices. C) increased GDP, decreased unemployment and falling prices. D) decreased GDP, increased unemployment and falling prices. E) decreased GDP, increased unemployment and rising prices. Answer: D Diff: 2 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 29) A positive aggregate demand shock results in A) decreased GDP, decreased unemployment and rising prices. B) increased GDP, decreased unemployment and rising prices. C) decreased GDP, increased unemployment and falling prices. D) decreased GDP, increased unemployment and rising prices. E) increased GDP, increased unemployment and falling prices. Answer: B Diff: 2 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 30) A negative aggregate supply shock results in A) decreased GDP, increased unemployment and falling prices. B) decreased GDP, decreased unemployment and falling prices. C) increased GDP, increased unemployment and rising prices. D) decreased GDP, increased unemployment and rising prices. E) decreased GDP, decreased unemployment and rising prices. Answer: D Diff: 2 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 31) An increasing price level and increased unemployment rate most likely come from A) rising input prices. B) higher income taxes. C) lower interest rates. D) increases in the value of the Canadian dollar. E) improvements in technology. Answer: A Diff: 3 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 408 Copyright © 2021 Pearson Canada Inc.

32) A positive aggregate supply shock results in A) increased GDP, increased unemployment and falling prices. B) increased GDP, increased unemployment and rising prices. C) decreased GDP, decreased unemployment and rising prices. D) decreased GDP, increased unemployment and falling prices. E) increased GDP, decreased unemployment and falling prices. Answer: E Diff: 3 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 33) Demand shocks move unemployment and inflation in A) the same directions, as the Phillips Curve suggests. B) opposite directions, as the Phillips Curve suggests. C) the same directions, which is not what the Phillips Curve suggests. D) opposite directions, which is not what the Phillips Curve suggests. E) circles. Answer: B Diff: 3 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 34) Supply shocks move unemployment and inflation in A) the same directions, as the Phillips Curve suggests. B) opposite directions, as the Phillips Curve suggests. C) the same directions, which is not what the Phillips Curve suggests. D) opposite directions, which is not what the Phillips Curve suggests. E) circles. Answer: C Diff: 3 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation.

35) The language of output gaps — recessionary gaps and inflationary gaps — A) applies only to outcomes of demand shocks. B) applies only to outcomes of supply shocks. C) applies to outcomes of both demand shocks and supply shocks. D) does not apply to outcomes of demand shocks or supply shocks. E) applies only to economic growth. Answer: A Diff: 3 Type: MC Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 36) In long-run macroeconomic equilibrium, aggregate quantity demanded equals aggregate quantity supplied equals potential GDP. Answer: TRUE Diff: 1 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 37) In short-run macroeconomic equilibrium, aggregate quantity demanded equals aggregate quantity supplied equals potential GDP. Answer: FALSE Diff: 1 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 38) In short-run macroeconomic equilibrium, aggregate quantity demanded equals aggregate quantity supplied. Answer: TRUE Diff: 1 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 39) "Stable prices" means the average price level is constant or is increasing at a low, predictable inflation rate. Answer: TRUE Diff: 2 Type: TF Page Ref: 219-228 Skill: Recall Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation.

40) "Growth in living standards" means increasing real GDP per person. Answer: TRUE Diff: 2 Type: TF Page Ref: 219-228 Skill: Recall Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 41) The best measure of "growth in living standards" is increasing real GDP. Answer: FALSE Diff: 2 Type: TF Page Ref: 219-228 Skill: Recall Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 42) The best measure of "growth in living standards" is increasing real GDP per person. Answer: TRUE Diff: 2 Type: TF Page Ref: 219-228 Skill: Recall Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 43) The best measure of "growth in living standards" is increasing nominal GDP. Answer: FALSE Diff: 2 Type: TF Page Ref: 219-228 Skill: Recall Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 44) The banking system can also be described as the market for loanable funds. Answer: TRUE Diff: 1 Type: TF Page Ref: 219-228 Skill: Recall Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 45) If consumers save some of their income, aggregate demand cannot be equal to short-run aggregate supply. Answer: FALSE Diff: 1 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation.

46) The exchange rate is the price of loanable funds. Answer: FALSE Diff: 2 Type: TF Page Ref: 219-228 Skill: Recall Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 47) In the loanable funds market, businesses do most of the borrowing to finance investment spending. Answer: TRUE Diff: 2 Type: TF Page Ref: 219-228 Skill: Recall Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 48) In the loanable funds market, consumers do most of the borrowing to finance mortgages and car loans. Answer: FALSE Diff: 2 Type: TF Page Ref: 219-228 Skill: Recall Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 49) The interest rate is the price of loanable funds. Answer: TRUE Diff: 1 Type: TF Page Ref: 219-228 Skill: Recall Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 50) If the population grows faster than real GDP, real GDP per person decreases. Answer: TRUE Diff: 1 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 51) If the population grows slower than real GDP, real GDP per person decreases. Answer: FALSE Diff: 1 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation.

52) When the exchange rate falls, the average price level rises and unemployment decreases. Answer: TRUE Diff: 3 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 53) When interest rates rise, average prices fall and unemployment increases. Answer: TRUE Diff: 3 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 54) Improvements in technology result in falling average prices and increasing unemployment. Answer: FALSE Diff: 2 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 55) Higher oil prices result in rising average prices and increasing unemployment. Answer: TRUE Diff: 2 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 56) Investor pessimism results in decreasing unemployment. Answer: FALSE Diff: 1 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 57) Supply shocks cause unemployment and inflation to move in the same direction. Answer: TRUE Diff: 2 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation.

58) Demand shocks cause unemployment and inflation to move in the same direction. Answer: FALSE Diff: 2 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 59) Supply shocks cause unemployment and inflation to move in opposite directions. Answer: FALSE Diff: 2 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 60) Demand shocks cause unemployment and inflation to move in opposite directions. Answer: FALSE Diff: 2 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 61) Rising average prices and increased unemployment could be caused by increases in the price of oil. Answer: TRUE Diff: 2 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 62) Rising average prices and decreased unemployment could be caused by increases in the price of oil. Answer: FALSE Diff: 2 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 63) A negative demand shock combined with a positive supply shock has no effect on the level of average prices. Answer: FALSE Diff: 3 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation.

64) When aggregate supply and aggregate demand match, that equilibrium is the world of Say's Law. Answer: TRUE Diff: 1 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 65) An increase in savings causes the interest rate to fall in the market for loanable funds. Answer: TRUE Diff: 1 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 66) Business investment based on borrowed funds helps to explain steady growth in living standards. Answer: TRUE Diff: 2 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 67) Business investment increases the quantity and quality of inputs, increasing potential GDP. Answer: TRUE Diff: 1 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 68) Mismatches between aggregate supply and aggregate demand cause recessions and expansions. Answer: TRUE Diff: 1 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 69) Negative and positive demand shocks cannot happen at the same time. Answer: FALSE Diff: 2 Type: TF Page Ref: 219-228 Skill: Recall Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation.

70) The language of output gaps — recessionary gaps and inflationary gaps — applies only to outcomes of demand shocks. Answer: TRUE Diff: 2 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 71) The language of output gaps — recessionary gaps and inflationary gaps — applies only to outcomes of supply shocks. Answer: FALSE Diff: 2 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation. 72) The language of output gaps — recessionary gaps and inflationary gaps — applies to outcomes of both demand shocks and supply shocks. Answer: FALSE Diff: 2 Type: TF Page Ref: 219-228 Skill: Applied Objective: 8.4 Use the aggregate supply and aggregate demand model to explain the macroeconomic performance of real GDP, unemployment, and inflation.

8.5 Shocking Starts and Finishes: Origins and Responses to Business Cycles 1) The "Yes - Markets Self-Adjust" camp A) focuses on the long-run. B) believes in Say's Law. C) believes in the economy's ability to hit macroeconomic performance targets. D) recognizes that business cycles do happen. E) does all of the above. Answer: E Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 2) The "No - Markets Fail Often" camp A) focuses on the short-run. B) believes business cycles happen regularly. C) believes the economy's self-adjusting mechanisms are slow. D) rejects Say's Law. E) does all of the above. Answer: E Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 3) The "Yes - Markets Self-Adjust" camp A) focuses on the short-run. B) believes in Say's Law. C) believes the economy's self-adjusting mechanisms are slow. D) believes business cycles happen regularly. E) does all of the above. Answer: B Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles.

4) The "No - Markets Fail Often" camp A) focuses on the long-run. B) believes business cycles happen regularly. C) believes in the economy's ability to hit macroeconomic performance targets. D) believes in Say's Law. E) does all of the above. Answer: B Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 5) The "Yes - Markets Self-Adjust" camp believes that investors behave like A) herds of animals. B) logical, rational Vulcans. C) Wayne Gretzky. D) animal spirits. E) broken thermostats. Answer: B Diff: 2 Type: MC Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 6) The "No - Markets Fail Often" camp believes that investors behave like A) herds of animals. B) logical, rational Vulcans. C) Wayne Gretzky. D) spirited animals. E) thermostats. Answer: A Diff: 2 Type: MC Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles.

7) The "Yes - Markets Self-Adjust" camp argues that in a recessionary gap, all of these market adjustments will happen except, A) price adjustments in the loanable funds market fix the saving problem for Say's Law. B) falling wage rates increase the quantity of labour demanded. C) falling interest rates increase business investment. D) falling output prices increase aggregate quantity demanded. E) falling output prices decrease net exports. Answer: E Diff: 3 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 8) The "Yes - Markets Self-Adjust" camp argues that in a recessionary gap, all of these market adjustments will happen except, A) price adjustments in the loanable funds market fix the saving problem for Say's Law. B) falling wage rates decrease the quantity of labour demanded. C) falling interest rates increase business investment. D) falling output prices increase aggregate quantity demanded. E) falling output prices increase net exports. Answer: B Diff: 3 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 9) The "No - Markets Fail Often" camp argues that in a recessionary gap, all of the following will happen except, A) workers resist wage cuts. B) employers resist wage cuts. C) falling interest rates increase business investment. D) falling output creates pessimistic expectations that decrease business investment. E) destabilizing demand shocks from R.O.W. Answer: C Diff: 3 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles.

10) The "No - Markets Fail Often" camp argues that in a recessionary gap, all of the following will happen except, A) workers and employers accept unemployment instead of wage cuts. B) consumer spending increases. C) savings increase in loanable funds markets. D) falling output creates pessimistic expectations that decrease business investment. E) wages in labour markets are sticky. Answer: B Diff: 3 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 11) After a negative demand shock, the "Yes - Markets Self-Adjust" camp argues that all of the following will happen except, A) export spending increases due to a lower Canadian price level. B) interest rates fall, increasing business investment spending. C) wages rise due to excess demand for labour. D) import spending decreases due to a lower Canadian price level. E) wages fall due to excess supply of labour. Answer: C Diff: 3 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 12) The "Yes - Markets Self-Adjust" camp argues that after a negative supply shock, the price level in Canada A) rises, decreasing Canadian spending on imports. B) falls, increasing R.O.W. spending on Canadian exports. C) falls, increasing Canadian spending on imports. D) rises, decreasing R.O.W. spending on Canadian exports. E) falls, decreasing Canadian spending on imports. Answer: D Diff: 3 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles.

13) The "No - Markets Fail Often" camp argues that A) wages are slow to rise. B) wages are slow to fall. C) most supply shocks originate outside the economy. D) business investors can predict the future. E) consumers save more when interest rates fall. Answer: B Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 14) The "No - Markets Fail Often" camp argues that A) expectations are changeable. B) animal spirits are rational. C) most supply shocks are external to the economy. D) business investors can predict the future. E) in a recessionary gap, business investors remain optimistic even when sales are falling. Answer: A Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 15) The "No - Markets Fail Often" camp argues that A) expectations are more important than interest rates for business investment decisions. B) most shocks are external to the economy. C) supply shocks are more important than demand shocks for explaining business cycles. D) business expectations are rational. E) government is part of the problem of business cycles. Answer: A Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 16) The "No - Markets Fail Often" camp argues that A) interest rates are more important than expectations for business investment decisions. B) most shocks are internal to the economy. C) supply shocks are more important than demand shocks for explaining business cycles. D) business expectations are rational. E) government is part of the problem of business cycles. Answer: B Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 421 Copyright © 2021 Pearson Canada Inc.

17) The "No - Markets Fail Often" camp argues that A) interest rates are more important than expectations for business investment decisions. B) most shocks are external to the economy. C) demand shocks are more important than supply shocks for explaining business cycles. D) business expectations are rational. E) government is part of the problem of business cycles. Answer: C Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 18) The "No - Markets Fail Often" camp argues that A) interest rates are more important than expectations for business investment decisions. B) most shocks are external to the economy. C) supply shocks are more important than demand shocks for explaining business cycles. D) business expectations are quickly changeable. E) government is part of the problem of business cycles. Answer: D Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 19) The "No - Markets Fail Often" camp argues that A) interest rates are more important than expectations for business investment decisions. B) most shocks are external to the economy. C) supply shocks are more important than demand shocks for explaining business cycles. D) business expectations are rational. E) government is the solution to business cycles, not the problem. Answer: E Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 20) The "Yes - Markets Self-Adjust" camp argues that A) interest rates are more important than expectations for business investment decisions. B) most shocks are internal to the economy. C) demand shocks are more important than supply shocks for explaining business cycles. D) business expectations are quickly changeable. E) government is the solution to business cycles, not the problem. Answer: A Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 422 Copyright © 2021 Pearson Canada Inc.

21) The "Yes - Markets Self-Adjust" camp argues that A) expectations are more important than interest rates for business investment decisions. B) most shocks are external to the economy. C) demand shocks are more important than supply shocks for explaining business cycles. D) business expectations are quickly changeable. E) government is the solution to business cycles, not the problem. Answer: B Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 22) The "Yes - Markets Self-Adjust" camp argues that A) expectations are more important than interest rates for business investment decisions. B) most shocks are internal to the economy. C) supply shocks are more important than demand shocks for explaining business cycles. D) business expectations are quickly changeable. E) government is the solution to business cycles, not the problem. Answer: C Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 23) The "Yes - Markets Self-Adjust" camp argues that A) expectations are more important than interest rates for business investment decisions. B) most shocks are internal to the economy. C) demand shocks are more important than supply shocks for explaining business cycles. D) business expectations are rational. E) government is the solution to business cycles, not the problem. Answer: D Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 24) The "Yes - Markets Self-Adjust" camp argues that A) expectations are more important than interest rates for business investment decisions. B) most shocks are internal to the economy. C) demand shocks are more important than supply shocks for explaining business cycles. D) business expectations are quickly changeable. E) government is part of the problem of business cycles. Answer: E Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 423 Copyright © 2021 Pearson Canada Inc.

25) The "No - Markets Fail Often" camp argues that an increase in savings A) always causes savers and investors to be pessimistic about the future. B) always causes interest rates to fall and increase business investment. C) always causes interest rates to rise and decrease business investment. D) might cause interest rates to rise and decrease business investment but only if savers and investors are optimistic about the future. E) might cause interest rates to fall and increase business investment, but only if savers and investors stay optimistic about the future. Answer: E Diff: 3 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 26) The "Yes - Markets Self-Adjust" camp argues that a negative demand shock results in A) increased saving and rising interest rates. B) decreased saving and rising interest rates. C) rising output prices, reducing the excess supply of products and services. D) falling wages, reducing the quantity of labour supplied. E) rising wages, reducing the quantity of labour demanded. Answer: D Diff: 2 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 27) The "Yes - Markets Self-Adjust" camp argues that a positive demand shock results in A) falling wages, reducing the excess supply of labour. B) rising prices, reducing excess demand for products and services. C) rising wages, reducing excess supply of labour. D) decreased saving and falling interest rates. E) falling Canadian average prices, increasing net exports. Answer: B Diff: 3 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles.

28) The "Yes - Markets Self-Adjust" camp argues that a positive demand shock results in A) falling Canadian average prices, increasing net exports. B) falling wages, reducing excess demand for labour. C) rising wages, reducing excess supply of labour. D) rising interest rates, decreasing business investment spending, and decreasing aggregate demand. E) falling interest rates, increasing business investment spending, and increasing aggregate demand. Answer: D Diff: 3 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 29) The "Yes - Markets Self-Adjust" camp argues that a positive supply shock results in A) falling Canadian average prices, increasing Canadian spending on imports. B) falling wages, increasing the quantity of labour supplied. C) falling wages, decreasing the quantity of labour demanded. D) rising Canadian average prices, decreasing net exports. E) falling Canadian average prices, increasing R.O.W. spending on Canadian exports. Answer: E Diff: 3 Type: MC Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 30) The "Yes - Markets Self-Adjust" and "No - Markets Fail Often" camps agree on the origins of shocks, but disagree on the responses of markets to the shocks. Answer: FALSE Diff: 2 Type: TF Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 31) Scientific discoveries allow for technological change as a supply shock. Answer: TRUE Diff: 1 Type: TF Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles.

32) The "No - Markets Fail Often" camp argues that investors who are pessimistic about the future may respond to lower interest rates by decreasing investment. Answer: TRUE Diff: 2 Type: TF Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 33) The "No - Markets Fail Often" camp believes that investors behave like rational Vulcans. Answer: FALSE Diff: 1 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 34) The "Yes - Markets Self-Adjust" camp believes that investors behave like rational Vulcans. Answer: TRUE Diff: 1 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 35) The "Yes - Markets Self-Adjust" camp believes that people make logical, rational choices, based on the best information available. Answer: TRUE Diff: 1 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 36) The "No - Markets Fail Often" camp believes that people make logical, rational choices, based on the best information available. Answer: FALSE Diff: 1 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 37) The "No - Markets Fail Often" camp believes that investors behave like herds of animals. Answer: TRUE Diff: 1 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles.

38) The "Yes - Markets Self-Adjust" camp believes that investors behave like herds of animals. Answer: FALSE Diff: 1 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 39) The "No - Markets Fail Often" camp believes that investors make decisions based on animal spirits. Answer: TRUE Diff: 1 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 40) The "Yes - Markets Self-Adjust" camp argues that an increase in savings results in a decrease in investment. Answer: FALSE Diff: 2 Type: TF Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 41) The "No - Markets Fail Often" camp argues that an increase in savings may result in a decrease in investment. Answer: TRUE Diff: 2 Type: TF Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 42) The origins of most shocks for the "No - Markets Fail Often" camp are internal to the economy. Answer: TRUE Diff: 2 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 43) The origins of most shocks for the "Yes - Markets Self-Adjust" camp are internal to the economy. Answer: FALSE Diff: 2 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 427 Copyright © 2021 Pearson Canada Inc.

44) The origins of most shocks are external to the economy for the "Yes - Markets Self-Adjust" camp and internal to the economy for the "No - Markets Fail Often" camp. Answer: TRUE Diff: 2 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 45) The origins of most shocks are internal to the economy for the "Yes - Markets Self-Adjust" camp and external to the economy for the "No - Markets Fail Often" camp. Answer: FALSE Diff: 2 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 46) The "No - Markets Fail Often" camp argues that adjustment problems in all markets fail to quickly restore the match between short-run aggregate supply and aggregate demand. Answer: TRUE Diff: 2 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 47) In explaining business investment spending, the "Yes - Markets Self-Adjust" camp emphasizes expectations and the "No - Markets Fail Often" camp emphasizes interest rates. Answer: FALSE Diff: 2 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 48) In explaining business investment spending, the "Yes - Markets Self-Adjust" camp emphasizes interest rates and the "No - Markets Fail Often" camp emphasizes expectations. Answer: TRUE Diff: 2 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 49) In explaining business cycles, the "Yes - Markets Self-Adjust" camp emphasizes supply shocks and the "No - Markets Fail Often" camp emphasizes demand shocks. Answer: TRUE Diff: 2 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 428 Copyright © 2021 Pearson Canada Inc.

50) In explaining business cycles, the "Yes - Markets Self-Adjust" camp emphasizes demand shocks and the "No - Markets Fail Often" camp emphasizes supply shocks. Answer: FALSE Diff: 2 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 51) In explaining business cycles, the "Yes - Markets Self-Adjust" camp believes government is part of the problem, not part of the solution. Answer: TRUE Diff: 2 Type: TF Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 52) In explaining business cycles, the "No - Markets Fail Often" camp believes government is part of the problem, not part of the solution. Answer: FALSE Diff: 2 Type: TF Page Ref: 229-233 Skill: Applied Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 53) For the "No - Markets Fail Often" camp, expectations are more important than interest rates for business investment decisions. Answer: TRUE Diff: 2 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 54) For the "No - Markets Fail Often" camp, interest rates are more important than expectations for business investment decisions. Answer: FALSE Diff: 2 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles.

55) For the "Yes - Markets Self-Adjust" camp, expectations are more important than interest rates for business investment decisions. Answer: FALSE Diff: 2 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. 56) For the "Yes - Markets Self-Adjust" camp, interest rates are more important than expectations for business investment decisions. Answer: TRUE Diff: 2 Type: TF Page Ref: 229-233 Skill: Recall Objective: 8.5 Describe the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" answers about origins, expectations, and market responses to business cycles. Macroeconomics for Life: Smart Choices for All?, Updated 2e (Cohen) Chapter 9 Money Is for Lunatics: Demanders and Suppliers of Money 9.1 Is It Smart to Not Want Money? Demand for Money 1) A double coincidence of wants requires A) two buyers each wanting what the other has. B) a buyer and a seller wanting the same thing. C) two buyers who want the same thing. D) two sellers who want the same thing. E) one buyer who wants two things. Answer: A Diff: 1 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 2) Which is a recognized function of money? A) unit of exchange B) medium of store C) store of exchange D) unit of account E) medium of value Answer: D Diff: 1 Type: MC Page Ref: 242-249 Skill: Recall Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 3) As a time machine for moving purchasing power from the present to the future, money functions as a 430 Copyright © 2021 Pearson Canada Inc.

A) medium of value. B) medium of exchange. C) store of exchange. D) store of value. E) unit of account. Answer: D Diff: 1 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money.

4) In a world where Say's Law always holds true, which function of money seems crazy? A) medium of value B) medium of exchange C) store of value D) store of exchange E) unit of account Answer: C Diff: 1 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 5) In a world where Say's Law always holds true, which function(s) of money still make sense are not crazy? A) unit of account and store of value B) unit of account and medium of exchange C) medium of exchange and store of value D) store of value only E) medium of exchange only Answer: B Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 6) Holding money to reduce uncertainty makes sense in A) Keynes' explanation of money as a unit of account. B) Say's explanation of money as a store of value. C) Say's explanation of money as a medium of exchange. D) Keynes' explanation of money as a store of value. E) Say's explanation of money as a unit of account. Answer: D Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money.

7) An rise in interest rates causes a(n) A) decrease in the quantity demanded of money. B) decrease in the opportunity cost of holding money. C) decrease in cost of borrowing money. D) increase in the demand for money. E) decrease in the demand for money. Answer: A Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 8) When the interest rate falls, the A) quantity demanded of money decreases. B) quantity demanded of money increases. C) opportunity cost of holding money increases. D) demand for money decreases. E) demand for money increases. Answer: B Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 9) When the interest rate falls, A) there is movement up along the money demand curve. B) there is movement down along the money demand curve. C) the opportunity cost of holding money increases. D) the money demand curve shifts leftward. E) the money demand curve shifts rightward. Answer: B Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 10) When real GDP decreases, A) there is movement up along the money demand curve. B) there is movement down along the money demand curve. C) the opportunity cost of holding money decreases. D) the money demand curve shifts leftward. E) the money demand curve shifts rightward. Answer: D Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 433 Copyright © 2021 Pearson Canada Inc.

11) When real GDP decreases, the A) quantity demanded of money decreases. B) quantity demanded of money increases. C) opportunity cost of holding money decreases. D) demand for money decreases. E) demand for money increases. Answer: D Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 12) When average prices fall, the A) quantity demanded of money decreases. B) quantity demanded of money increases. C) purchasing power of money decreases. D) demand for money increases. E) demand for money decreases. Answer: E Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 13) When average prices fall, A) there is movement up along the money demand curve. B) there is movement down along the money demand curve. C) the opportunity cost of holding money decreases. D) the money demand curve shifts leftward. E) the money demand curve shifts rightward. Answer: D Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money.

14) When average prices rise, the A) quantity demanded of money decreases. B) quantity demanded of money increases. C) purchasing power of money increases. D) demand for money increases. E) demand for money decreases. Answer: D Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 15) When average prices rise, A) there is movement up along the money demand curve. B) there is movement down along the money demand curve. C) the opportunity cost of holding money decreases. D) the money demand curve shifts leftward. E) the money demand curve shifts rightward. Answer: E Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 16) When average prices rise, the A) quantity demanded of money decreases. B) quantity demanded of money increases. C) purchasing power of money decreases. D) quantity of money supplied increases. E) quantity of money supplied decreases. Answer: C Diff: 3 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 17) The law of demand for money says A) supply creates its own demand. B) as the interest rate rises, the quantity of money demanded decreases. C) as the interest rate rises, money demand decreases. D) as the price level rises, the quantity of money demanded decreases. E) as the price level rises, money demand decreases. Answer: B Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 435 Copyright © 2021 Pearson Canada Inc.

18) The law of demand for money says A) supply creates its own demand. B) as the price of money rises, the quantity of money demanded decreases. C) as the price of money rises, money demand decreases. D) as the price level rises, the quantity of money demanded decreases. E) as the price level rises, money demand decreases. Answer: B Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 19) Bonds offer a(n) A) uncertain stream of payments and a fixed time period. B) uncertain stream of payments and a fixed price. C) fixed stream of payments and a fixed time period. D) uncertain stream of payments and an uncertain price. E) fixed stream of payments and an uncertain price. Answer: C Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 20) A barter economy has a problem known as A) the mismatch between aggregate supply and aggregate demand. B) fundamental uncertainty about the future. C) scarcity. D) mutually beneficial trade. E) the double coincidence of wants. Answer: E Diff: 1 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money.

21) On which function of money do J.B. Say and J.M. Keynes disagree? A) unit of value B) medium of exchange C) unit of account D) store of value E) liquidity Answer: D Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 22) An increase in real GDP increases the A) demand for money. B) supply of money. C) velocity of money. D) quantity of money demanded. E) quantity of money supplied. Answer: A Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 23) An decrease in real GDP decreases the A) demand for money. B) supply of money. C) velocity of money. D) quantity of money demanded. E) quantity of money supplied. Answer: A Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 24) When Vladimir sells bonds and gets money, his liquidity A) decreases and he gives up interest. B) increases and he gives up interest. C) decreases and he gains interest. D) increases and he gains interest. E) and interest do not change. Answer: B Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 437 Copyright © 2021 Pearson Canada Inc.

25) When Vladimir uses money to buy bonds, his liquidity A) decreases and he gives up interest. B) increases and he gives up interest. C) decreases and he gains interest. D) increases and he gains interest. E) and interest do not change. Answer: C Diff: 2 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 26) Liquidity is the A) opportunity cost of holding money. B) ease of converting assets into the economy's medium of exchange. C) price of money. D) ease of converting money into bonds. E) state of being drunk. Answer: B Diff: 2 Type: MC Page Ref: 242-249 Skill: Recall Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 27) Liquidity is the A) opportunity cost of holding bonds. B) ease of converting money into bonds. C) price of money. D) opportunity cost of holding money. E) state of being sober. Answer: A Diff: 2 Type: MC Page Ref: 242-249 Skill: Recall Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 28) In a barter economy with four products there are ________ unique relative prices. A) 16 B) 6 C) 4 D) 8 E) 12 Answer: B Diff: 3 Type: MC Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 438 Copyright © 2021 Pearson Canada Inc.

29) Money can be anything, as long as it is acceptable as a means of paying for products and services. Answer: TRUE Diff: 1 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 30) Bonds pay interest and provide liquidity. Answer: FALSE Diff: 1 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 31) Bonds are the most important type of interest-bearing asset in the world. Answer: TRUE Diff: 2 Type: TF Page Ref: 242-249 Skill: Recall Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 32) J.M. Keynes believes people hold money as protection against uncertainty. Answer: TRUE Diff: 1 Type: TF Page Ref: 242-249 Skill: Recall Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 33) J.B. Say and J.M. Keynes disagree about money's role as a unit of account. Answer: FALSE Diff: 1 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 34) As a unit of account, money allows you to easily see the relative prices of all products and services. Answer: TRUE Diff: 1 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money.

35) The interest rate is the opportunity cost of holding money. Answer: TRUE Diff: 1 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 36) The opportunity cost of holding bonds is interest. Answer: FALSE Diff: 1 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 37) The opportunity cost of holding bonds is liquidity. Answer: TRUE Diff: 1 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 38) The opportunity cost of holding money is liquidity. Answer: FALSE Diff: 1 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 39) Liquidity is the opportunity cost of holding money. Answer: FALSE Diff: 1 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 40) Liquidity is the opportunity cost of holding bonds. Answer: TRUE Diff: 1 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money.

41) If the price level falls by 10 percent and real GDP falls by 10 percent, the demand for money will be unchanged. Answer: FALSE Diff: 3 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 42) People hold all their wealth in stocks and bonds only. Answer: FALSE Diff: 1 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 43) In the simple examples about the demand for money, people hold wealth either as bonds or money. Answer: TRUE Diff: 1 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 44) A bond is a financial asset that offers fixed payments over an uncertain time period. Answer: FALSE Diff: 2 Type: TF Page Ref: 242-249 Skill: Recall Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 45) A bond has fixed payments and a variable market price. Answer: TRUE Diff: 2 Type: TF Page Ref: 242-249 Skill: Recall Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 46) When the price level rises, the demand for money decreases. Answer: FALSE Diff: 2 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money.

47) When the price level rises, the demand curve for money shifts leftward. Answer: FALSE Diff: 2 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 48) When the price level falls, the demand for money decreases. Answer: TRUE Diff: 2 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 49) When the price level falls, the demand curve for money shifts leftward. Answer: TRUE Diff: 2 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 50) When interest rates fall, the demand for money increases. Answer: FALSE Diff: 2 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 51) When interest rates fall, the demand curve for money shifts rightward. Answer: FALSE Diff: 2 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 52) When interest rates fall, the demand curve for money shifts leftward. Answer: FALSE Diff: 2 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money.

53) If the price level falls by 10 percent and real GDP increases by 10 percent, then the demand for money will likely be unchanged. Answer: TRUE Diff: 3 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 54) The law of demand for money works as long as average prices and real GDP do not change. Answer: TRUE Diff: 2 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 55) It is always a smart choice to hold your wealth in the form of interest-bearing bonds. Answer: FALSE Diff: 2 Type: TF Page Ref: 242-249 Skill: Applied Objective: 9.1 Explain three functions of money and why people give up interest on bonds to demand money. 9.2 Legal Counterfeiting? Supply of Money 1) When Navdeep transfers $1,000 from her savings account to her chequing account, A) M1+ increases and M2+ decreases. B) M1+ increases and M2+ is unchanged. C) M1+ increases and M2+ increases. D) M1+ is unchanged and M2+ decreases. E) M1+ is unchanged and M2+ is unchanged. Answer: B Diff: 3 Type: MC Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 2) When the interest rate falls, A) the quantity of money supplied increases. B) the supply of money increases. C) the quantity of money supplied decreases. D) the supply of money decreases. E) none of the above are true. Answer: E Diff: 2 Type: MC Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 443 Copyright © 2021 Pearson Canada Inc.

3) When the interest rate falls, A) the quantity of money supplied increases. B) the supply of money curves shifts rightward. C) the quantity of money supplied decreases. D) the supply of money curve shifts leftward. E) none of the above are true. Answer: E Diff: 2 Type: MC Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 4) A VISA credit card is A) deposit money. B) fiat money. C) not money. D) convertible paper money. E) commodity money. Answer: C Diff: 2 Type: MC Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 5) When Komal gathers up all of her loose change and deposits it in her chequing account, the immediate effect is A) both M1+ and M2+ increase. B) M1+ increases and M2+ is unchanged. C) M2+ increases and M1+ is unchanged. D) both M1+ and M2+ are unchanged. E) both M1+ and M2+ decrease. Answer: D Diff: 3 Type: MC Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money.

6) After winning $100 on a trip to Las Vegas, Hugo returns to Canada and deposits $60 in his savings account and $40 in his chequing account. The immediate effect is A) M1+ increases by $60. B) M1+ increases by $100. C) M2+ is unchanged. D) M1+ is unchanged. E) M2+ increases by $100. Answer: E Diff: 3 Type: MC Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 7) Reserves held by Canadian banks represent ________ percent of the value of all demand deposits. A) less than 1 B) 1 C) 5 D) 10 E) more than 10 Answer: A Diff: 2 Type: MC Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 8) A debit card is A) deposit money. B) not money. C) convertible paper money. D) commodity money. E) fiat money. Answer: B Diff: 2 Type: MC Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money.

9) Most money today is A) credit money. B) deposit money. C) convertible paper money. D) commodity money. E) fiat money. Answer: B Diff: 2 Type: MC Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 10) Canadian currency today is A) credit money. B) deposit money. C) convertible paper money. D) commodity money. E) fiat money. Answer: E Diff: 2 Type: MC Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 11) Useful commodity money has the qualities of being easy to carry, to measure, and to divide into fractions. Which function of money is not affected by these qualities? A) medium of value B) medium of exchange C) store of exchange D) store of value E) unit of account Answer: D Diff: 2 Type: MC Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money.

12) Which is not a role of the Bank of Canada? A) conducting monetary policy B) issuing currency C) acting as banker to the chartered banks D) acting as banker to the government E) printing currency Answer: E Diff: 2 Type: MC Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 13) Last week Clinton paid off $10,000 on his student loan. As a result, A) both M1+ and M2+ increased. B) the money supply was not affected. C) M1+ increased but M2+ decreased. D) the money supply decreased. E) the money supply increased. Answer: D Diff: 3 Type: MC Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 14) The Bank of Canada preserves the stability of the financial system by A) serving as a lender of last resort. B) issuing currency. C) acting as banker to the government. D) managing the money supply. E) holding reserves of foreign currency. Answer: A Diff: 2 Type: MC Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money.

15) By making loans to banks that are short of funds because borrowers went bankrupt, the Bank of Canada is A) issuing currency. B) serving as a lender of last resort. C) acting as banker to the government. D) managing the money supply. E) conducting monetary policy. Answer: B Diff: 2 Type: MC Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 16) Suppose you deposit $2,000 cash in your bank. The bank desires to hold 20 percent of all deposits as reserves. What amount of new loans will your bank create immediately after you make the deposit? A) $400. B) $8,000. C) $1,600. D) $2,000. E) $10,000. Answer: C Diff: 3 Type: MC Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 17) When cash is deposited in a chartered bank, the bank makes new loans. This, A) increases currency in circulation. B) has no effect on currency in circulation. C) increases M1+. D) decreases M1+. E) has no effect on M1+. Answer: C Diff: 3 Type: MC Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money.

18) A bank run A) can happen when the likelihood of one depositor asking for her money is not influenced by other depositors asking for their money. B) occurs when many customers want to repay their loans at the same time. C) occurs when many customers want to take out new loans at the same time. D) can happen when the likelihood of one depositor asking for her money is influenced by other depositors asking for their money. E) is the Scotiabank Marathon. Answer: D Diff: 2 Type: MC Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 19) There is a tradeoff in any banking system between A) M1+ and M2+. B) making more high risk loans and earning lower profits. C) the supply of money and the demand for money. D) profits and collateral. E) holding a larger fraction of reserves and earning lower profits. Answer: E Diff: 3 Type: MC Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 20) Commodity money has no alternative uses. Answer: FALSE Diff: 2 Type: TF Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 21) Canadian dollar bills used to be convertible into gold, but now are only convertible into silver. Answer: FALSE Diff: 2 Type: TF Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money.

22) Canadian dollar bills used to be convertible into gold, but now are valuable simply because the government says they are. Answer: TRUE Diff: 1 Type: TF Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 23) Debit cards are an example of deposit money. Answer: FALSE Diff: 2 Type: TF Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 24) Playing card money in 17th century New France is an example of convertible paper money. Answer: FALSE Diff: 2 Type: TF Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 25) Playing card money in 17th century New France is an example of fiat money. Answer: TRUE Diff: 2 Type: TF Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 26) A chartered bank requires collateral in order to reduce the risk from borrowers defaulting on loans. Answer: TRUE Diff: 2 Type: TF Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 27) A bank run occurs when many depositors withdraw cash at all once. Answer: TRUE Diff: 2 Type: TF Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money.

28) A bank run can happen when the likelihood of one depositor asking for his money is not influenced by other depositors asking for their money. Answer: FALSE Diff: 2 Type: TF Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 29) A bank run can happen when the likelihood of one depositor asking for his money is influenced by other depositors asking for their money. Answer: TRUE Diff: 2 Type: TF Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 30) Banks face a tradeoff between profits and prudence. Answer: TRUE Diff: 2 Type: TF Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 31) Chartered banks hold Government of Canada bonds as assets. Answer: TRUE Diff: 2 Type: TF Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 32) Currency in circulation represents around 9 percent of the M1+ money supply. Answer: TRUE Diff: 2 Type: TF Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 33) Reserves held by the Canadian banks represent around 9 percent of demand deposits. Answer: FALSE Diff: 2 Type: TF Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money.

34) Reserves held by the Canadian banks represent less than 1 percent of demand deposits. Answer: TRUE Diff: 2 Type: TF Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 35) The money supply decreases when a bank loan is paid off. Answer: TRUE Diff: 2 Type: TF Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 36) The supply of money increases when the interest rate rises. Answer: FALSE Diff: 2 Type: TF Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 37) The quantity of money supplied increases when the interest rate rises. Answer: TRUE Diff: 2 Type: TF Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 38) If the fraction of deposits held as reserves increases, then the money supply will decrease. Answer: TRUE Diff: 3 Type: TF Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 39) If the fraction of deposits held as reserves decreases, then the money supply will decrease. Answer: FALSE Diff: 3 Type: TF Page Ref: 250-257 Skill: Applied Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money.

40) The Bank of Canada maintains the stability and liquidity of the financial system because of its role as the banker to the Government of Canada. Answer: FALSE Diff: 3 Type: TF Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 41) Liquid assets earn a higher interest rate than do riskier loans to consumers. Answer: FALSE Diff: 3 Type: TF Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 42) Liquid assets earn a lower interest rate than do riskier loans to consumers. Answer: TRUE Diff: 3 Type: TF Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money. 43) The money supply in Canada is determined entirely by the Bank of Canada. Answer: FALSE Diff: 3 Type: TF Page Ref: 250-257 Skill: Recall Objective: 9.2 Identify four forms of money, and describe how the Bank of Canada and chartered banks create money.

9.3 What Is the Price of Money? Interest Rates, Money, and Bonds 1) The interest rate is A) the price of money. B) the opportunity cost of holding money. C) the price for borrowing money. D) compensation for giving up liquidity. E) all of the above. Answer: E Diff: 2 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 2) When interest rates rise, there immediately is an excess A) supply of money and an excess supply of bonds. B) supply of money and an excess demand for bonds. C) demand for money and an excess supply of bonds. D) demand for money and an excess demand for bonds. E) demand for bonds and no demand for money. Answer: B Diff: 2 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 3) Bonds do not promise a fixed A) payment per year. B) value at purchase. C) value when time period is up. D) percentage of interest. E) time period. Answer: D Diff: 2 Type: MC Page Ref: 258-261 Skill: Recall Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate.

4) Bonds A) are the most important type of loanable funds. B) can be bought and sold in bond markets after they are issued. C) have prices that can change from the original value of the bond D) determine long-term interest rates E) are all of the above. Answer: E Diff: 1 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 5) When there is an excess supply of money, bond prices A) fall and the price of money falls. B) rise and the price of money rises. C) rise and the price of money falls. D) fall and the price of money rises. E) fall and the interest rate rises. Answer: C Diff: 2 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 6) When there is an excess demand for money, bond prices A) fall and the price of money falls. B) fall and the price of money rises. C) fall and the interest rate falls. D) rise and the interest rate falls. E) rise and the interest rate rises. Answer: B Diff: 2 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 7) When there is an excess demand for bonds, bond prices A) rise and the price of money falls. B) rise and the price of money rises. C) fall and the interest rate rises. D) fall and the interest rate falls. E) fall and the price of money rises. Answer: A Diff: 2 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 455 Copyright © 2021 Pearson Canada Inc.

8) When there is an excess supply of bonds, bond prices A) rise and the price of money falls. B) rise and the price of money rises. C) fall and the interest rate rises. D) fall and the interest rate falls. E) fall and the price of money falls. Answer: C Diff: 2 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 9) When the money supply increases, bond prices A) fall and the price of money falls. B) rise and interest rates rise. C) fall and the price of money rises. D) rise and interest rates fall. E) fall and interest rates rise. Answer: D Diff: 2 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 10) When the money supply decreases, bond prices A) rise and the price of money falls. B) fall and the price of money falls. C) rise and interest rates rise. D) rise and interest rates fall. E) fall and interest rates rise. Answer: E Diff: 2 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 11) When money demand increases, bond prices A) fall and interest rates rise. B) fall and the price of money falls. C) rise and the price of money falls. D) rise and interest rates rise. E) rise and interest rates fall. Answer: A Diff: 2 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 456 Copyright © 2021 Pearson Canada Inc.

12) When money demand decreases, bond prices A) rise and the price of money rises. B) rise and interest rates fall. C) fall and the price of money rises. D) fall and interest rates fall. E) fall and interest rates rise. Answer: B Diff: 2 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 13) When the fraction of deposits banks hold as reserves increases, bond prices A) rise and the price of money falls. B) fall and the price of money falls. C) fall and interest rates rise. D) rise and interest rates fall. E) rise and interest rates rise. Answer: C Diff: 3 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 14) When the fraction of deposits banks hold as reserves decreases, bond prices A) rise and the price of money falls. B) fall and the price of money falls. C) fall and interest rates rise. D) fall and interest rates fall. E) rise and interest rates rise. Answer: A Diff: 3 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 15) Compared to money, bonds are A) less liquid and less risky. B) less liquid and riskier. C) more liquid and less risky. D) more liquid and riskier. E) less liquid and of equal risk. Answer: B Diff: 2 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 457 Copyright © 2021 Pearson Canada Inc.

16) Interests rates A) are usually higher on short-term bonds than on long-term bonds. B) for short-term bonds tend to rise when interest rates for long-term bonds fall. C) for short-term bonds tend to fall when interest rates for long-term bonds rise. D) are usually lower on short-term bonds than on long-term bonds. E) are usually higher on low-risk bonds and lower on high-risk bonds. Answer: D Diff: 2 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 17) Interests rates A) are usually higher on short-term bonds than on long-term bonds. B) for short-term bonds tend to rise when interest rates for long-term bonds fall. C) for short-term bonds tend to fall when interest rates for long-term bonds rise. D) are usually higher on low-risk bonds and lower on high-risk bonds. E) for short-term and long-term bonds tend to move together. Answer: E Diff: 2 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 18) Interests rates A) are usually higher on short-term bonds than on long-term bonds. B) are usually lower on low-risk bonds and higher on high-risk bonds. C) for short-term bonds tend to fall when interest rates for long-term bonds rise. D) are usually higher on low-risk bonds and lower on high-risk bonds. E) for short-term bonds tend to rise when interest rates for long-term bonds fall. Answer: B Diff: 2 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate.

19) You pay $10,000 for a one-year bond with an original value of $10,000 and a single fixed payment of $800 at the end of the year. You hold the bond until the year is up, but during that time, the market price of the bond falls to $8,000. The interest rate on your investment is A) 80 percent. B) 8 percent. C) 10 percent. D) 100 percent. E) higher than interest rates on similar bonds at the end of the year. Answer: B Diff: 3 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 20) Paola pays $10,000 for a one-year bond with an original value of $10,000 and a single fixed payment of $800 at the end of the year. During the year, Paola unexpectedly needs cash. She sells the bond to Parminder, at the market price of the bond which fell to $8,000. If Parminder keeps the bond to the end of the year, the interest rate on his investment is A) 80 percent. B) 8 percent. C) 10 percent. D) 100 percent. E) higher than interest rates on similar bonds at the end of the year. Answer: C Diff: 3 Type: MC Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 21) The interest rate is the opportunity cost of holding money. Answer: TRUE Diff: 2 Type: TF Page Ref: 258-261 Skill: Recall Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 22) The interest rate is the opportunity cost of holding bonds. Answer: FALSE Diff: 2 Type: TF Page Ref: 258-261 Skill: Recall Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate.

23) A bond does not promise a fixed interest rate. Answer: TRUE Diff: 1 Type: TF Page Ref: 258-261 Skill: Recall Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 24) A bond does promises a fixed interest rate. Answer: FALSE Diff: 1 Type: TF Page Ref: 258-261 Skill: Recall Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 25) A bond does not promise fixed dollar payments. Answer: FALSE Diff: 1 Type: TF Page Ref: 258-261 Skill: Recall Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 26) A bond promises fixed dollar payments. Answer: FALSE Diff: 1 Type: TF Page Ref: 258-261 Skill: Recall Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 27) A one-year bond with a $10,000 original value offers a single fixed payment of $800 at the end of the year. You buy this bond for $8,000 on the bond market. The interest rate on your investment will be 10 percent. Answer: TRUE Diff: 2 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 28) A one-year bond with a $10,000 original value offers a single fixed payment of $800 at the end of the year. You buy this bond for $8,000 on the bond market. The interest rate on your investment will be 8 percent. Answer: FALSE Diff: 2 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate.

29) A one-year bond with a $10,000 original value offers a single fixed payment of $400 at the end of the year. You buy this bond for $8,000 on the bond market. The interest rate on your investment will be 5 percent. Answer: TRUE Diff: 2 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 30) A one-year bond with a $10,000 original value offers a single fixed payment of $400 at the end of the year. You buy this bond for $8,000 on the bond market. The interest rate on your investment will be 4 percent. Answer: FALSE Diff: 2 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 31) You pay $10,000 for a one-year bond with a $10,000 original value and a single fixed payment of $400 at the end of the year. You hold the bond until the year is up, but during that time, the market price of the bond falls to $8,000. The interest rate on your investment will be 5 percent. Answer: FALSE Diff: 3 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 32) You pay $10,000 for a one-year bond with a $10,000 original value and a single fixed payment of $400 at the end of the year. You hold the bond until the year is up, but during that time, the market price of the bond falls to $8,000. The interest rate on your investment will be 4 percent. Answer: TRUE Diff: 3 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 33) When the money supply increases, interest rates fall and bond prices rise. Answer: TRUE Diff: 2 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate.

34) When the money supply decreases, interest rates fall and bond prices rise. Answer: FALSE Diff: 2 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 35) When the fraction of deposits banks hold as reserves increases, interest rates fall and bond prices rise. Answer: FALSE Diff: 3 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 36) When the fraction of deposits banks hold as reserves decreases, interest rates fall and bond prices rise. Answer: TRUE Diff: 3 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 37) When money demand increases, interest rates rise and bond prices fall. Answer: TRUE Diff: 2 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 38) When money demand decreases, interest rates rise and bond prices fall. Answer: FALSE Diff: 2 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 39) When money supply decreases, interest rates fall and bond prices rise. Answer: FALSE Diff: 2 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate.

40) When money supply increases, interest rates rise and bond prices fall. Answer: FALSE Diff: 2 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 41) Interest rates on different financial assets tend to all rise together and fall together. Answer: TRUE Diff: 2 Type: TF Page Ref: 258-261 Skill: Recall Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 42) Long-term bonds usually have higher interest rates than short-term bonds. Answer: TRUE Diff: 1 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 43) Long-term bonds usually have lower interest rates than short-term bonds. Answer: FALSE Diff: 1 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 44) High-risk bonds usually have lower interest rates than low-risk bonds. Answer: FALSE Diff: 2 Type: TF Page Ref: 258-261 Skill: Recall Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 45) High-risk bonds usually have higher interest rates than low-risk bonds. Answer: TRUE Diff: 2 Type: TF Page Ref: 258-261 Skill: Recall Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate.

46) High-liquidity bonds usually have lower interest rates than low-liquidity bonds. Answer: TRUE Diff: 2 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 47) High-liquidity bonds usually have higher interest rates than low-liquidity bonds. Answer: FALSE Diff: 2 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 48) As a store of value, bonds are less liquid than money. Answer: TRUE Diff: 1 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 49) As a store of value, bonds are more liquid than money. Answer: FALSE Diff: 1 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 50) As a store of value, bonds are riskier than money. Answer: TRUE Diff: 1 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate. 51) As a store of value, bonds are less risky than money. Answer: FALSE Diff: 1 Type: TF Page Ref: 258-261 Skill: Applied Objective: 9.3 Relate bond prices and interest rates, and explain how money and loanable funds markets determine the interest rate.

9.4 Does Money Make the Real World Go Around? Domestic Transmission Mechanism from Money to Real GDP 1) The connection between changes in money markets and changes in aggregate demand is called the A) Phillips Curve. B) real balances effect. C) money multiplier. D) monetary transmission mechanism. E) quantity theory of money. Answer: D Diff: 1 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 2) The quantity theory of money suggests that changes in the money supply have direct effects on A) real GDP. B) consumption. C) investment. D) inflation. E) the velocity of money. Answer: D Diff: 1 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 3) The most important part of the monetary transmission mechanism is the effect of A) the demand for money. B) the supply of money. C) interest rates. D) consumption spending. E) business investment spending. Answer: C Diff: 1 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism.

4) Changes in the money supply do not directly or indirectly affect A) aggregate supply. B) the price level. C) consumption. D) investment. E) aggregate demand. Answer: A Diff: 1 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 5) Lower interest rates are a A) positive aggregate supply shock. B) negative aggregate supply shock. C) positive aggregate demand shock. D) negative aggregate demand shock. E) positive aggregate demand shock and a positive aggregate supply shock. Answer: C Diff: 1 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 6) Higher interest rates are a A) positive aggregate supply shock. B) negative aggregate supply shock. C) positive aggregate demand shock. D) negative aggregate demand shock. E) negative aggregate demand shock and a negative aggregate supply shock. Answer: D Diff: 2 Type: MC Page Ref: 262-264 Skill: Recall Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism.

7) Through the domestic monetary transmission mechanism, increases in the money supply cause A) lower interest rates, which are a positive aggregate demand shock. B) lower interest rates, which are a negative aggregate demand shock. C) lower interest rates, which are a positive aggregate supply shock. D) higher interest rates, which are a negative aggregate demand shock. E) higher interest rates, which are a positive aggregate demand shock. Answer: A Diff: 2 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 8) Through the domestic monetary transmission mechanism, decreases in the money supply cause A) higher interest rates, which are a positive aggregate demand shock. B) higher interest rates, which are a negative aggregate demand shock. C) higher interest rates, which are a negative aggregate supply shock. D) lower interest rates, which are a negative aggregate demand shock. E) lower interest rates, which are a positive aggregate demand shock. Answer: B Diff: 2 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 9) Through the domestic monetary transmission mechanism, increases in money demand cause A) lower interest rates, which are a positive aggregate demand shock. B) higher interest rates, which are a positive aggregate demand shock. C) higher interest rates, which are a negative aggregate supply shock. D) lower interest rates, which are a negative aggregate demand shock. E) higher interest rates, which are a negative aggregate demand shock. Answer: E Diff: 2 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism.

10) Through the domestic monetary transmission mechanism, decreases in money demand cause A) lower interest rates, which are a positive demand shock. B) higher interest rates, which are a positive demand shock. C) higher interest rates, which are a negative supply shock. D) lower interest rates, which are a negative demand shock. E) higher interest rates, which are a negative demand shock. Answer: A Diff: 2 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 11) Through the domestic monetary transmission mechanism, lower interest rates cause A) inflation and decreased unemployment. B) deflation and increased unemployment. C) deflation and decreased unemployment. D) inflation and increased unemployment. E) none of the above. Answer: A Diff: 2 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 12) Through the domestic monetary transmission mechanism, increases in money demand cause A) inflation and increased unemployment. B) deflation and increased unemployment. C) deflation and decreased unemployment. D) inflation and decreased unemployment. E) none of the above. Answer: B Diff: 3 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 13) Through the domestic monetary transmission mechanism, decreases in money demand cause A) inflation and increased unemployment. B) deflation and increased unemployment. C) deflation and decreased unemployment. D) inflation and decreased unemployment. E) none of the above. Answer: D Diff: 3 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 468 Copyright © 2021 Pearson Canada Inc.

14) Through the domestic monetary transmission mechanism, higher interest rates cause A) inflation and decreased unemployment. B) deflation and increased unemployment. C) deflation and decreased unemployment. D) inflation and increased unemployment. E) none of the above. Answer: B Diff: 3 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 15) Through the domestic monetary transmission mechanism, lower interest rates cause A) increased real GDP and decreased unemployment. B) decreased real GDP and increased unemployment. C) increased real GDP and increased unemployment. D) decreased real GDP and decreased unemployment. E) increased real GDP and no change in unemployment. Answer: A Diff: 3 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 16) Through the domestic monetary transmission mechanism, decreases in money demand cause A) increased real GDP and increased unemployment. B) decreased real GDP and increased unemployment. C) increased real GDP and decreased unemployment. D) decreased real GDP and decreased unemployment. E) increased real GDP and no change in unemployment. Answer: C Diff: 3 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism.

17) Through the domestic monetary transmission mechanism, higher interest rates cause A) increased real GDP and decreased unemployment. B) decreased real GDP and increased unemployment. C) increased real GDP and increased unemployment. D) decreased real GDP and decreased unemployment. E) decreased real GDP and no change in unemployment. Answer: B Diff: 3 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 18) Through the domestic monetary transmission mechanism, increases in money demand cause A) increased real GDP and decreased unemployment. B) decreased real GDP and no change in unemployment. C) increased real GDP and increased unemployment. D) decreased real GDP and decreased unemployment. E) decreased real GDP and increased unemployment. Answer: E Diff: 3 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 19) Through the domestic monetary transmission mechanism, higher interest rates cause A) inflation and increased real GDP. B) inflation and decreased real GDP. C) deflation and increased real GDP. D) deflation and decreased real GDP. E) none of the above. Answer: D Diff: 3 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 20) Through the domestic monetary transmission mechanism, increases in money demand cause A) inflation and increased real GDP. B) deflation and decreased real GDP. C) deflation and increased real GDP. D) inflation and decreased real GDP. E) none of the above. Answer: B Diff: 3 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 470 Copyright © 2021 Pearson Canada Inc.

21) Through the domestic monetary transmission mechanism, decreases in money demand cause A) inflation and increased real GDP. B) inflation and decreased real GDP. C) deflation and increased real GDP. D) deflation and decreased real GDP. E) none of the above. Answer: A Diff: 3 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 22) Through the domestic monetary transmission mechanism, lower interest rates cause A) inflation and increased real GDP. B) inflation and decreased real GDP. C) deflation and increased real GDP. D) deflation and decreased real GDP. E) none of the above. Answer: A Diff: 3 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 23) Decreases in the fraction of deposits that banks hold as reserves A) create a negative demand shock. B) create a positive demand shock. C) create a positive supply shock. D) create a negative supply shock. E) have no impact on aggregate supply or aggregate demand. Answer: B Diff: 3 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 24) Increases in the fraction of deposits that banks hold as reserves A) create a negative demand shock. B) create a positive demand shock. C) create a positive supply shock. D) create a negative supply shock. E) have no impact on aggregate supply or aggregate demand. Answer: A Diff: 3 Type: MC Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 471 Copyright © 2021 Pearson Canada Inc.

25) An economy with money is more productive than a barter economy. Answer: TRUE Diff: 1 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 26) In a market economy based on money, changes in the demand or supply of money affect real GDP. Answer: TRUE Diff: 1 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 27) Money does not directly increase aggregate supply or directly contribute to economic growth. Answer: TRUE Diff: 1 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 28) Money contributes to economic growth by increasing aggregate supply. Answer: FALSE Diff: 1 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 29) The monetary transmission mechanism describes how the impact of money is transmitted to prices. Answer: FALSE Diff: 2 Type: TF Page Ref: 262-264 Skill: Recall Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 30) The monetary transmission mechanism describes how the impact of money is transmitted to real GDP. Answer: TRUE Diff: 2 Type: TF Page Ref: 262-264 Skill: Recall Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism.

31) Decreases in the money supply cause higher interest rates, lower bond prices and a negative demand shock. Answer: TRUE Diff: 2 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 32) The link from money and bond markets to aggregate demand is called the monetary transmission mechanism. Answer: TRUE Diff: 2 Type: TF Page Ref: 262-264 Skill: Recall Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 33) Higher interest rates are a positive demand shock. Answer: FALSE Diff: 1 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 34) Higher interest rates are a negative demand shock. Answer: TRUE Diff: 1 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 35) Lower interest rates are a positive demand shock. Answer: TRUE Diff: 1 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 36) Lower interest rates are a negative demand shock. Answer: FALSE Diff: 1 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism.

37) Increases in the money supply cause lower interest rates and a negative demand shock. Answer: FALSE Diff: 2 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 38) Increases in the money supply cause lower interest rates and a positive demand shock. Answer: TRUE Diff: 2 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 39) Increases in the money supply cause higher interest rates and a negative demand shock. Answer: FALSE Diff: 2 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 40) Increases in the money supply cause higher interest rates and a positive demand shock. Answer: FALSE Diff: 2 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 41) Decreases in the money supply cause lower interest rates and a negative demand shock. Answer: FALSE Diff: 2 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 42) Decreases in the money supply cause lower interest rates and a positive demand shock. Answer: FALSE Diff: 2 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism.

43) Decreases in the money supply cause higher interest rates and a negative demand shock. Answer: TRUE Diff: 2 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 44) Decreases in the money supply cause higher interest rates and a positive demand shock. Answer: FALSE Diff: 2 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 45) Increases in money demand do not affect aggregate demand. Answer: FALSE Diff: 2 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 46) Increases in money demand affect aggregate demand. Answer: TRUE Diff: 2 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 47) Increases in the money supply cause higher interest rates, reducing business investment spending. Answer: FALSE Diff: 2 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 48) Increases in the fraction of deposits that banks hold as reserves increase interest rates and reduce borrowing in the loanable funds market. Answer: TRUE Diff: 3 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism.

49) Decreases in the fraction of deposits that banks hold as reserves increase interest rates and create a negative demand shock. Answer: FALSE Diff: 3 Type: TF Page Ref: 262-264 Skill: Applied Objective: 9.4 Explain how money affects real GDP, unemployment, and inflation through the monetary transmission mechanism. 9.5 "Yes, Market Self-Adjust" and "No, Markets Fail Often" as Facebook Friends? How Much Does Money Matter for Business Cycles? 1) Followers of J.M. Keynes argue that money slows markets' adjustments because money gives people a way to A) get rich. B) spend. C) invest. D) consume. E) save. Answer: E Diff: 1 Type: MC Page Ref: 265-268 Skill: Applied Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 2) Modern followers of J.B. Say and J.M. Keynes agree on A) the advantages of money exchange over barter. B) the effect of money on prices and inflation. C) the quantity theory of money. D) the domestic monetary transmission mechanism. E) all of the above. Answer: E Diff: 2 Type: MC Page Ref: 265-268 Skill: Applied Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 3) Modern followers of J.B. Say and J.M. Keynes disagree on how money A) affects the loanable funds market. B) causes inflation. C) improves productivity over a barter economy. D) should be supplied. E) functions as a unit of account. Answer: A Diff: 2 Type: MC Page Ref: 265-268 Skill: Applied Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 476 Copyright © 2021 Pearson Canada Inc.

4) Modern followers of J.B. Say and J.M. Keynes disagree on whether market adjustments to economic shocks are slowed by A) the loanable funds market. B) the R.O.W. C) the government. D) investors. E) consumers. Answer: A Diff: 2 Type: MC Page Ref: 265-268 Skill: Applied Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 5) With which statement does the "Yes - Markets Self-Adjust" camp disagree? A) External supply shocks are the main contributors to business cycles. B) Money and the loanable funds market facilitate the transmission mechanism between interest rates and aggregate demand. C) Money affects external supply shocks. D) Money helps markets adjust to equilibrium. E) When people save more money, lower interest rates increase business investment spending. Answer: C Diff: 3 Type: MC Page Ref: 265-268 Skill: Applied Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 6) The "No - Markets Fail Often" camp believes that A) external supply shocks are the main contributors to business cycles. B) money and the loanable funds market facilitate the transmission mechanism between interest rates and aggregate demand. C) money creates new internal demand shocks. D) money helps markets adjust to equilibrium. E) when people save more money, lower interest rates always increase business investment spending. Answer: C Diff: 3 Type: MC Page Ref: 265-268 Skill: Applied Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles.

7) With which of the following statements would the "No - Markets Fail Often" camp disagree? A) Banks' tension between prudence and profits contributes to business cycles. B) Money gives people a way not to spend. C) Money's store-of-value function contributes to business cycles. D) Money helps markets adjust to equilibrium. E) Money can block the transmission mechanism between interest rates and aggregate demand. Answer: D Diff: 2 Type: MC Page Ref: 265-268 Skill: Applied Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 8) The "Yes - Markets Self-Adjust" camp believes that A) banks' tension between prudence and profits contributes to business cycles. B) money gives people a way not to spend. C) money's store-of-value function contributes to business cycles. D) money helps markets adjust to equilibrium. E) money blocks the transmission mechanism between interest rates and aggregate demand. Answer: D Diff: 3 Type: MC Page Ref: 265-268 Skill: Applied Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 9) Followers of J.B. Say believe that we would be better off in a barter economy. Answer: FALSE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 10) Followers of J.M. Keynes believe that we would be better off in a barter economy. Answer: FALSE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 11) Followers of J.B. Say and J.M. Keynes disagree about whether money harms the loanable funds market. Answer: TRUE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles.

12) Followers of J.B. Say and J.M. Keynes agree that a money economy improves productivity over a barter economy. Answer: TRUE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 13) Followers of J.B. Say and J.M. Keynes agree that money harms the loanable funds market. Answer: FALSE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 14) According to the "Yes - Markets Self-Adjust" camp, money does not affect external supply shocks that are the main source of business cycles. Answer: TRUE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 15) According to the "No - Markets Self-Fail Often" camp, money does not affect external supply shocks that are the main source of business cycles. Answer: FALSE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 16) According to the "Yes - Markets Self-Adjust" camp, money affects external supply shocks that are the main source of business cycles. Answer: FALSE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 17) According to the "No - Markets Self-Fail Often" camp, money affects external supply shocks that are the main source of business cycles. Answer: FALSE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 479 Copyright © 2021 Pearson Canada Inc.

18) According to the "No - Markets Fail Often" camp, money allows savings to flow easily through the loanable funds market to facilitate business borrowing for investment spending. Answer: FALSE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 19) According to the "Yes - Markets Self-Adjust" camp, money allows savings to flow easily through the loanable funds market to facilitate business borrowing for investment spending. Answer: TRUE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 20) The "Yes - Markets Self-Adjust" camp believes that banks' tension between prudence and profits contributes to business cycles. Answer: FALSE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 21) The "No - Markets Fail Often" camp believes that banks' tension between prudence and profits contributes to business cycles. Answer: TRUE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 22) The "Yes - Markets Self-Adjust" camp believes that money creates new internal demand shocks causing business cycles. Answer: FALSE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 23) The "No - Markets Fail Often" camp believes that money creates new internal demand shocks causing business cycles. Answer: TRUE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 480 Copyright © 2021 Pearson Canada Inc.

24) The "Yes - Markets Self-Adjust" camp believes that money helps markets adjust to equilibrium. Answer: TRUE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 25) The "No - Markets Fail Often" camp believes that money helps markets adjust to equilibrium. Answer: FALSE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 26) The "Yes - Markets Self-Adjust" camp believes that money's store-of-value function contributes to business cycles. Answer: FALSE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 27) The "No - Markets Fail Often" camp believes that money's store-of-value function contributes to business cycles. Answer: TRUE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. 28) The "Yes - Markets Self-Adjust" camp believes that money can block the transmission mechanism between interest rates and aggregate demand. Answer: FALSE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles.

29) The "No - Markets Fail Often" camp believes that money can block the transmission mechanism between interest rates and aggregate demand. Answer: TRUE Diff: 2 Type: TF Page Ref: 265-268 Skill: Recall Objective: 9.5 Differentiate the "Yes - Markets Self-Adjust" and "No - Markets Fail Often" positions on the effect of money on business cycles. Macroeconomics for Life: Smart Choices for All?, Updated 2e (Cohen) Chapter 10 Trading Dollars for Dollars? Exchange Rates and Payments with the Rest of the World 10.1 Shuffling Off to Buffalo: Demand and Supply of Canadian Dollars 1) Which statements are true? A higher value of the Canadian dollar makes: 1. R.O.W. imports and assets more expensive for Canadians. 2. R.O.W. imports and assets less expensive for Canadians. 3. Canadian exports and assets more expensive for non-Canadians. 4. Canadian exports and assets less expensive for non-Canadians. A) 1 and 3 B) 1 and 4 C) 2 and 3 D) 2 and 4 E) 2 only Answer: C Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 2) Which statements are true? A lower value of the Canadian dollar makes: 1. R.O.W. imports and assets more expensive for Canadians. 2. R.O.W. imports and assets less expensive for Canadians. 3. Canadian exports and assets more expensive for non-Canadians. 4. Canadian exports and assets less expensive for non-Canadians. A) 1 and 3 B) 1 and 4 C) 2 and 3 D) 2 and 4 E) 1 only 482 Copyright © 2021 Pearson Canada Inc.

Answer: B Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar.

3) Which statements are true? If the exchange rate changes from C$1 = US$0.90 to C$1 = US$1.10, then the: 1. Canadian dollar depreciated against the U.S. dollar. 2. Canadian dollar appreciated against the U.S. dollar. 3. U.S. dollar depreciated against the Canadian dollar. 4. U.S. dollar appreciated against the Canadian dollar. A) 1 and 3 B) 1 and 4 C) 2 and 3 D) 2 and 4 E) 2 only Answer: C Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 4) Which statements are true? If the exchange rate changes from C$1 = US$1.10 to C$1 = US$0.90, then the: 1. Canadian dollar depreciated against the U.S. dollar. 2. Canadian dollar appreciated against the U.S. dollar. 3. U.S. dollar depreciated against the Canadian dollar. 4. U.S. dollar appreciated against the Canadian dollar. A) 1 and 3 B) 1 and 4 C) 2 and 3 D) 2 and 4 E) 1 only Answer: B Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar.

5) Which statements are true? If the exchange rate changes from US$1 = C$1.10 to US$1 = C$0.90, then the: 1. Canadian dollar depreciated against the U.S. dollar. 2. Canadian dollar appreciated against the U.S. dollar. 3. U.S. dollar depreciated against the Canadian dollar. 4. U.S. dollar appreciated against the Canadian dollar. A) 1 and 3 B) 1 and 4 C) 2 and 3 D) 2 and 4 E) 3 only Answer: C Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 6) Which statements are true? If the exchange rate changes from US$1 = C$0.90 to US$1 = C$1.10, then the: 1. Canadian dollar appreciated against the U.S. dollar. 2. Canadian dollar depreciated against the U.S. dollar. 3. U.S. dollar appreciated against the Canadian dollar. 4. U.S. dollar depreciated against the Canadian dollar. A) 1 and 3 B) 1 and 4 C) 2 and 3 D) 2 and 4 E) 3 only Answer: C Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar.

7) When there is excess demand for Canadian dollars in the foreign exchange market, A) competition among sellers raises the exchange rate. B) competition among buyers raises the exchange rate. C) competition among sellers lowers the exchange rate. D) competition among buyers lowers the exchange rate. E) cooperation between buyers and sellers lowers the exchange rate. Answer: B Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 8) When there is a shortage of Canadian dollars in the foreign exchange market, A) competition among sellers raises the exchange rate. B) competition among buyers raises the exchange rate. C) competition among sellers lowers the exchange rate. D) competition among buyers lowers the exchange rate. E) cooperation between buyers and sellers lowers the exchange rate. Answer: B Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 9) When there is excess supply of Canadian dollars in the foreign exchange market, A) competition among sellers raises the exchange rate. B) competition among buyers raises the exchange rate. C) competition among sellers lowers the exchange rate. D) competition among buyers lowers the exchange rate. E) cooperation between buyers and sellers raises the exchange rate. Answer: C Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 10) When there is a surplus of Canadian dollars in the foreign exchange market, A) competition among sellers raises the exchange rate. B) competition among buyers raises the exchange rate. C) competition among sellers lowers the exchange rate. D) competition among buyers lowers the exchange rate. E) cooperation between buyers and sellers raises the exchange rate. Answer: C Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar.

11) According to the law of demand for Canadian dollars, as the exchange rate A) rises, the quantity demanded of Canadian dollars decreases. B) rises, the demand for Canadian dollars decreases. C) falls, the quantity demanded of Canadian dollars decreases. D) falls, the demand for Canadian dollars decreases. E) rises or falls, none of above are true. Answer: A Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 12) According to the law of demand for Canadian dollars, as the exchange rate A) rises, the quantity demanded of Canadian dollars decreases. B) rises, the demand curve for Canadian dollars shifts leftward. C) falls, the quantity demanded of Canadian dollars decreases. D) falls, the demand curve for Canadian dollars shifts leftward. E) rises or falls, none of above are true. Answer: A Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 13) According to the law of supply for Canadian dollars, as the exchange rate A) rises, the quantity supplied of Canadian dollars decreases. B) rises, the supply of Canadian dollars decreases. C) falls, the quantity supplied of Canadian dollars decreases. D) falls, the supply of Canadian dollars decreases. E) rises or falls, none of above are true. Answer: C Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 14) According to the law of supply for Canadian dollars, as the exchange rate A) rises, the quantity supplied of Canadian dollars decreases. B) rises, the supply curve of Canadian dollars shifts leftward. C) falls, the quantity supplied of Canadian dollars decreases. D) falls, the supply curve of Canadian dollars shifts leftward. E) rises or falls, none of above are true. Answer: C Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar.

15) According to the law of demand for Canadian dollars, as the exchange rate A) rises, the quantity demanded of Canadian dollars increases. B) rises, the demand for Canadian dollars increases. C) falls, the quantity demanded of Canadian dollars increases. D) falls, the demand for Canadian dollars increases. E) rises or falls, none of above are true. Answer: C Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 16) According to the law of demand for Canadian dollars, as the exchange rate A) rises, the quantity demanded of Canadian dollars increases. B) rises, the demand curve for Canadian dollars shifts rightward. C) falls, the quantity demanded of Canadian dollars increases. D) falls, the demand curve for Canadian dollars shifts rightward. E) rises or falls, none of above are true. Answer: C Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 17) According to the law of supply for Canadian dollars, as the exchange rate A) rises, the quantity supplied of Canadian dollars increases. B) rises, the supply of Canadian dollars increases. C) falls, the quantity supplied of Canadian dollars increases. D) falls, the supply of Canadian dollars increases. E) rises or falls, none of above are true. Answer: A Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 18) According to the law of supply for Canadian dollars, as the exchange rate A) rises, the quantity supplied of Canadian dollars increases. B) rises, the supply curve of Canadian dollars shifts rightward. C) falls, the quantity supplied of Canadian dollars increases. D) falls, the supply curve of Canadian dollars shifts rightward. E) rises or falls, none of above are true. Answer: A Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar.

19) If C$1.00 = US$0.80, what is the reciprocal exchange rate? A) C$0.80 = US$1.00 B) C$0.80 = US$1.25 C) US$1.00 = C$1.25 D) US$1.00 = C$0.80 E) US$1.00 = C$8.00 Answer: C Diff: 3 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 20) All of the following create a demand for Canadian dollars in the foreign exchange market except A) Susan from Manitoba goes shopping in New York. B) Richard from New York buys a Government of Canada bond. C) Samantha from France buys a bottle of Canadian wine. D) Alexandra from Mexico pays tuition to the University of Montreal. E) Rachel from New Jersey goes on a shopping trip in Toronto. Answer: A Diff: 1 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 21) When Michael from Ontario buys hockey tickets in Michigan to watch the Maple Leafs crush the Red Wings, the effect on the foreign exchange market is a(n) A) increased supply of U.S. dollars. B) increased demand for Canadian dollars. C) increased supply of Canadian dollars. D) decreased supply of U.S. dollars. E) decreased demand for U.S. dollars. Answer: C Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 22) When Michael from Ontario buys hockey tickets in Michigan to watch the Maple Leafs crush the Red Wings, the effect on the foreign exchange market is a A) rightward shift of the supply curve of U.S. dollars. B) rightward shift of the demand curve for Canadian dollars. C) rightward shift of the supply curve of Canadian dollars. D) leftward shift of the supply curve of U.S. dollars. E) leftward shift of the demand curve for U.S. dollars. Answer: C Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 489 Copyright © 2021 Pearson Canada Inc.

23) When Richard from New York buys a Government of Canada bond, the effect on the foreign exchange market is A) increased demand for U.S. dollars. B) decreased demand for Canadian dollars. C) increased supply of Canadian dollars. D) increased demand for Canadian dollars. E) decreased supply of U.S. dollars. Answer: D Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 24) When Richard from New York buys a Government of Canada bond, the effect on the foreign exchange market is a A) rightward shift of the demand curve for U.S. dollars. B) leftward shift of the demand curve for Canadian dollars. C) rightward shift of the supply curve of Canadian dollars. D) rightward shift of the demand curve for Canadian dollars. E) leftward shift of the supply curve of U.S. dollars. Answer: D Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 25) When the Canadian Teachers Pension Plan buys stock in the U.S.-based Apple Corporation, the effect on the foreign exchange market is A) increased demand for Canadian dollars. B) increased supply of Canadian dollars. C) increased supply of U.S. dollars. D) decreased supply of U.S. dollars. E) decreased demand for U.S. dollars. Answer: B Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 26) When the Canadian Teachers Pension Plan buys stock in the U.S.-based Apple Corporation, the effect on the foreign exchange market is a A) rightward shift of the demand curve for Canadian dollars. B) rightward shift of the supply curve of Canadian dollars. C) rightward shift of the supply curve of U.S. dollars. D) leftward shift of the supply curve of U.S. dollars. E) leftward shift of the demand curve for U.S. dollars. Answer: B Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 490 Copyright © 2021 Pearson Canada Inc.

27) An excess supply of Canadian dollars in the foreign exchange market causes the Canadian dollar to A) depreciate, increasing imports. B) depreciate, decreasing exports. C) appreciate, increasing exports. D) appreciate, decreasing exports. E) depreciate, increasing exports. Answer: E Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 28) An excess demand for Canadian dollars in the foreign exchange market causes the Canadian dollar to A) appreciate, increasing imports. B) appreciate, increasing exports. C) depreciate, increasing exports. D) depreciate, decreasing imports. E) depreciate, decreasing exports. Answer: A Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 29) As the value of the Canadian dollar rises in the foreign exchange market, the A) import effect increases the quantity of Canadian dollars supplied. B) import effect increases the quantity of Canadian dollars demanded. C) import effect causes a decrease in imports. D) export effect causes an increase in exports. E) export effect increases the quantity of Canadian dollars demanded. Answer: A Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 30) If the Canadian dollar exchanges for 0.90 U.S. dollars and also for 0.65 Euros, then a U.S. dollar exchanges for A) 1.00 Euros. B) 1.55 Euros. C) 0.25 Euros. D) 1.39 Euros. E) 0.72 Euros. Answer: E Diff: 3 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 491 Copyright © 2021 Pearson Canada Inc.

31) The market in which the currency of one country exchanges for the currency of another country is the A) money market. B) capital market. C) foreign exchange market. D) forward exchange market. E) international trading market. Answer: C Diff: 1 Type: MC Page Ref: 276-283 Skill: Recall Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 32) The quantity of Canadian dollars demanded depends on all of the following except the A) exchange rate. B) Canadian demand for imports from R.O.W. C) interest rates in Canada. D) interest rates in R.O.W. E) expected future exchange rate. Answer: B Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 33) The exchange rate between the Canadian dollar and the British pound is 0.5 pounds per dollar. If a radio sells for 38 pounds in Britain, what is the dollar price of the radio? A) $19 B) $25 C) $38 D) $57 E) $76 Answer: E Diff: 2 Type: MC Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 34) A big wheat harvest that results in record Canadian export sales increases the demand for Canadian dollars in the foreign exchange market. Answer: TRUE Diff: 1 Type: TF Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar.

35) An American investor who buys a Government of Canada bond increases the supply of Canadian dollars in the foreign exchange market. Answer: FALSE Diff: 1 Type: TF Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 36) When a student from Toronto pays her tuition to a American university, the supply of Canadian dollars decreases in the foreign exchange market. Answer: FALSE Diff: 1 Type: TF Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 37) When a student from Toronto pays her tuition to a American university, the demand for U.S. dollars increases in the foreign exchange market. Answer: TRUE Diff: 1 Type: TF Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 38) Excess demand for Canadian dollars in the FOREX market causes the Canadian dollar to depreciate. Answer: FALSE Diff: 2 Type: TF Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 39) Excess supply of Canadian dollars in the FOREX market causes the Canadian dollar to depreciate. Answer: TRUE Diff: 2 Type: TF Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 40) The import effect suggests that when the exchange rate rises, Canadians buy more imported products. Answer: TRUE Diff: 2 Type: TF Page Ref: 276-283 Skill: Recall Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar.

41) The import effect suggests that when the exchange rate falls, Canadians buy more imported products. Answer: FALSE Diff: 2 Type: TF Page Ref: 276-283 Skill: Recall Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 42) The export effect suggests that when the exchange rate falls, demand for Canadian exports increases. Answer: TRUE Diff: 2 Type: TF Page Ref: 276-283 Skill: Recall Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 43) The export effect suggests that when the exchange rate rises, demand for Canadian exports increases. Answer: FALSE Diff: 2 Type: TF Page Ref: 276-283 Skill: Recall Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 44) An exchange rate of C$1.00 = US$0.90 means it takes 90 cents U.S. to buy 1 Canadian dollar. Answer: TRUE Diff: 2 Type: TF Page Ref: 276-283 Skill: Recall Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 45) An exchange rate of C$1.00 = US$0.90 means it takes 90 cents Canadian to buy 1 U.S. dollar. Answer: FALSE Diff: 1 Type: TF Page Ref: 276-283 Skill: Applied Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 46) Non-Canadians' demand for Canadian dollars is a demand for Canadian exports and assets. Answer: TRUE Diff: 2 Type: TF Page Ref: 276-283 Skill: Recall Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 47) Canadians' supply of Canadian dollars is a demand for imports and assets from R.O.W. Answer: TRUE Diff: 2 Type: TF Page Ref: 276-283 Skill: Recall Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 494 Copyright © 2021 Pearson Canada Inc.

48) Canadians' supply of Canadian dollars is a supply of exports and assets to R.O.W. Answer: FALSE Diff: 2 Type: TF Page Ref: 276-283 Skill: Recall Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 49) In the foreign exchange market, the demand for one currency is the supply of another currency. Answer: TRUE Diff: 1 Type: TF Page Ref: 276-283 Skill: Recall Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 50) The Canadian dollar appreciated against the U.S. dollar between 2002 and 2007. Answer: TRUE Diff: 1 Type: TF Page Ref: 276-283 Skill: Recall Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 51) The Canadian dollar appreciated against the U.S. dollar between 1991 and 2002. Answer: FALSE Diff: 1 Type: TF Page Ref: 276-283 Skill: Recall Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 52) A rise in the exchange rate is called a currency depreciation. Answer: FALSE Diff: 1 Type: TF Page Ref: 276-283 Skill: Recall Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar. 53) A fall in the exchange rate is called a currency depreciation. Answer: TRUE Diff: 1 Type: TF Page Ref: 276-283 Skill: Recall Objective: 10.1 Explain how demand and supply determine the value of the Canadian dollar.

10.2 Dancing With Dollars: Fluctuating Exchange Rates 1) The Canadian dollar depreciates if A) Canadian interest rates fall relative to other countries. B) the Canadian inflation rate falls relative to other countries. C) Canadian real GDP increases. D) R.O.W. demand for Canadian exports increases. E) world prices for Canadian resources rise. Answer: A Diff: 2 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 2) The Canadian dollar appreciates if A) Canadian real GDP decreases. B) world prices for Canadian resources fall. C) Canadian interest rates fall relative to other countries. D) the Canadian inflation rate rises relative to other countries. E) speculators believe the Canadian dollar will appreciate in the future. Answer: E Diff: 2 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 3) The Canadian dollar appreciates against the U.S. dollar if A) Canadian interest rates fall relative to U.S. interest rates. B) U.S. interest rates rise relative to Canadian interest rates. C) U.S. demand for Canadian exports decreases. D) prices rise in the U.S. but remain constant in Canada. E) speculators believe the Canadian dollar will depreciate in the future. Answer: D Diff: 2 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 4) A negative demand shock causes the Canadian dollar to depreciate because A) the Canadian interest rate differential increases. B) import spending is reduced. C) investor confidence in Canada is reduced. D) negative demand shocks cause inflation. E) Canadian resources will be less valuable in international markets. Answer: C Diff: 3 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations.

5) A lower inflation rate in Canada relative to other countries causes the Canadian dollar to appreciate because A) Canadian real interest rates fall. B) prices of Canadian resources fall in international markets. C) speculators anticipate depreciation of the Canadian dollar. D) Canadian products and services are relatively cheaper so exports to R.O.W. increase. E) Canadian products and services are relatively cheaper so imports from R.O.W. increase. Answer: D Diff: 2 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 6) When Canadian interest rates fall the A) demand for Canadian dollars in the foreign exchange market increases. B) Canadian inflation rate falls. C) demand for Canadian exports decreases. D) supply of Canadian dollars in the foreign exchange market decreases. E) Canadian dollar depreciates. Answer: E Diff: 2 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 7) When Canadian interest rates fall the A) demand curve for Canadian dollars in the foreign exchange market shifts rightward. B) Canadian inflation rate falls. C) demand for Canadian exports decreases. D) supply curve of Canadian dollars in the foreign exchange market shifts leftward. E) Canadian dollar depreciates. Answer: E Diff: 2 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 8) When most currency speculators expect the Canadian dollar to depreciate, the A) Canadian dollar depreciates. B) Canadian dollar appreciates. C) demand for Canadian dollars increases. D) supply of Canadian dollars decreases. E) Canadian interest rate differential increases. Answer: A Diff: 2 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations.

9) When most currency speculators expect the Canadian dollar to depreciate, the A) Canadian dollar depreciates. B) Canadian dollar appreciates. C) demand curve for Canadian dollars shifts rightward. D) supply curve of Canadian dollars shifts leftward. E) Canadian interest rate differential increases. Answer: A Diff: 2 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 10) When most currency speculators expect the Canadian dollar to appreciate, the A) demand for Canadian dollars decreases. B) supply of Canadian dollars increases. C) demand for Canadian dollars increases. D) demand for Canadian dollars does not change. E) supply of Canadian dollars does not change. Answer: C Diff: 2 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 11) When most currency speculators expect the Canadian dollar to appreciate, the A) demand curve for Canadian dollars shifts leftward. B) supply curve of Canadian dollars shifts rightward. C) demand curve for Canadian dollars shifts rightward. D) demand curve for Canadian dollars does not shift. E) supply curve of Canadian dollars does not shift. Answer: C Diff: 2 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 12) Currency speculators sell Canadian dollars whenever they think that the A) Canadian real interest rates are rising. B) Canadian inflation rate is falling. C) Canadian real GDP is increasing. D) world prices for Canadian resources are falling. E) demand for Canadian dollars is increasing. Answer: D Diff: 2 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations.

13) When the Canadian money supply increases, the A) demand for Canadian dollars decreases. B) supply of Canadian dollars decreases. C) Canadian dollar appreciates in value. D) Canadian interest rates rise. E) velocity of money decreases. Answer: A Diff: 3 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 14) When the Canadian money supply increases, the A) demand curve for Canadian dollars shifts leftward. B) supply curve of Canadian dollars shifts leftward. C) Canadian dollar appreciates in value. D) Canadian interest rates rise. E) velocity of money decreases. Answer: A Diff: 3 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 15) When the Canadian money supply decreases, the A) demand for Canadian dollars decreases. B) supply of Canadian dollars increases. C) Canadian dollar appreciates in value. D) Canadian interest rates fall. E) value of the Canadian dollar does not change. Answer: C Diff: 3 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 16) When the Canadian money supply decreases, the A) demand curve for Canadian dollars shifts leftward. B) supply curve of Canadian dollars shifts rightward. C) Canadian dollar appreciates in value. D) Canadian interest rates fall. E) value of the Canadian dollar does not change. Answer: C Diff: 3 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations.

17) When R.O.W. demand for Canadian exports decreases, the A) Canadian dollar is not affected. B) demand for Canadian dollars increases. C) supply of Canadian dollars decreases. D) Canadian dollar appreciates. E) Canadian dollar depreciates. Answer: E Diff: 3 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 18) When R.O.W. demand for Canadian exports decreases, the A) Canadian dollar is not affected. B) demand curve for Canadian dollars shifts rightward. C) supply curve of Canadian dollars shifts leftward. D) Canadian dollar appreciates. E) Canadian dollar depreciates. Answer: E Diff: 3 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 19) The economic force that causes opposite effect on the value of the Canadian dollar is changes in A) interest rate differentials. B) inflation rate differentials. C) Canadian real GDP. D) R.O.W. demand for Canadian exports. E) expectations. Answer: C Diff: 2 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 20) The economic force that reinforces the effect of other forces on the value of the Canadian dollar is changes in A) interest rate differentials. B) inflation rate differentials. C) Canadian real GDP. D) R.O.W. demand for Canadian exports. E) expectations. Answer: E Diff: 2 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations.

21) The economic force that causes opposite effects on the value of the Canadian dollar is changes in A) interest rate differentials. B) inflation rate differentials. C) world prices for Canadian resource exports. D) Canadian real GDP. E) expectations. Answer: D Diff: 3 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 22) The economic force that reinforces the effect of other forces on value of the Canadian dollar is changes in A) interest rate differentials. B) expectations. C) world prices for Canadian resource exports. D) Canadian real GDP. E) inflation rate differentials. Answer: B Diff: 3 Type: MC Page Ref: 284-290 Skill: Recall Objective: 10.2 Explain five forces causing exchange rate fluctuations. 23) What increases the supply of Canadian dollars in the foreign exchange market? A) An increase in demand for imports from R.O.W. by Canadians. B) A decrease in demand for Canadian exports by non-Canadians. C) The Canadian dollar is expected to appreciate next year. D) U.S. interest rates fall. E) None of the above. Answer: A Diff: 2 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 24) What increases the demand for Canadian dollars in the foreign exchange market? A) An increase in demand for imports from R.O.W. by Canadians. B) A decrease in demand for Canadian exports by non-Canadians. C) The Canadian dollar is expected to appreciate next year. D) U.S. interest rates rise. E) The Canadian dollar is expected to depreciate next year. Answer: C Diff: 2 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations.

25) The Canadian dollar depreciates against the Japanese yen if there is a(n) A) rise in the Canadian interest rate. B) fall in the Canadian interest rate. C) fall in the Japanese interest rate. D) increase in the expected future value of the Canadian dollar. E) increase in the Canadian interest rate differential. Answer: B Diff: 2 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 26) If you think the Canadian dollar will depreciate, you can expect to make money by A) only buying Canadian dollars. B) only buying U.S. dollars. C) only selling Canadian dollars. D) only selling U.S. dollars. E) both buying U.S. dollars and selling Canadian dollars. Answer: E Diff: 3 Type: MC Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 27) A decreasing Canadian inflation rate differential causes the Canadian dollar to appreciate because our exports become relatively cheaper in international markets. Answer: TRUE Diff: 1 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 28) A decreasing Canadian inflation rate differential causes the Canadian dollar to depreciate because our exports become relatively more expensive in international markets. Answer: FALSE Diff: 1 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 29) When most speculators expect the Canadian dollar to appreciate, they increase the supply of our currency in the FOREX market so, the Canadian dollar appreciates. Answer: FALSE Diff: 1 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations.

30) When most speculators expect the Canadian dollar to appreciate, they increase the demand for our currency in the FOREX market so, the Canadian dollar appreciates. Answer: TRUE Diff: 1 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 31) When R.O.W demand for Canadian exports increases, demand for Canadian dollars in the FOREX market increases. Answer: TRUE Diff: 1 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 32) When R.O.W demand for Canadian exports increases, demand for Canadian dollars in the FOREX market decreases. Answer: FALSE Diff: 1 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 33) When world prices for Canadian resource exports fall, demand for Canadian dollars in the FOREX market increases. Answer: FALSE Diff: 2 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 34) When world prices for Canadian resource exports fall, demand for Canadian dollars in the FOREX market decreases. Answer: TRUE Diff: 2 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 35) Currency speculators buy Canadian dollars if they think that world prices for Canadian resources will fall. Answer: FALSE Diff: 2 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations.

36) Currency speculators buy Canadian dollars if they think that world prices for Canadian resources will rise. Answer: TRUE Diff: 2 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 37) An increase in Canadian interest rates relative to other countries causes the Canadian dollar to appreciate. Answer: TRUE Diff: 2 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 38) A decrease in Canadian interest rates relative to other countries causes the Canadian dollar to appreciate. Answer: FALSE Diff: 2 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 39) When Canadian real GDP increases, demand for Canadian dollars in the FOREX market increases. Answer: TRUE Diff: 2 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 40) When Canadian real GDP decreases, demand for Canadian dollars in the FOREX market increases. Answer: FALSE Diff: 3 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 41) When Canadian real GDP decreases, the import effect alone causes the Canadian dollar to depreciate. Answer: FALSE Diff: 3 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations.

42) When Canadian real GDP increases, the growth effect alone causes the Canadian dollar to depreciate. Answer: FALSE Diff: 3 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 43) When Canadian real GDP decreases, the growth effect alone causes the Canadian dollar to depreciate. Answer: TRUE Diff: 3 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 44) An increase in the world price of oil causes the Canadian dollar to appreciate. Answer: TRUE Diff: 3 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 45) Currency speculators sell Canadian dollars if they think that Canadian interest rates will rise. Answer: FALSE Diff: 1 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 46) Currency speculators sell Canadian dollars if they think that Canadian interest rates will fall. Answer: TRUE Diff: 1 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 47) Changes in Canadian GDP is the economic force that causes opposite effects on the value of the Canadian dollar. Answer: TRUE Diff: 2 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 48) Changes in world prices for Canadian resource exports is the economic force that causes opposite effects on the value of the Canadian dollar. Answer: FALSE Diff: 2 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations.

49) Changes in expectations is the economic force that reinforces the effect of other forces on the value of the Canadian dollar. Answer: TRUE Diff: 1 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 50) Changes in Canadian GDP is the economic force that reinforces the effect of other forces on the value of the Canadian dollar. Answer: FALSE Diff: 2 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 51) When Canadian GDP increases, the growth effect usually dominates the import effect on the value of the Canadian dollar. Answer: TRUE Diff: 2 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 52) When Canadian GDP increases, the import effect usually dominates the growth effect on the value of the Canadian dollar. Answer: FALSE Diff: 2 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 53) If investors are confident that the Canadian economy will be strong, they buy Canadian assets, pushing up the value of the Canadian dollar. Answer: TRUE Diff: 2 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations. 54) If investors are confident that the Canadian economy will be strong, they sell Canadian assets to make profits, pushing down the value of the Canadian dollar. Answer: FALSE Diff: 2 Type: TF Page Ref: 284-290 Skill: Applied Objective: 10.2 Explain five forces causing exchange rate fluctuations.

10.3 How Exchange Rates Affect Your Life: International Transmission Mechanism 1) An appreciating Canadian dollar causes a A) negative demand shock. B) positive demand shock. C) positive supply shock. D) negative supply shock. E) stagflation. Answer: A Diff: 1 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 2) A depreciating Canadian dollar causes a A) negative supply shock. B) positive supply shock. C) positive demand shock. D) negative demand shock. E) stagflation. Answer: C Diff: 1 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 3) A depreciating Canadian dollar causes a(n) A) inflationary gap. B) recessionary gap. C) stagflation. D) positive supply shock. E) negative supply shock. Answer: A Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 4) An appreciating Canadian dollar causes a(n) A) inflationary gap. B) stagflation. C) recessionary gap. D) positive supply shock. E) negative supply shock. Answer: C Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation.

5) An appreciating Canadian dollar is a negative demand shock because A) government spending decreases. B) imports decrease. C) business investment spending decreases. D) consumer spending decreases. E) exports decrease. Answer: E Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 6) A depreciating Canadian dollar is a positive demand shock because A) government spending increases. B) imports increase. C) business investment spending increases. D) consumer spending increases. E) exports increase. Answer: E Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 7) The direct impact on Canadian inflation of an exchange rate depreciation occurs because A) higher prices of imports to Canada are inflationary. B) lower prices of Canadian exports are deflationary. C) decreasing net exports decrease aggregate demand. D) increasing net exports increase aggregate demand. E) increasing net exports lead to stagflation. Answer: A Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 8) The direct impact on Canadian inflation of an exchange rate appreciation occurs because A) lower prices of Canadian exports are deflationary. B) lower prices of imports to Canada are deflationary. C) decreasing net exports decrease aggregate demand. D) increasing net exports increase aggregate demand. E) decreasing net exports lead to stagflation. Answer: B Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation.

9) The indirect effect on Canadian inflation of an exchange rate appreciation A) reinforces the direct effect. B) can sometimes offset the direct effect. C) can never offset the direct effect. D) is equal and opposite to the direct effect. E) is inflationary. Answer: A Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 10) The indirect effect on Canadian inflation of an exchange rate depreciation A) can sometimes offset the direct effect. B) reinforces the direct effect. C) can never offset the direct effect. D) is equal and opposite to the direct effect. E) is deflationary. Answer: B Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 11) A recessionary gap results from A) depreciation of the C$ leading to decreased imports. B) appreciation of the C$ leading to increased exports. C) appreciation of the C$ leading to decreased exports. D) depreciation of the C$ leading to increased imports. E) depreciation of the C$ leading to decreased exports. Answer: C Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 12) An inflationary gap results from A) appreciation of the C$ leading to increased exports. B) depreciation of the C$ leading to increased imports. C) appreciation of the C$ leading to decreased exports. D) depreciation of the C$ leading to increased exports. E) appreciation of the C$ leading to decreased imports. Answer: D Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation.

13) A stronger Canadian dollar hurts A) importers. B) exporters. C) Canadians who shop in the U.S. D) Canadian students who attend U.S. universities. E) Americans only. Answer: B Diff: 3 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 14) A weaker Canadian dollar hurts A) importers. B) exporters. C) U.S. tourists in Canada. D) U.S. students who attend Canadian universities. E) none of the above. Answer: A Diff: 3 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 15) As the Canadian dollar weakens, Canadian A) real GDP decreases. B) inflation decreases. C) exports decrease. D) imports increase. E) unemployment decreases. Answer: E Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 16) As the Canadian dollar weakens, Canadian A) real GDP increases. B) inflation decreases. C) exports decrease. D) imports increase. E) unemployment increases. Answer: A Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation.

17) As the Canadian dollar weakens, Canadian A) real GDP decreases. B) inflation increases. C) exports decrease. D) imports increase. E) unemployment increases. Answer: B Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 18) As the Canadian dollar weakens, Canadian A) real GDP decreases. B) inflation decreases. C) exports increase. D) imports increase. E) unemployment increases. Answer: C Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 19) As the Canadian dollar weakens, Canadian A) real GDP decreases. B) inflation decreases. C) exports decrease. D) imports decrease. E) unemployment increases. Answer: D Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 20) As the Canadian dollar strengthens, Canadian A) real GDP increases. B) inflation decreases. C) exports increase. D) imports decrease. E) unemployment decreases. Answer: B Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation.

21) As the Canadian dollar strengthens, Canadian A) real GDP decreases. B) inflation increases. C) exports increase. D) imports decrease. E) unemployment decreases. Answer: A Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 22) As the Canadian dollar strengthens, Canadian A) real GDP increases. B) inflation increases. C) exports decrease. D) imports decrease. E) unemployment decreases. Answer: C Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 23) As the Canadian dollar strengthens, Canadian A) real GDP increases. B) inflation increases. C) exports increase. D) imports increase. E) unemployment decreases. Answer: D Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 24) As the Canadian dollar strengthens, Canadian A) real GDP increases. B) inflation increases. C) exports increase. D) imports decrease. E) unemployment increases. Answer: E Diff: 2 Type: MC Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation.

25) An appreciating Canadian dollar causes a negative demand shock because export spending decreases and import spending increases. Answer: TRUE Diff: 1 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 26) A depreciating Canadian dollar causes stagflation. Answer: FALSE Diff: 1 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 27) An appreciating Canadian dollar causes stagflation. Answer: FALSE Diff: 1 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 28) A depreciating Canadian dollar causes a positive demand shock because export spending increases and import spending decreases. Answer: TRUE Diff: 1 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 29) A depreciating dollar causes a recessionary gap. Answer: FALSE Diff: 2 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 30) The direct impact on Canadian inflation of an exchange rate depreciation occurs because higher prices of imports to Canada are inflationary. Answer: TRUE Diff: 2 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 31) A recessionary gap can be caused by an appreciation of the Canadian dollar and decreased exports. Answer: TRUE Diff: 2 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation.

32) A strong Canadian dollar hurts exporters. Answer: TRUE Diff: 1 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 33) A weak Canadian dollar hurts exporters. Answer: FALSE Diff: 1 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 34) A strong Canadian dollar hurts importers. Answer: FALSE Diff: 1 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 35) A weak Canadian dollar hurts importers. Answer: TRUE Diff: 1 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 36) As the dollar weakens, unemployment increases. Answer: FALSE Diff: 2 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 37) As the dollar weakens, unemployment decreases. Answer: TRUE Diff: 2 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 38) An inflationary gap can be caused by a depreciation of the Canadian dollar and increased exports. Answer: TRUE Diff: 3 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation.

39) When the Canadian dollar depreciates, the direct effect on Canadian inflation always reinforces the indirect effect. Answer: TRUE Diff: 2 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 40) A stronger Canadian dollar is always preferable to a weaker Canadian dollar. Answer: FALSE Diff: 1 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 41) A weaker Canadian dollar is always preferable to a stronger Canadian dollar. Answer: FALSE Diff: 1 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 42) The key to international transmission mechanisms is the impact of exchange rates on interest rates. Answer: FALSE Diff: 1 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 43) The key to international transmission mechanisms is the impact of exchange rates on exports and imports. Answer: TRUE Diff: 1 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 44) When the price of Canadian exports to the rest of the world rise, the inflation rate rises in other countries. Answer: TRUE Diff: 1 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 45) When the price of imports to Canada rise, measured in Canadian dollars, the inflation rate rises in Canada. Answer: TRUE Diff: 1 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 515 Copyright © 2021 Pearson Canada Inc.

46) An appreciating Canadian dollar causes inflation in Canada. Answer: FALSE Diff: 1 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 47) A depreciating Canadian dollar causes inflation in Canada. Answer: TRUE Diff: 1 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 48) When the Canadian dollar appreciates, the direct impact on inflation in Canada reinforces the indirect impact on inflation. Answer: TRUE Diff: 2 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation. 49) When the Canadian dollar depreciates, the direct impact on inflation in Canada is opposite to the indirect impact on inflation. Answer: FALSE Diff: 2 Type: TF Page Ref: 291-294 Skill: Applied Objective: 10.3 Trace the effect of exchange rates on real GDP, unemployment, and inflation.

10.4 Overvalued Compared to What? Purchasing Power Parity and Rate of Return Parity Anchors 1) Purchasing power parity states that A) exchange rates adjust to equalize prices across countries. B) prices adjust to equalize rates of return across countries. C) rates of return adjust to equalize expected exchange rate fluctuations. D) exchange rates adjust to equalize the real purchasing power of money across countries. E) purchasing power adjusts to reflect expected exchange rate fluctuations. Answer: D Diff: 2 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 2) With interest rate parity, A) exchange rates remain equal. B) expected depreciations equal expected appreciations. C) money flows to where interest rates are lowest. D) interest rates charged in different countries remain equal. E) rates of return are equalized, accounting for expected exchange rate fluctuations. Answer: E Diff: 2 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 3) Suppose purchasing power parity (PPP) depends only on hamburgers. The exchange rate is C$1.00 = US$0.80 and hamburger prices are C$2.00 in Canada and US$1.50 in the U.S. PPP suggests that the A) Canadian dollar is overvalued. B) Canadian dollar is undervalued. C) demand for Canadian dollars will increase. D) supply of Canadian dollars will decrease. E) supply of U.S. dollars will decrease. Answer: A Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates.

4) Suppose purchasing power parity (PPP) depends only on hamburgers. The exchange rate is C$1.00 = US$0.80 and hamburger prices are C$2.00 in Canada and US$1.80 in the U.S. PPP suggests that the A) demand for Canadian dollars will decrease. B) Canadian dollar is overvalued. C) Canadian dollar is undervalued. D) supply of Canadian dollars will increase. E) supply of U.S. dollars will increase. Answer: C Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 5) Suppose purchasing power parity (PPP) depends only on hamburgers. The exchange rate is C$1.00 = US$0.70 and hamburger prices are C$2.00 in Canada and US$1.50 in the U.S. PPP suggests that the A) supply of Canadian dollars will increase. B) Canadian dollar is overvalued. C) demand for Canadian dollars will decrease. D) Canadian dollar is undervalued. E) supply of U.S. dollars will increase. Answer: D Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 6) Suppose purchasing power parity (PPP) depends only on hamburgers. The exchange rate is C$1.00 = US$0.80 and hamburger prices are C$1.80 in Canada and US$2.00 in the U.S. PPP suggests that the A) Canadian dollar is undervalued. B) Canadian dollar is overvalued. C) demand for Canadian dollars will increase. D) supply of Canadian dollars will decrease. E) supply of U.S. dollars will decrease. Answer: A Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates.

7) Suppose purchasing power parity (PPP) depends only on hamburgers. The exchange rate is C$1.00 = US$0.80 and hamburger prices are C$2.00 in Canada. PPP suggests that the price of a hamburger in the U.S. should be A) US$ 1.25. B) US$ 2.00. C) US$ 2.50. D) US$ 1.60. E) US$ 0.80. Answer: D Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 8) Suppose purchasing power parity (PPP) depends only on hamburgers. The exchange rate is C$1.00 = US$0.80 and hamburger prices are US$2.00 in the U.S. PPP suggests that the price of a hamburger in Canada should be A) C$ 2.50. B) C$ 2.00. C) C$ 1.60. D) C$ 1.25. E) C$ 0.80. Answer: A Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 9) Suppose purchasing power parity (PPP) depends only on hotel rooms. The exchange rate is C$1.00 = US$0.80 and a room at the Weston Hotel in Niagara Falls, New York costs US$200. PPP suggests that the price of a room at the Weston Hotel in Niagara Falls, Ontario should be A) C$ 200. B) C$ 250. C) C$ 160. D) C$ 125. E) C$ 80. Answer: B Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates.

10) Suppose purchasing power parity (PPP) depends only on hotel rooms. The exchange rate is C$1.00 = US$0.80 and a room at the Weston Hotel in Niagara Falls, Ontario costs C$200. PPP suggests that the price of a room at the Weston Hotel in Niagara Falls, New York should be A) US$ 80. B) US$ 200. C) US$ 250. D) US$ 125. E) US$ 160. Answer: E Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 11) Which statement best describes how rate of return parity happens? A) The expected depreciation of the Canadian dollar is currently lowering demand for it. B) The price of apples is the same in Canada and the U.S., adjusting for the exchange rate. C) The market feeling is that the Canadian dollar is overvalued and will likely appreciate. D) The recent high Canadian interest rate has decreased the supply of Canadian dollars. E) None of the above. Answer: D Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 12) Which statement best describes purchasing power parity? A) The expected depreciation of the Canadian dollar is currently lowering demand for it. B) The price of apples is the same in Canada and the U.S., adjusting for the exchange rate. C) The market feeling is that the Canadian dollar is overvalued and will likely depreciate. D) The recent high Canadian interest rate has increased the demand for Canadian dollars. E) None of the above. Answer: B Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates.

13) If the rate of return in India is higher than the rate of return in Canada, rate of return parity suggests the difference is due to A) expected interest rates. B) expected exchange rates. C) current interest rates. D) current exchange rates. E) purchasing power parity. Answer: B Diff: 1 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 14) If the interest rate in Japan is greater than the interest rate in Canada, rate of return parity suggests that A) the inflation rate is lower in Japan than in Canada. B) Canadian financial assets are poor investments. C) the yen is expected to depreciate against the Canadian dollar. D) the yen is expected to appreciate against the Canadian dollar. E) Japanese financial assets are poor investments. Answer: C Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 15) If the interest rate in Japan is less than the interest rate in Canada, rate of return parity suggests that A) the inflation rate is higher in Japan than in Canada. B) Canadian financial assets are poor investments. C) the yen is expected to depreciate against the Canadian dollar. D) the yen is expected to appreciate against the Canadian dollar. E) Japanese financial assets are poor investments. Answer: D Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates.

16) If the rate of return is 8 percent in Mexico and 3 percent in Canada, the A) law of one price predicts a single international rate of return between 8 percent and 3 percent. B) Mexican peso is expected to depreciate against the Canadian dollar by 5 percent. C) Mexican peso is expected to appreciate against the Canadian dollar by 5 percent. D) rate of return in Mexico is expected to fall to 3 percent. E) rate of return in Canada is expected to rise to 8 percent. Answer: B Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 17) If the rate of return is 3 percent in Mexico and 8 percent in Canada, the A) law of one price predicts a single international rate of return between 3 percent and 8 percent. B) Mexican peso is expected to depreciate against the Canadian dollar by 5 percent. C) Mexican peso is expected to appreciate against the Canadian dollar by 5 percent. D) rate of return in Mexico is expected to rise to 8 percent. E) rate of return in Canada is expected to fall to 3 percent. Answer: C Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 18) If the rate of return is 3 percent in Mexico and 1 percent in Canada, the A) law of one price predicts a single international rate of return between 3 percent and 1 percent. B) Mexican peso is expected to depreciate against the Canadian dollar by 2 percent. C) Mexican peso is expected to appreciate against the Canadian dollar by 2 percent. D) rate of return in Mexico is expected to fall to 1 percent. E) rate of return in Canada is expected to rise to 3 percent. Answer: B Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 19) If the rate of return is 1 percent in Mexico and 3 percent in Canada, the A) law of one price predicts a single international rate of return between 1 percent and 3 percent. B) Mexican peso is expected to depreciate against the Canadian dollar by 2 percent. C) Mexican peso is expected to appreciate against the Canadian dollar by 2 percent. D) rate of return in Mexico is expected to rise to 3 percent. E) rate of return in Canada is expected to fall to 1 percent. Answer: C Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 522 Copyright © 2021 Pearson Canada Inc.

20) A hamburger costs C$4.50 in Fredericton, New Brunswick, and the exchange rate is 67 U.S. cents per Canadian dollar. Then the A) hamburger will cost US$4.50 if purchasing power parity holds. B) Canadian dollar is expected to depreciate according to purchasing power parity. C) Canadian dollar is expected to appreciate according to purchasing power parity. D) hamburger will cost US$3.00 if purchasing power parity holds. E) hamburger will cost US$3.00 if rate of return parity holds. Answer: D Diff: 3 Type: MC Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 21) Suppose purchasing power parity (PPP) depends only on hamburgers. The exchange rate is C$1.00 = US$0.70 and hamburger prices are C$2.00 in Canada and US$1.50 in the U.S. PPP suggests that the exchange rate is undervalued. Answer: TRUE Diff: 2 Type: TF Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 22) With interest rate parity, money flows to where interest rates are lowest. Answer: FALSE Diff: 1 Type: TF Page Ref: 295-300 Skill: Recall Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 23) With rate of return parity, money flows to where rates of return are lowest. Answer: FALSE Diff: 1 Type: TF Page Ref: 295-300 Skill: Recall Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 24) With rate of return parity, money flows to where rates of return are highest. Answer: TRUE Diff: 1 Type: TF Page Ref: 295-300 Skill: Recall Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates.

25) Purchasing power parity suggests that exchange rates adjust to equalize prices. Answer: FALSE Diff: 1 Type: TF Page Ref: 295-300 Skill: Recall Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 26) Purchasing power parity suggests that exchange rates adjust to equalize the purchasing power of money across countries. Answer: TRUE Diff: 1 Type: TF Page Ref: 295-300 Skill: Recall Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 27) Suppose purchasing power parity (PPP) depends only on hamburgers. The exchange rate is C$1.00 = US$0.80 and hamburger prices are C$2.00 in Canada and US$1.50 in the U.S. PPP suggests that the Canadian dollar is overvalued. Answer: TRUE Diff: 2 Type: TF Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 28) Suppose purchasing power parity (PPP) depends only on hamburgers. The exchange rate is C$1.00 = US$0.80 and hamburger prices are C$2.00 in Canada and US$1.80 in the U.S. PPP suggests that the Canadian dollar is undervalued. Answer: TRUE Diff: 2 Type: TF Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 29) Suppose purchasing power parity (PPP) depends only on hamburgers. The exchange rate is C$1.00 = US$0.80 and hamburger prices are C$1.80 in Canada and US$2.00 in the U.S. PPP suggests that the Canadian dollar is overvalued. Answer: FALSE Diff: 2 Type: TF Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates.

30) Suppose purchasing power parity (PPP) depends only on hamburgers. The exchange rate is C$1.00 = US$0.80 and hamburger prices are C$2.00 in Canada. PPP suggests that the price of a hamburger in the U.S. should be US$1.60. Answer: TRUE Diff: 2 Type: TF Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 31) Suppose purchasing power parity (PPP) depends only on hamburgers. The exchange rate is C$1.00 = US$0.80 and hamburger prices are US$2.00 in the U.S. PPP suggests that the price of a hamburger in Canada should be C$2.50. Answer: TRUE Diff: 3 Type: TF Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 32) Suppose purchasing power parity (PPP) depends only on hotel rooms. The exchange rate is C$1.00 = US$0.80 and a room at the Weston Hotel in Niagara Falls, New York costs US$200. PPP suggests that the price of a room at the Weston Hotel in Niagara Falls, Ontario should be C$250. Answer: TRUE Diff: 3 Type: TF Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 33) Suppose purchasing power parity (PPP) depends only on hotel rooms. The exchange rate is C$1.00 = US$0.80 and a room at the Weston Hotel in Niagara Falls, Ontario costs C$200. PPP suggests that the price of a room at the Weston Hotel in Niagara Falls, New York should be US$160. Answer: TRUE Diff: 3 Type: TF Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 34) The law of one price states that different products and services in a market must have the same price. Answer: FALSE Diff: 1 Type: TF Page Ref: 295-300 Skill: Recall Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates.

35) The law of one price states that differences in prices of the same product across markets will be eliminated by the actions of profit-seekers. Answer: TRUE Diff: 1 Type: TF Page Ref: 295-300 Skill: Recall Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 36) A floating exchange rate is determined by governments or central banks in foreign exchange markets. Answer: FALSE Diff: 1 Type: TF Page Ref: 295-300 Skill: Recall Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 37) A fixed exchange rate is determined by governments or central banks. Answer: TRUE Diff: 1 Type: TF Page Ref: 295-300 Skill: Recall Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 38) Rate of return parity is another name for purchasing power parity. Answer: FALSE Diff: 1 Type: TF Page Ref: 295-300 Skill: Recall Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 39) Rate of return parity is an example of the law of one price applied to investments. Answer: TRUE Diff: 1 Type: TF Page Ref: 295-300 Skill: Applied Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 40) Most countries today have fixed exchange rates. Answer: FALSE Diff: 1 Type: TF Page Ref: 295-300 Skill: Recall Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates.

41) China has purposefully fixed its exchange rate so that the yuan is overvalued relative to the U.S. dollar. Answer: FALSE Diff: 1 Type: TF Page Ref: 295-300 Skill: Recall Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 42) China has purposefully fixed its exchange rate so that the yuan is undervalued relative to the U.S. dollar. Answer: TRUE Diff: 1 Type: TF Page Ref: 295-300 Skill: Recall Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 43) Purchasing power parity assumes all products and services are traded easily and without cost across borders. Answer: TRUE Diff: 1 Type: TF Page Ref: 295-300 Skill: Recall Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 44) Despite its limitations, purchasing power parity is the best available standard for predicting where exchange rates are likely to settle. Answer: TRUE Diff: 1 Type: TF Page Ref: 295-300 Skill: Recall Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates. 45) The purchasing power parity exchange rate is the best rate for the Canadian macroeconomic outcomes of full employment, stable prices, and steady economic growth. Answer: FALSE Diff: 2 Type: TF Page Ref: 295-300 Skill: Recall Objective: 10.4 Describe how purchasing power parity and rate of return parity provide standards for exchange rates.

10.5 Where Do All the Dollars Flow? International Balance of Payments 1) Which statement about the balance of payments accounts is true? A) Flows of Canadian dollars into Canada are positive numbers. B) Flows of Canadian dollars out of Canada are positive numbers. C) Canadian exports are negative numbers. D) Canadian imports are positive numbers. E) Flows of Canadian dollars into Canada are negative numbers. Answer: A Diff: 1 Type: MC Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 2) Which statement about the balance of payments accounts is true? A) Flows of Canadian dollars into Canada are negative numbers. B) Flows of Canadian dollars out of Canada are positive numbers. C) Canadian exports are negative numbers. D) Canadian imports are positive numbers. E) Flows of Canadian dollars out of Canada are negative numbers. Answer: E Diff: 1 Type: MC Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 3) Which statement about the balance of payments accounts is false? A) Flows of Canadian dollars into Canada are positive numbers. B) Flows of Canadian dollars out of Canada are negative numbers. C) Canadian exports are positive numbers. D) Canadian imports are positive numbers. E) Canadian imports are negative numbers. Answer: D Diff: 1 Type: MC Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero.

4) Which statement about the balance of payments accounts is false? A) Flows of Canadian dollars into Canada are positive numbers. B) Flows of Canadian dollars out of Canada are negative numbers. C) Canadian exports are negative numbers. D) Canadian exports are positive numbers. E) Canadian imports are negative numbers. Answer: C Diff: 1 Type: MC Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 5) The main items on the A) current account are exports and imports. B) current account are exports and Canadian investments in R.O.W. C) current account are imports and R.O.W. investments in Canada. D) financial account are exports and Canadian investments in R.O.W E) financial account are imports and R.O.W. investments in Canada. Answer: A Diff: 1 Type: MC Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 6) The main items on the A) financial account are Canadian investments in R.O.W. and R.O.W. investments in Canada. B) current account are exports and Canadian investments in R.O.W. C) current account are imports and R.O.W. investments in Canada. D) financial account are exports and Canadian investments in R.O.W E) financial account are imports and R.O.W. investments in Canada. Answer: A Diff: 1 Type: MC Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero.

7) A current account surplus means A) Canadian spending on imports from R.O.W. is greater than R.O.W. spending on Canadian exports. B) R.O.W. spending on Canadian exports is greater than Canadian spending on imports from R.O.W. C) Canadian investments in R.O.W. are greater than R.O.W. investments in Canada. D) R.O.W. investments in Canada are greater than Canadian investments in R.O.W. E) there is also a capital account surplus. Answer: B Diff: 2 Type: MC Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 8) A current account deficit means A) Canadian spending on imports from R.O.W. is greater than R.O.W. spending on Canadian exports. B) R.O.W. spending on Canadian exports is greater than Canadian spending on imports from R.O.W. C) Canadian investments in R.O.W. are greater than R.O.W. investments in Canada. D) R.O.W. investments in Canada are greater than Canadian investments in R.O.W. E) there is also a capital account deficit. Answer: A Diff: 2 Type: MC Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 9) A capital account surplus means A) Canadian spending on imports from R.O.W. is greater than R.O.W. spending on Canadian exports. B) R.O.W. spending on Canadian exports is greater than Canadian spending on imports from R.O.W. C) Canadian investments in R.O.W. are greater than R.O.W. investments in Canada. D) R.O.W. investments in Canada are greater than Canadian investments in R.O.W. E) there is also a current account surplus. Answer: D Diff: 2 Type: MC Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero.

10) A capital account deficit means A) Canadian spending on imports from R.O.W. is greater than R.O.W. spending on Canadian exports. B) R.O.W. spending on Canadian exports is greater than Canadian spending on imports from R.O.W. C) Canadian investments in R.O.W. are greater than R.O.W. investments in Canada. D) R.O.W. investments in Canada are greater than Canadian investments in R.O.W. E) there is also a current account deficit. Answer: C Diff: 2 Type: MC Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 11) Which activity is a positive entry on the Canadian current account? A) A Canadian tourist spends $2,000 at the SXSW Festival in Austin, Texas. B) A U.S. tourist spends $3,000 at the Toronto International Film Festival. C) A Canadian buys a German government bond. D) A Canadian from Halifax invests in a hockey stick factory in Saskatchewan. E) A French investor buys a winery in the Okanagan Valley in British Columbia. Answer: B Diff: 1 Type: MC Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 12) Which activity is a negative entry on the Canadian current account? A) A Canadian tourist spends $2,000 at the SXSW Festival in Austin, Texas. B) A U.S. tourist spends $3,000 at the Toronto International Film Festival. C) A Canadian buys a German government bond. D) A Canadian from Halifax invests in a hockey stick factory in Saskatchewan. E) A French investor buys a winery in the Okanagan Valley in British Columbia. Answer: A Diff: 1 Type: MC Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero.

13) Which activity is a positive entry on the Canadian financial account? A) A Canadian tourist spends $2,000 at the SXSW Festival in Austin, Texas. B) A U.S. tourist spends $3,000 at the Toronto International Film Festival. C) A Canadian buys a German government bond. D) A Canadian from Halifax invests in a hockey stick factory in Saskatchewan. E) A French investor buys a winery in the Okanagan Valley in British Columbia. Answer: E Diff: 1 Type: MC Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 14) Which activity is a negative entry on the Canadian financial account? A) A Canadian tourist spends $2,000 at the SXSW Festival in Austin, Texas. B) A U.S. tourist spends $3,000 at the Toronto International Film Festival. C) A Canadian buys a German government bond. D) A Canadian from Halifax invests in a hockey stick factory in Saskatchewan. E) A French investor buys a winery in the Okanagan Valley in British Columbia. Answer: C Diff: 1 Type: MC Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 15) Suppose Canada has a zero balance (no surplus or deficit) on the both the current account and on the capital account. Then Canadian businesses import new machinery from Italy, financing that increase by borrowing from Japan. On Canada's balance of payments accounts there is now a current account A) surplus and a financial account surplus. B) surplus and a financial account deficit. C) deficit and a financial account surplus. D) deficit and a financial account deficit. E) surplus and a financial account balance of zero. Answer: C Diff: 2 Type: MC Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero.

16) Suppose Canada has a zero balance (no surplus or deficit) on the both the current account and on the capital account. Then Canadian businesses export new snow blowing machinery to Italy, which Italy finances by borrowing from a Canadian bank. On Canada's balance of payments accounts there is now a current account A) surplus and a financial account surplus. B) surplus and a financial account deficit. C) deficit and a financial account surplus. D) deficit and a financial account deficit. E) surplus and a financial account balance of zero. Answer: B Diff: 2 Type: MC Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 17) Flows of Canadian dollars into Canada are positive numbers on the balance of payments accounts. Answer: TRUE Diff: 1 Type: TF Page Ref: 300-303 Skill: Recall Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 18) Flows of Canadian dollars into Canada are negative numbers on the balance of payments accounts. Answer: FALSE Diff: 2 Type: TF Page Ref: 300-303 Skill: Recall Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 19) Flows of Canadian dollars out of Canada are positive numbers on the balance of payments accounts. Answer: FALSE Diff: 1 Type: TF Page Ref: 300-303 Skill: Recall Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 20) Flows of Canadian dollars out of Canada are negative numbers on the balance of payments accounts. Answer: TRUE Diff: 2 Type: TF Page Ref: 300-303 Skill: Recall Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 533 Copyright © 2021 Pearson Canada Inc.

21) Canadian exports are positive numbers on Canada's balance of payments accounts. Answer: TRUE Diff: 1 Type: TF Page Ref: 300-303 Skill: Recall Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 22) Canadian exports are negative numbers on Canada's balance of payments accounts. Answer: FALSE Diff: 1 Type: TF Page Ref: 300-303 Skill: Recall Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 23) Imports into Canada are positive numbers on Canada's balance of payments accounts. Answer: FALSE Diff: 1 Type: TF Page Ref: 300-303 Skill: Recall Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 24) Imports into Canada are negative numbers on Canada's balance of payments accounts. Answer: TRUE Diff: 1 Type: TF Page Ref: 300-303 Skill: Recall Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 25) To understand the pluses and minuses on Canada's balance of payments accounts, focus on the flows of money into (positive) and out of (negative) Canada. Answer: TRUE Diff: 2 Type: TF Page Ref: 300-303 Skill: Recall Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 26) To understand the pluses and minuses on Canada's balance of payments accounts, focus on the flows of products into (positive) and out of (negative) Canada. Answer: FALSE Diff: 2 Type: TF Page Ref: 300-303 Skill: Recall Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero.

27) The two main items on the current account are exports and imports. Answer: TRUE Diff: 1 Type: TF Page Ref: 300-303 Skill: Recall Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 28) The two main items on the current account are Canadian investments in R.O.W. and R.O.W. investments in Canada. Answer: FALSE Diff: 1 Type: TF Page Ref: 300-303 Skill: Recall Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 29) The two main items on the financial account are exports and imports. Answer: FALSE Diff: 1 Type: TF Page Ref: 300-303 Skill: Recall Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 30) The two main items on the financial account are Canadian investments in R.O.W. and R.O.W. investments in Canada. Answer: TRUE Diff: 1 Type: TF Page Ref: 300-303 Skill: Recall Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 31) Because demand for one currency is also the supply of another currency, the balance of payments accounts must add up to zero. Answer: TRUE Diff: 1 Type: TF Page Ref: 300-303 Skill: Recall Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 32) Current account balance + financial account balance + statistical discrepancy = zero. Answer: TRUE Diff: 1 Type: TF Page Ref: 300-303 Skill: Recall Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero.

33) A financial account surplus means that R.O.W. invested more in Canada than Canadians invested in R.O.W. Answer: TRUE Diff: 1 Type: TF Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 34) A financial account surplus means that Canadians invested more in R.O.W. than R.O.W. invested in Canada. Answer: FALSE Diff: 1 Type: TF Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 35) A financial account deficit means that R.O.W. invested more in Canada than Canadians invested in R.O.W. Answer: FALSE Diff: 1 Type: TF Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 36) A financial account deficit means that Canadians invested more in R.O.W. than R.O.W. invested in Canada. Answer: TRUE Diff: 1 Type: TF Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 37) A current account surplus means that R.O.W. spending on Canadian exports is greater than Canadian spending on imports from R.O.W. Answer: TRUE Diff: 1 Type: TF Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 38) A current account surplus means that Canadian spending on imports from R.O.W. is greater than R.O.W. spending on Canadian exports. Answer: FALSE Diff: 1 Type: TF Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 536 Copyright © 2021 Pearson Canada Inc.

39) A current account deficit means that R.O.W. spending on Canadian exports is greater than Canadian spending on imports from R.O.W. Answer: FALSE Diff: 1 Type: TF Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 40) A current account deficit means that Canadian spending on imports from R.O.W. is greater than R.O.W. spending on Canadian exports. Answer: TRUE Diff: 1 Type: TF Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 41) When there is a current account deficit there is a capital account surplus. Answer: TRUE Diff: 1 Type: TF Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 42) When there is a current account deficit there is a capital account deficit. Answer: FALSE Diff: 1 Type: TF Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 43) When there is a current account surplus there is a capital account surplus. Answer: FALSE Diff: 1 Type: TF Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. 44) When there is a current account surplus there is a capital account deficit. Answer: TRUE Diff: 1 Type: TF Page Ref: 300-303 Skill: Applied Objective: 10.5 Describe the two main parts of the balance of payments account, and explain why they must add up to zero. Macroeconomics for Life: Smart Choices for All?, Updated 2e (Cohen) Chapter 11 Steering Blindly? Monetary Policy and the Bank of Canada 537 Copyright © 2021 Pearson Canada Inc.

11.1 What Do Central Banks Do? Bank of Canada's Objectives and Targets 1) The Bank of Canada's inflation-control target is an inflation rate A) between 1 and 3 percent. B) between 1 and 2 percent. C) between 2 and 3 percent. D) of 0 percent, or no inflation. E) of less than 5 percent. Answer: A Diff: 2 Type: MC Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 2) The Bank of Canada's inflation-control target is measured by the A) core CPI. B) CPI. C) CPI, with core CPI as an operational guide. D) core CPI, with CPI as an operational guide. E) Minister of Finance. Answer: C Diff: 2 Type: MC Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 3) The core inflation rate A) is used by the Bank of Canada as an operational guide. B) excludes products and services with the most volatile prices. C) provides the best measure of the underlying trend of inflation. D) does not fluctuate as much at the inflation rate based on the CPI. E) is all of the above. Answer: E Diff: 1 Type: MC Page Ref: 312-313 Skill: Applied Objective: 11.1 Identify the objectives of monetary policy.

4) The Bank of Canada's price stability goal is keeping the A) price level stable. B) unemployment rate low at any cost. C) inflation rate low at any cost. D) inflation rate at zero so it does not significantly affect people's economic decisions. E) inflation rate low enough so it does not significantly affect people's economic decisions. Answer: E Diff: 2 Type: MC Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 5) The Bank of Canada's inflation-control target range is ________ percent a year, and monetary policy aims for a target inflation rate of ________ percent a year. A) 3 to 5; 4 B) 1 to 3; 2 C) 2 to 4; 3 D) 0 to 2; 1 E) -1 to 1; 0 Answer: B Diff: 2 Type: MC Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 6) Core inflation is the percentage change in A) the Consumer Price Index including the eight most volatile prices. B) an inflation rate that ranges between 1 percent and 3 percent annually. C) the Consumer Price Index excluding the eight most volatile prices. D) the average of the 8 most volatile prices in the Consumer Price Index. E) the target midpoint inflation rate. Answer: C Diff: 2 Type: MC Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 7) In addition to the overall CPI inflation rate, the Bank of Canada plays close attention to the core inflation rate because it A) is more volatile and therefore a better predictor of the underlying trend of inflation. B) includes taxes, while the overall CPI rate does not. C) has a lower average value which makes the Bank look better. D) is less volatile and a better predictor of the underlying trend of inflation. E) excludes eight volatile prices and is more likely to stay within the target range. Answer: D Diff: 1 Type: MC Page Ref: 312-313 Skill: Applied Objective: 11.1 Identify the objectives of monetary policy.

8) When the inflation rate is 2 percent the Bank of Canada should take no action. Answer: TRUE Diff: 2 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 9) Canada has a monetary-based economy. Answer: TRUE Diff: 1 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 10) Price stability means the inflation rate is zero. Answer: FALSE Diff: 1 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 11) Price stability means the inflation rate is constant. Answer: FALSE Diff: 1 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 12) Price stability means an inflation rate low enough that it does not significantly affect people's economic decisions. Answer: TRUE Diff: 1 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 13) Canada's inflation control target is an annual inflation rate of 1 to 3 percent as measured by the core consumer price index. Answer: FALSE Diff: 2 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 14) Canada's inflation control target is an annual inflation rate of 1 - 3 percent as measured by the consumer price index (CPI). Answer: TRUE Diff: 2 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy.

15) Interest rates are the Bank of Canada's most important monetary policy tool. Answer: TRUE Diff: 1 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 16) The Bank of Canada is responsible for fiscal policy. Answer: FALSE Diff: 1 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 17) The Bank of Canada is responsible for monetary policy. Answer: TRUE Diff: 1 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 18) The Prime Minister is the driver at the wheel for Canadian monetary policy. Answer: FALSE Diff: 1 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 19) The Bank of Canada uses monetary policy to steer the economy towards stable prices, steady economic growth, and full employment. Answer: TRUE Diff: 1 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 20) The current Governor of the Bank of Canada is Mark Carney. Answer: FALSE Diff: 1 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 21) The current Governor of the Bank of Canada is Stephen Poloz. Answer: TRUE Diff: 1 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy.

22) The Bank of Canada was created during the economic boom of the 1920s. Answer: FALSE Diff: 1 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 23) The Bank of Canada was created in 1935 during the Great Depression. Answer: TRUE Diff: 1 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 24) The original Bank of Canada Act directs the Bank to control the money supply and interest rates to avoid inflation, business cycles, and unemployment. Answer: TRUE Diff: 1 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 25) Everyone in Canada agrees about the Bank of Canada's inflation control target of 1 to 3 percent. Answer: FALSE Diff: 2 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 26) The Bank of Canada aims for a target inflation rate of 2 percent. Answer: TRUE Diff: 1 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy. 27) The Bank of Canada aims for a target inflation rate of 0 percent. Answer: FALSE Diff: 1 Type: TF Page Ref: 312-313 Skill: Recall Objective: 11.1 Identify the objectives of monetary policy.

11.2 Target Shooting: Open Market Operations 1) When the Bank of Canada buys bonds on the bond market, the A) demand for money increases. B) demand for money decreases. C) supply of money increases. D) supply of money decreases. E) supply of bonds increases. Answer: C Diff: 1 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 2) When the Bank of Canada uses open market operations to lower the overnight rate, the A) demand for money increases. B) demand for money decreases. C) supply of money increases. D) supply of money decreases. E) supply of bonds increases. Answer: C Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 3) When the Bank of Canada buys bonds on the bond market, the A) demand for bonds increases. B) demand for bonds decreases. C) supply of bonds increases. D) supply of bonds decreases. E) supply of money decreases. Answer: A Diff: 1 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates.

4) When the Bank of Canada uses open market operations to lower the overnight rate, the A) demand for bonds increases. B) demand for bonds decreases. C) supply of bonds increases. D) supply of bonds decreases. E) supply of money decreases. Answer: A Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 5) When the Bank of Canada sells bonds on the bond market, the A) demand for money increases. B) demand for money decreases. C) supply of money increases. D) supply of money decreases. E) supply of bonds decreases. Answer: D Diff: 1 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 6) When the Bank of Canada uses open market operations to raise the overnight rate, the A) demand for money increases. B) demand for money decreases. C) supply of money increases. D) supply of money decreases. E) supply of bonds decreases. Answer: D Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 7) When the Bank of Canada sells bonds on the bond market, the A) demand for bonds increases. B) demand for bonds decreases. C) supply of bonds increases. D) supply of bonds decreases. E) supply of money increases. Answer: C Diff: 1 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 544 Copyright © 2021 Pearson Canada Inc.

8) When the Bank of Canada uses open market operations to raise the overnight rate, the A) demand for bonds increases. B) demand for bonds decreases. C) supply of bonds increases. D) supply of bonds decreases. E) supply of money increases. Answer: C Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 9) When the inflation rate is 4 percent, the Bank of Canada will A) buy bonds to lower interest rates and increase aggregate demand. B) sell bonds to raise interest rates and decrease aggregate demand. C) do nothing, since an interest rate of 4 percent is desirable. D) sell bonds to lower interest rates and accelerate the economy. E) buy bonds to raise interest rates and slow down the economy. Answer: B Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 10) When the inflation rate is 4 percent, the Bank of Canada will A) buy bonds to lower interest rates and shift the aggregate demand curve rightward. B) sell bonds to raise interest rates and shift the aggregate demand curve leftward. C) do nothing, since an interest rate of 4 percent is desirable. D) sell bonds to lower interest rates and accelerate the economy. E) buy bonds to raise interest rates and slow down the economy. Answer: B Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 11) To achieve its inflation-control target, the Bank of Canada focuses on the A) 10-year government bond rate. B) prime rate. C) 3-month Treasury bill rate. D) overnight rate. E) rate for 25-year variable mortgages. Answer: D Diff: 2 Type: MC Page Ref: 314-320 Skill: Recall Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 545 Copyright © 2021 Pearson Canada Inc.

12) When the Bank of Canada buys bonds the A) increased demand for bonds raises bond prices and raises interest rates. B) increased supply of bonds lowers bond prices and raises interest rates. C) money supply decreases. D) increased supply of bonds raises bond prices and lowers interest rates. E) increased demand for bonds raises bond prices and lowers interest rates. Answer: E Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 13) When the Bank of Canada sells bonds the A) increased supply of bonds lowers bond prices and lowers interest rates. B) increased supply of bonds lowers bonds prices and raises interest rates. C) money supply increases. D) increased demand for bonds raises bond prices and lowers interest rates. E) increased demand for bonds raises bond prices and raises interest rates. Answer: B Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 14) If the annual inflation rate is 0.5 percent, the Bank of Canada will A) sell bonds to raise interest rates and slow down the economy. B) buy bonds to lower interest rates and accelerate the economy. C) do nothing since an inflation rate of 0.5 percent is desirable. D) buy bonds to raise interest rates and increase aggregate demand. E) sell bonds to lower interest rates and increase aggregate demand. Answer: B Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 15) When the economy is speeding too fast, all of the following happen except A) inflation is above target inflation. B) real GDP is above potential GDP. C) unemployment is increasing. D) there is an inflationary gap. E) nominal GDP is above real GDP. Answer: C Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 546 Copyright © 2021 Pearson Canada Inc.

16) When the economy is slowing down too much, all of the following happen except A) inflation is below target inflation. B) real GDP is below potential GDP. C) unemployment is increasing. D) there is an inflationary gap. E) there is a recessionary gap. Answer: D Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 17) When the Bank of Canada buys bonds from a chartered bank, chartered bank reserves A) decrease and chartered banks make additional loans. B) increase and chartered banks reduce loans. C) decrease and chartered banks reduce loans. D) decrease and interest rates fall. E) increase and chartered banks make additional loans. Answer: E Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 18) When the Bank of Canada sells bonds to a chartered bank, chartered bank reserves A) decrease and interest rates rise. B) decrease and chartered banks make additional loans. C) increase and chartered banks make additional loans. D) increase and chartered banks reduce loans. E) increase and interest rates fall. Answer: A Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 19) The Bank of Canada changes the target rate A) continuously. B) eight times a year. C) without warning the public. D) once a year in the annual budget. E) every 24 months. Answer: B Diff: 2 Type: MC Page Ref: 314-320 Skill: Recall Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 547 Copyright © 2021 Pearson Canada Inc.

20) 25 basis points is A) a quarter of one percent. B) 25 percent. C) the difference between the overnight rate and the prime rate. D) the difference between the inflation rate measured by the CPI and by the core CPI. E) the difference between the prime rate and the 3-month Treasury Bill rate. Answer: A Diff: 2 Type: MC Page Ref: 314-320 Skill: Recall Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 21) When the Bank of Canada sells bonds on the bond market, this A) lowers interest rates. B) decreases chartered bank reserves. C) increases the quantity of money. D) increases chartered bank loans to the public. E) increases chartered bank reserves. Answer: B Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 22) When the Bank of Canada buys bonds on the bond market, this A) decreases chartered bank reserves. B) increases chartered bank loans to the public. C) lowers the price of bonds. D) fights inflation. E) decreases the money supply. Answer: B Diff: 3 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates.

23) To increase aggregate demand, the Bank of Canada A) sells bonds, decreasing chartered bank reserves, decreasing lending, and lowering the overnight rate. B) sells bonds, decreasing chartered bank reserves, decreasing lending, and raising the overnight rate. C) sells bonds, decreasing chartered bank reserves, increasing lending, and raising the overnight rate. D) buys bonds, increasing chartered bank reserves, increasing lending, and lowering the overnight rate. E) buys bonds, increasing chartered bank reserves, increasing lending, and raising the overnight rate. Answer: D Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 24) To decrease aggregate demand, the Bank of Canada A) raises the overnight rate, increasing the money supply. B) lowers the overnight rate, increasing the money supply. C) lowers the overnight rate, decreasing the money supply. D) raises the overnight rate, decreasing the money supply. E) raises the overnight rate, decreasing the demand for money. Answer: D Diff: 3 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 25) If the Bank of Canada wants to eliminate an inflationary gap, it will A) buy government bonds. B) lower the overnight rate. C) raise the overnight rate. D) raise the inflation target. E) lower the inflation target. Answer: C Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates.

26) If the Bank of Canada is worried about inflation it will ________ the overnight rate to ________. A) raise; increase aggregate demand B) lower; increase aggregate demand C) raise; decrease aggregate demand D) lower; decrease aggregate demand E) raise; decrease potential GDP Answer: C Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 27) If the Bank of Canada is worried about inflation it will ________ the overnight rate to ________. A) raise; shift the aggregate demand curve rightward B) lower; shift the aggregate demand curve rightward C) raise; shift the aggregate demand curve leftward D) lower; shift the aggregate demand curve leftward E) raise; decrease potential GDP Answer: C Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 28) Which statement about interest rates is false? A) The prime rate equals the overnight rate plus 3 percent. B) Long-run interest rates tend to be higher than short-run interest rates. C) Long-run bonds tend to be riskier than short-run bonds. D) Investors require a higher reward for forgoing more liquidity. E) Long-run interest rates fluctuate less than short-run interest rates. Answer: A Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates.

29) Which statement about interest rates is false? A) The prime rate equals the overnight rate plus 2 percent. B) Long-run interest rates tend to be lower than short-run interest rates. C) Long-run bonds tend to be riskier than short-run bonds. D) Investors require a higher reward for forgoing more liquidity. E) Long-run interest rates fluctuate less than short-run interest rates. Answer: B Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 30) Which statement about interest rates is false? A) The prime rate equals the overnight rate plus 2 percent. B) Long-run interest rates tend to be higher than short-run interest rates. C) Short-run bonds tend to be riskier than long-run bonds. D) Investors require a higher reward for forgoing more liquidity. E) Long-run interest rates fluctuate less than short-run interest rates. Answer: C Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 31) Which statement about interest rates is false? A) The prime rate equals the overnight rate plus 2 percent. B) Long-run interest rates tend to be higher than short-run interest rates. C) Long-run bonds tend to be riskier than short-run bonds. D) Investors require a higher reward for bonds with more liquidity. E) Long-run interest rates fluctuate less than short-run interest rates. Answer: D Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 32) Which statement about interest rates is false? A) The prime rate equals the overnight rate plus 2 percent. B) Long-run interest rates tend to be higher than short-run interest rates. C) Long-run bonds tend to be riskier than short-run bonds. D) Investors require a higher reward for forgoing more liquidity. E) Long-run interest rates fluctuate more than short-run interest rates. Answer: E Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 551 Copyright © 2021 Pearson Canada Inc.

33) Which statement about interest rates is true? A) The prime rate equals the overnight rate plus 2 percent. B) Long-run interest rates tend to be lower than short-run interest rates. C) Short-run bonds tend to be riskier than long-run bonds. D) Investors require a higher reward for bonds with more liquidity. E) Long-run interest rates fluctuate more than short-run interest rates. Answer: A Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 34) Which statement about interest rates is true? A) The prime rate equals the overnight rate plus 3 percent. B) Long-run interest rates tend to be higher than short-run interest rates. C) Short-run bonds tend to be riskier than long-run bonds. D) Investors require a higher reward for bonds with more liquidity. E) Long-run interest rates fluctuate more than short-run interest rates. Answer: B Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 35) Which statement about interest rates is true? A) The prime rate equals the overnight rate plus 3 percent. B) Long-run interest rates tend to be lower than short-run interest rates. C) Long-run bonds tend to be riskier than short-run bonds. D) Investors require a higher reward for bonds with more liquidity. E) Long-run interest rates fluctuate more than short-run interest rates. Answer: C Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates.

36) Which statement about interest rates is true? A) The prime rate equals the overnight rate plus 3 percent. B) Long-run interest rates tend to be lower than short-run interest rates. C) Short-run bonds tend to be riskier than long-run bonds. D) Investors require a higher reward for foregoing more liquidity. E) Long-run interest rates fluctuate more than short-run interest rates. Answer: D Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 37) Which statement about interest rates is true? A) The prime rate equals the overnight rate plus 3 percent. B) Long-run interest rates tend to be lower than short-run interest rates. C) Short-run bonds tend to be riskier than long-run bonds. D) Investors require a higher reward for bonds with more liquidity. E) Long-run interest rates fluctuate less than short-run interest rates. Answer: E Diff: 2 Type: MC Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 38) The Bank of Canada changes its target rate once a year. Answer: FALSE Diff: 2 Type: TF Page Ref: 314-320 Skill: Recall Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 39) When the Bank of Canada sells bonds, the increased demand for bonds raises bond prices and lowers interest rates. Answer: FALSE Diff: 1 Type: TF Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 40) When the Bank of Canada buys bonds, chartered bank reserves increase and banks can increase lending. Answer: TRUE Diff: 2 Type: TF Page Ref: 314-320 Skill: Recall Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 553 Copyright © 2021 Pearson Canada Inc.

41) When the inflation rate is 0.5 percent, the Bank of Canada will sell bonds to lower interest rates and accelerate the economy. Answer: FALSE Diff: 2 Type: TF Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 42) When the inflation rate is 5 percent, the Bank of Canada will sell bonds to raise interest rates and decrease aggregate demand. Answer: TRUE Diff: 2 Type: TF Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 43) When the Bank of Canada buys bonds from a chartered bank, chartered bank reserves increase and interest rates fall. Answer: TRUE Diff: 2 Type: TF Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 44) The overnight rate is the interest rate that chartered banks charge each other for one-day loans. Answer: TRUE Diff: 1 Type: TF Page Ref: 314-320 Skill: Recall Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 45) Interest rates are determined entirely by central banks. Answer: FALSE Diff: 1 Type: TF Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 46) Interest rates are determined in money and loanable funds markets and by central banks. Answer: TRUE Diff: 2 Type: TF Page Ref: 314-320 Skill: Recall Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates.

47) Central banks determine long-run interest rates. Answer: FALSE Diff: 2 Type: TF Page Ref: 314-320 Skill: Recall Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 48) Loanable funds markets, not central banks, determine long-run interest rates. Answer: TRUE Diff: 2 Type: TF Page Ref: 314-320 Skill: Recall Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 49) In a recessionary gap, the Bank of Canada raises interest rates to decrease aggregate demand. Answer: FALSE Diff: 1 Type: TF Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 50) In an inflationary gap, the Bank of Canada raises interest rates to decrease aggregate demand. Answer: TRUE Diff: 1 Type: TF Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 51) To lower interest rates and accelerate the economy, the Bank of Canada buys bonds which increases the money supply. Answer: TRUE Diff: 2 Type: TF Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 52) To raise interest rates and slow down the economy, the Bank of Canada sells bonds which increases the money supply. Answer: FALSE Diff: 2 Type: TF Page Ref: 314-320 Skill: Applied Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates.

53) The prime rate equals the overnight rate plus 2 percent. Answer: TRUE Diff: 2 Type: TF Page Ref: 314-320 Skill: Recall Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 54) The prime rate equals the overnight rate plus 25 basis points. Answer: FALSE Diff: 2 Type: TF Page Ref: 314-320 Skill: Recall Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 55) The overnight rate, the prime rate, and the rate on 3-month Treasury bills tend to move up and down together. Answer: TRUE Diff: 2 Type: TF Page Ref: 314-320 Skill: Recall Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 56) The overnight rate, the prime rate, and the rate on 10-year government bonds tend to move up and down together. Answer: FALSE Diff: 2 Type: TF Page Ref: 314-320 Skill: Recall Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 57) Long-run interest rates tend to be higher and less volatile than short-run interest rates. Answer: TRUE Diff: 2 Type: TF Page Ref: 314-320 Skill: Recall Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates. 58) Long-run bonds tend to be riskier than short-run bonds, so investors require a higher reward for forgoing liquidity for so long. Answer: TRUE Diff: 2 Type: TF Page Ref: 314-320 Skill: Recall Objective: 11.2 Explain how the Bank of Canada uses open market operations to change target interest rates.

11.3 Driving with the Bank of Canada: Transmission Mechanisms 1) Lower interest rates create a A) positive demand shock. B) negative demand shock. C) negative supply shock. D) positive supply shock. E) stagflation. Answer: A Diff: 1 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 2) Higher interest rates create a A) positive demand shock. B) negative demand shock. C) negative supply shock. D) positive supply shock. E) stagflation. Answer: B Diff: 1 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 3) When the Bank of Canada sells bonds, interest rates A) rise, business investment decreases, and the Canadian dollar depreciates. B) fall, business investment increases, and the Canadian dollar depreciates. C) rise, business investment decreases, and the Canadian dollar appreciates. D) fall, business investment increases, and the Canadian dollar appreciates. E) fall, business investment decreases, and the Canadian dollar appreciates. Answer: C Diff: 3 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment.

4) When the Bank of Canada buys bonds, interest rates A) fall, business investment increases, and the Canadian dollar appreciates. B) rise, business investment decreases, and the Canadian dollar appreciates. C) rise, business investment decreases, and the Canadian dollar depreciates. D) fall, business investment increases, and the Canadian dollar depreciates. E) fall, business investment decreases, and the Canadian dollar appreciates. Answer: D Diff: 3 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 5) When the Bank of Canada lowers interest rates, the Canadian dollar A) depreciates, creating a negative demand shock. B) depreciates, creating a positive demand shock. C) appreciates, creating a positive supply shock. D) appreciates, creating a negative supply shock. E) appreciates, creating a negative demand shock. Answer: B Diff: 2 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 6) When the Bank of Canada raises interest rates, the Canadian dollar A) depreciates, creating a negative demand shock. B) depreciates, creating a positive demand shock. C) appreciates, creating a positive demand shock. D) appreciates, creating a negative supply shock. E) appreciates, creating a negative demand shock. Answer: E Diff: 2 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment.

7) To close a recessionary gap the Bank of Canada will ________ bonds and ________ interest rates. A) sell; lower B) buy; raise C) default on its; outlaw D) buy; lower E) sell; raise Answer: D Diff: 2 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 8) When the inflation rate is 4 percent, the Bank of Canada will ________ bonds and the Canadian dollar will ________. A) sell; expire B) sell; depreciate C) sell; appreciate D) buy; appreciate E) buy; depreciate Answer: C Diff: 2 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 9) When the Bank of Canada raises interest rates, this A) increases unemployment and decreases inflation. B) decreases unemployment and decreases inflation. C) decreases unemployment but creates stagflation. D) increases unemployment and increases inflation. E) decreases unemployment and increases inflation. Answer: A Diff: 2 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment.

10) When the Bank of Canada raises interest rates, the international transmission mechanism creates a ________ and the domestic transmission mechanism creates a ________. A) negative supply shock; negative supply shock B) negative demand shock; positive demand shock C) negative supply shock; negative demand shock D) positive demand shock; positive demand shock E) negative demand shock; negative demand shock Answer: E Diff: 2 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 11) When the Bank of Canada lowers interest rates, the international transmission mechanism creates a ________ and the domestic transmission mechanism creates a ________. A) positive supply shock; positive supply shock B) positive demand shock; negative demand shock C) positive supply shock; positive demand shock D) positive demand shock; positive demand shock E) negative demand shock; negative demand shock Answer: D Diff: 2 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 12) When the Bank of Canada buys bonds, exports A) increase and imports decrease, so net exports increase. B) and imports both increase, so the effect on net exports is unclear. C) decrease and imports increase, so net exports decrease. D) and imports both decrease, so the effect on net exports is unclear. E) and imports both increase, so net exports increase. Answer: A Diff: 3 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment.

13) When the Bank of Canada lowers interest rates, exports A) increase and imports decrease, so net exports increase. B) and imports both increase, so the effect on net exports is unclear. C) decrease and imports increase, so net exports decrease. D) and imports both decrease, so the effect on net exports is unclear. E) and imports both increase, so net exports increase. Answer: A Diff: 3 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 14) During a period of deflation the Bank of Canada will A) raise interest rates, causing an exchange rate depreciation. B) lower interest rates, causing an exchange rate appreciation. C) do nothing because falling prices are good. D) lower interest rates, causing an exchange rate depreciation. E) raise interest rates, causing an exchange rate appreciation. Answer: D Diff: 2 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 15) If the Bank of Canada buys bonds on the bond market, all of the following happen except A) bank reserves increase. B) the supply of money increases. C) business investment increases. D) the overnight rate rises. E) net exports increase. Answer: D Diff: 2 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 16) Which statement correctly describes how monetary policy affects the economy? A) House sales are down, due to increases in the money supply. B) The extra money pumped into the economy by the central bank is decreasing exports. C) The decreased supply of money is helping sell exports abroad. D) Businesses are investing more, now that monetary policy has attacked the inflationary gap. E) The extra money pumped into the economy by the central bank is creating more jobs. Answer: E Diff: 3 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 561 Copyright © 2021 Pearson Canada Inc.

17) Which statement correctly describes how monetary policy affects the economy? A) House sales are down, due to increases in the money supply. B) The extra money pumped into the economy by the central bank is increasing exports. C) The decreased supply of money is helping sell exports abroad. D) Businesses are investing more, now that monetary policy has attacked the inflationary gap. E) The extra money pumped into the economy by the central bank is reducing jobs. Answer: B Diff: 3 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 18) Which statement correctly describes an anti-inflationary monetary policy? A) The Bank of Canada's recent buying of government bonds is stimulating the housing sector. B) The Bank of Canada's recent moves to lower interest rates are behind the recent depreciation of the Canadian dollar. C) The Bank of Canada's recent moves to raise the overnight rate are leading to less lending and less consumer spending. D) The Bank of Canada's recent sales of government bonds are stimulating the housing sector. E) The Bank of Canada's recent moves to decrease the value of the Canadian dollar are leading to more spending in the economy. Answer: C Diff: 3 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 19) An increase in the supply of money leads to a(n) A) increase in aggregate supply. B) decrease in net exports. C) decrease in real GDP. D) decrease in inflation. E) increase in aggregate demand. Answer: E Diff: 2 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment.

20) Facing an inflationary gap, an increase in the overnight rate results in a(n) A) increase in both real GDP and the price level. B) increase in real GDP, but a fall in the price level. C) increase in real GDP, but no change in the price level. D) rise in the price level, but no change in real GDP. E) fall in both the price level and real GDP. Answer: E Diff: 3 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 21) When the Bank of Canada lowers the overnight rate, the exchange rate ________, imports ________, and exports ________. A) appreciates; increase; increase B) appreciates; increase; decrease C) depreciates; decrease; increase D) depreciates; decrease; decrease E) depreciates; increase; decrease Answer: C Diff: 3 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 22) If Canadian interest rates rise, the value of the Canadian dollar ________ and net exports ________. A) appreciates; increase B) appreciates; decrease C) depreciates; increase D) depreciates; decrease E) appreciates only if U.S. interest rates also fall; decrease Answer: B Diff: 2 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment.

23) When the Bank of Canada lowers the overnight rate, the Canadian interest rate differential ________ and the Canadian dollar ________ on the foreign exchange market. A) increases; appreciates B) increases; depreciates C) decreases; appreciates D) decreases; depreciates E) decreases; reaches interest rate parity Answer: D Diff: 2 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 24) A decrease in the overnight loans rate leads to A) an increase in the supply of money. B) a depreciation in the exchange rate. C) an increase in exports. D) an increase in consumer spending. E) all of the above. Answer: E Diff: 2 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 25) In response to a recessionary gap, the Bank of Canada will ________ the overnight rate to ________. A) raise; increase aggregate demand B) lower; increase aggregate demand C) raise; decrease aggregate demand D) lower; decrease aggregate demand E) lower; increase potential GDP Answer: B Diff: 2 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment.

26) In response to a recessionary gap, the Bank of Canada will ________ the overnight rate to ________. A) raise; shift the aggregate demand curve rightward B) lower; shift the aggregate demand curve rightward C) raise; shift the aggregate demand curve leftward D) lower; shift the aggregate demand curve leftward E) lower; shift the long-run aggregate supply curve (LAS) rightward Answer: B Diff: 2 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 27) In response to an inflationary gap, the Bank of Canada A) waits until the price level falls before acting. B) lowers the overnight rate by selling bonds. C) raises the overnight rate by selling bonds. D) lowers the overnight rate by buying bonds. E) raises the overnight rate by buying bonds. Answer: C Diff: 1 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 28) The headline "The Bank of Canada Cuts the Bank Rate" suggests that the Bank of Canada wants to A) reduce inflationary pressures. B) increase the overnight rate. C) increase aggregate demand. D) make the Canadian dollar appreciate. E) help banks make profits. Answer: C Diff: 1 Type: MC Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 29) The effects of monetary policy work through aggregate demand only. Answer: TRUE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment.

30) Higher interest rates work like an accelerator to speed up the economy. Answer: FALSE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 31) Lower interest rates work like a brake to slow down the economy. Answer: FALSE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 32) Lower interest rates work like an accelerator to speed up the economy. Answer: TRUE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 33) Higher interest rates work like a brake to slow down the economy. Answer: TRUE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 34) Lower interest rates reduce the cost of interest-sensitive purchases for consumers and businesses. Answer: TRUE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 35) Lower interest rates are a positive aggregate supply shock. Answer: FALSE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment.

36) Higher interest rates are a negative aggregate demand shock. Answer: TRUE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 37) The international transmission mechanism works through the effect of the Canadian interestrate differential on the value of the Canadian dollar. Answer: TRUE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 38) The international transmission mechanism works through the effect of interest rates on interest-sensitive spending. Answer: FALSE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 39) The domestic transmission mechanism works through the effect of interest rates on interestsensitive spending. Answer: TRUE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 40) Through the international transmission mechanism, higher interest rates decrease exports and increase imports. Answer: TRUE Diff: 2 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 41) An appreciating Canadian dollar is a positive aggregate demand shock. Answer: FALSE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment.

42) A depreciating Canadian dollar is a negative aggregate demand shock. Answer: FALSE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 43) An appreciating Canadian dollar is a negative aggregate demand shock. Answer: TRUE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 44) A depreciating Canadian dollar is a positive aggregate demand shock. Answer: TRUE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 45) Monetary policy to brake the economy by raising interest rates is often politically popular. Answer: FALSE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 46) Monetary policy to brake the economy by raising interest rates is often politically unpopular. Answer: TRUE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 47) Monetary policy to accelerate the economy by lowering interest rates is often politically unpopular. Answer: FALSE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment.

48) When the central bank sells bonds, the international transmission mechanism partially offsets the impact of the domestic transmission mechanism. Answer: FALSE Diff: 2 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 49) When the Bank of Canada lowers interest rates, the international transmission mechanism reinforces the impact of the domestic transmission mechanism on the economy. Answer: TRUE Diff: 2 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 50) In dealing with an inflationary gap 18 to 24 months in the future, monetary policy is like "taking away the punch bowl just when the party is getting started." Answer: TRUE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 51) In dealing with a recessionary gap 18 to 24 months in the future, monetary policy is like "taking away the punch bowl just when the party is getting started." Answer: FALSE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment. 52) Higher interest rates decrease real GDP and increase inflation. Answer: FALSE Diff: 1 Type: TF Page Ref: 321-328 Skill: Applied Objective: 11.3 Trace the effects of interest rate changes on aggregate demand, inflation, real GDP, and unemployment.

11.4 Transmission Breakdowns: Balance Sheet Recessions and Monetary Policy 1) The Global Financial Crisis was caused by A) falling net exports. B) decreased business investment spending. C) higher interest rates. D) a negative supply shock. E) falling asset prices. Answer: E Diff: 1 Type: MC Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 2) Which are not assets on a chartered bank's balance sheet? A) mortgages B) deposits C) commercial loans D) government bonds E) corporate bonds Answer: B Diff: 2 Type: MC Page Ref: 329-334 Skill: Recall Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 3) During a balance sheet recession, businesses focus on A) investment spending. B) buying assets. C) reducing debt. D) maximizing profits. E) maximizing sales. Answer: C Diff: 2 Type: MC Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession.

4) Monetary policy during the Global Financial Crisis was unusual because A) the international transmission mechanism failed. B) the Bank of Canada raised interest rates. C) lower interest rates caused the Canadian dollar to appreciate. D) lower interest rates did not stimulate aggregate demand. E) banks used excess reserves to increase lending. Answer: D Diff: 2 Type: MC Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 5) The term quantitative easing describes the behaviour of central banks when they buy A) gold. B) government bonds. C) cash reserves. D) easy money. E) mortgages. Answer: E Diff: 1 Type: MC Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 6) The quantity theory of money predicts that when the economy is at potential GDP, a 10 percent increase in the money supply results in a 10 percent A) increase in the inflation rate. B) decrease in unemployment. C) decrease in the inflation rate. D) increase in the velocity of money. E) increase in potential GDP. Answer: A Diff: 1 Type: MC Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession.

7) The quantity theory of money predicts that increases in the money supply lead to noninflationary increases in real GDP when A) real GDP is above potential GDP. B) real GDP is below potential GDP. C) the international transmission mechanism breaks down. D) the domestic transmission mechanism breaks down. E) hell freezes over. Answer: B Diff: 2 Type: MC Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 8) When real GDP is less than potential GDP, an increase in the quantity of money leads to a(n) A) increase in both real GDP and the price level. B) decrease in real GDP and an increase in the price level. C) constant real GDP and an increase in the price level. D) decrease in both real GDP and the price level. E) increase in real GDP and a decrease in the price level. Answer: A Diff: 2 Type: MC Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 9) Quantitative easing is part of the Bank of Canada's role as A) manager of the exchange rate. B) banker to the government. C) issuer of currency. D) regulator of the money supply. E) lender of last resort. Answer: E Diff: 2 Type: MC Page Ref: 329-334 Skill: Recall Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession.

10) During the Global Financial Crisis, the Bank of Canada A) sold mortgages to foreign investors. B) sold mortgages to chartered banks. C) bought mortgages from chartered banks. D) bought shares of publicly traded companies. E) bought mortgages from the U.S. Federal Reserve Bank. Answer: C Diff: 2 Type: MC Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 11) The Global Financial Crisis challenged monetary policy because the ________ became difficult to predict. A) target interest rate B) international transmission mechanism C) Minister of Finance D) domestic transmission mechanism E) exchange rate Answer: D Diff: 1 Type: MC Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 12) When the inflation rate is 3 percent and the nominal interest rate is 5 percent, the real interest rate is A) 2 percent. B) 8 percent. C) 0.6 percent. D) 1.6 percent. E) 7 percent. Answer: A Diff: 1 Type: MC Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession.

13) Which statement is false? A) The prime rate is a nominal interest rate. B) The prime rate is not adjusted for inflation. C) The realized real interest rate adjusts the nominal interest rate to remove the effects of inflation. D) Real interest rate equals nominal interest rate divided by inflation rate. E) In the last half of 2009, the real interest rate was 0.25 percent, close to zero. Answer: D Diff: 1 Type: MC Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 14) Which statement is false? A) The prime rate is a real interest rate. B) The prime rate is not adjusted for inflation. C) The realized real interest rate adjusts the nominal interest rate to remove the effects of inflation. D) Real interest rate equals nominal interest rate minus the inflation rate. E) In the last half of 2009, the real interest rate was 0.25 percent, close to zero. Answer: A Diff: 1 Type: MC Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 15) Which statement is false? A) The prime rate is a nominal interest rate. B) The prime rate is adjusted for inflation. C) The realized real interest rate adjusts the nominal interest rate to remove the effects of inflation. D) Real interest rate equals nominal interest rate minus the inflation rate. E) In the last half of 2009, the real interest rate was 0.25 percent, close to zero. Answer: B Diff: 1 Type: MC Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession.

16) During a balance sheet recession, the transmission mechanism of monetary policy is blocked by money's function as a A) medium of value. B) medium of exchange. C) store of exchange. D) store of value. E) unit of account. Answer: D Diff: 1 Type: MC Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 17) Quantitative easing A) floods the financial system with money. B) creates risks of inflation as the economy approaches potential GDP. C) replaces liabilities on chartered bank balance sheets with cash assets. D) makes it easier for chartered banks to make new loans. E) does all of the above. Answer: E Diff: 3 Type: MC Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 18) Quantitative easing A) floods the financial system with debt. B) creates risks of inflation as the economy approaches potential GDP. C) replaces liabilities on chartered bank balance sheets with debt. D) makes it harder for chartered banks to make new loans. E) does all of the above. Answer: B Diff: 3 Type: MC Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 19) Falling housing prices were a factor in the Global Financial Crisis. Answer: TRUE Diff: 1 Type: TF Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession.

20) During the Global Financial Crisis, central banks used quantitative easing to buy high risk assets from the financial sector. Answer: TRUE Diff: 2 Type: TF Page Ref: 329-334 Skill: Recall Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 21) When central banks engage in quantitative easing, they are acting in their role as banker to the government. Answer: FALSE Diff: 1 Type: TF Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 22) When real GDP is below potential GDP, a 10 percent increase in the money supply always results in a 10 percent increase in the price level. Answer: FALSE Diff: 2 Type: TF Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 23) A monetary policy to accelerate the economy may not encourage spending when consumers and businesses are focused on liquidity. Answer: TRUE Diff: 2 Type: TF Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 24) During the Global Financial Crisis, the international transmission mechanism of monetary policy failed. Answer: FALSE Diff: 2 Type: TF Page Ref: 329-334 Skill: Recall Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 25) During the Global Financial Crisis, the domestic transmission mechanism of monetary policy failed. Answer: TRUE Diff: 2 Type: TF Page Ref: 329-334 Skill: Recall Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 576 Copyright © 2021 Pearson Canada Inc.

26) When real GDP is at potential GDP, a 5 percent decrease in the money supply results in a 5 percent increase in prices. Answer: FALSE Diff: 3 Type: TF Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 27) The quantity theory of money assumes that velocity and real GDP are fixed. Answer: TRUE Diff: 3 Type: TF Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 28) During a balance sheet recession, businesses are mostly concerned with reducing their liabilities. Answer: TRUE Diff: 2 Type: TF Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 29) The banking system put profits over prudence before and after the Global Financial Crisis. Answer: FALSE Diff: 2 Type: TF Page Ref: 329-334 Skill: Recall Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 30) The banking system put profits over prudence before the Global Financial Crisis, but prudence over profits after. Answer: TRUE Diff: 2 Type: TF Page Ref: 329-334 Skill: Recall Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 31) When the real interest rate is 2 percent and the inflation rate is 5 percent, the nominal interest rate is 3 percent. Answer: FALSE Diff: 2 Type: TF Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 577 Copyright © 2021 Pearson Canada Inc.

32) When the real interest rate is 2 percent and the inflation rate is 5 percent, the nominal interest rate is 7 percent. Answer: TRUE Diff: 2 Type: TF Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 33) Nominal interest rates can never be less than real interest rates. Answer: FALSE Diff: 2 Type: TF Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 34) Real interest rates are more important than nominal interest rates for making smart saving and investing decisions. Answer: TRUE Diff: 1 Type: TF Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 35) In a balance sheet recession, smart individual choices to save and not spend do not add up to smart choices for the economy as a whole. Answer: TRUE Diff: 1 Type: TF Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 36) In a balance sheet recession, chartered bank choices for prudence over profits do not add up to smart choices for the economy as a whole. Answer: TRUE Diff: 1 Type: TF Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 37) Most recessions are triggered by decreasing business investment spending, falling net exports, or rising interest rates. Answer: TRUE Diff: 2 Type: TF Page Ref: 329-334 Skill: Recall Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 578 Copyright © 2021 Pearson Canada Inc.

38) Most recessions are triggered by falling asset prices. Answer: FALSE Diff: 2 Type: TF Page Ref: 329-334 Skill: Recall Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 39) Assets are what you own or earn, while liabilities are what you owe or spend. Answer: TRUE Diff: 1 Type: TF Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 40) Assets are what you owe or spend, while liabilities are what you own or earn. Answer: FALSE Diff: 1 Type: TF Page Ref: 329-334 Skill: Applied Objective: 11.4 Explain what blocks monetary transmission mechanisms, and how quantitative easing can overcome a balance sheet recession. 11.5 Who's Driving? Anchoring Inflation Expectations 1) Canada's inflation-control target is set A) jointly by the Bank of Canada and the U.S. Federal Reserve. B) by the Bank of Canada. C) by the Government of Canada. D) jointly by the Bank of Canada and the Government of Canada. E) by the International Monetary Fund. Answer: D Diff: 2 Type: MC Page Ref: 334-341 Skill: Recall Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 2) When most people expect inflation, A) their expectations come true. B) they demand lower wages as compensation. C) businesses frequently lower prices. D) deflation can happen. E) they save more, spend less. Answer: A Diff: 1 Type: MC Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 579 Copyright © 2021 Pearson Canada Inc.

3) The Bank of Canada's strict focus on inflation-rate targeting has A) promoted freer trade. B) confused the voting public. C) anchored inflationary expectations. D) maintained independence from politicians. E) preserved liquidity in the financial sector. Answer: C Diff: 2 Type: MC Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 4) The "Yes - Markets Self-Adjust" and "No - Markets Fail Often" camps agree A) on fixed rules for monetary policy. B) on the need for a central bank independent from political control. C) on government discretion for monetary policy. D) that a central bank should be accountable to voters. E) that inflation-rate targeting anchors expectations. Answer: E Diff: 2 Type: MC Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 5) When the Governor of the Bank of Canada cannot agree with the Government of Canada over the conduct of monetary policy, A) monetary policy is cancelled for a period of two years. B) the Governor can be forced to resign. C) the government will be defeated in parliament. D) the Prime Minister can be forced to resign. E) the Supreme Court of Canada decides. Answer: B Diff: 2 Type: MC Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree.

6) The original Phillips Curve suggests a trade-off between A) inflation and unemployment. B) inflation and interest rates. C) exchange rates and interest rates. D) inflation and velocity. E) interest rates and unemployment. Answer: A Diff: 2 Type: MC Page Ref: 334-341 Skill: Recall Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 7) The original Phillips Curve trade-off between inflation and unemployment works as long as A) animal spirits do not change. B) there is inflation-rate targeting by the central bank. C) there is an independent central bank. D) exchange rates do not change. E) expectations about inflation do not change. Answer: E Diff: 3 Type: MC Page Ref: 334-341 Skill: Recall Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 8) The only Governor of the Bank of Canada who was forced to resign was A) Crow. B) Towers. C) Coyne. D) Carney. E) Theissen. Answer: C Diff: 2 Type: MC Page Ref: 334-341 Skill: Recall Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree.

9) The "Yes - Markets Self-Adjust" and "No - Markets Fail Often" camps disagree on the need for a central bank to A) issues currency. B) stick to fixed rules for monetary policy. C) act as banker to the banks. D) regulate financial markets. E) protect depositors. Answer: B Diff: 2 Type: MC Page Ref: 334-341 Skill: Recall Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 10) During the stagflation triggered by the OPEC price hikes in the 1970's, central banks increased the money supply because A) they thought the recession was caused by a negative demand shock. B) this is the best policy for a negative supply shock. C) low interest rates are appropriate policy for an inflationary gap. D) the government's inflation-rate target range was 10 to 15 percent. E) they thought a lower exchange rate was preferable to low interest rates. Answer: A Diff: 3 Type: MC Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 11) The "No - Markets Fail Often" camp favours A) hands-off rules for monetary policy. B) a role for government in monetary policy. C) an independent central bank. D) fixed rules that leave no discretion for monetary policy. E) all of the above. Answer: B Diff: 3 Type: MC Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree.

12) The "Yes - Markets Self-Adjust" camp favours A) hands-off rules for monetary policy. B) inflation-rate targeting to anchor expectations. C) an independent central bank. D) fixed rules that leave no discretion for monetary policy. E) all of the above. Answer: E Diff: 3 Type: MC Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 13) Critics of inflation control targets worry that A) civil servants control monetary policy rather than elected officials. B) elected officials control monetary policy rather than civil servants. C) targets encourage a focus on real GDP growth and employment at the expense of inflation. D) targets encourage a focus on inflation at the expense of employment and real GDP growth. E) targets anchor inflation expectations. Answer: D Diff: 3 Type: MC Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 14) A criticism of the Bank of Canada's focus on an inflation control target is that A) if inflation falls below the target range, a recession will result. B) if inflation rises above the target range, the Bank decreases aggregate demand and could create a recession and unemployment. C) the Bank pays too much attention to unemployment and real GDP growth and not enough to inflation control. D) it makes it hard to set expectations of inflation. E) the Bank rarely achieves its target. Answer: B Diff: 2 Type: MC Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree.

15) Monetary policy is difficult to conduct because A) the chartered banks often don't cooperate. B) the policy tools don't work. C) politicians often block the policy's outcomes. D) the interest rate always rises. E) it can take years for real GDP to respond to interest rate changes. Answer: E Diff: 2 Type: MC Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 16) Canada's inflation control target is set jointly by the Bank of Canada and the U.S. Federal Reserve. Answer: FALSE Diff: 2 Type: TF Page Ref: 334-341 Skill: Recall Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 17) The Bank of Canada is totally independent of Parliament. Answer: FALSE Diff: 2 Type: TF Page Ref: 334-341 Skill: Recall Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 18) The Bank of Canada has considerable independence, but is ultimately accountable to Parliament. Answer: TRUE Diff: 2 Type: TF Page Ref: 334-341 Skill: Recall Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 19) Canada's inflation control target is set jointly by the Bank of Canada and the Government of Canada. Answer: TRUE Diff: 2 Type: TF Page Ref: 334-341 Skill: Recall Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree.

20) Canada's inflation control target is set by the Bank of Canada only. Answer: FALSE Diff: 2 Type: TF Page Ref: 334-341 Skill: Recall Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 21) Canada's inflation control target is set by the Government of Canada only. Answer: FALSE Diff: 2 Type: TF Page Ref: 334-341 Skill: Recall Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 22) The Bank of Canada and the Government of Canada are jointly responsible for conducting monetary policy. Answer: FALSE Diff: 2 Type: TF Page Ref: 334-341 Skill: Recall Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 23) The Bank of Canada alone is responsible for conducting monetary policy. Answer: TRUE Diff: 2 Type: TF Page Ref: 334-341 Skill: Recall Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 24) Hands-on and hands-off economists agree that targeting inflation anchors inflationary expectations. Answer: TRUE Diff: 2 Type: TF Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 25) The OPEC oil price cartel broke up in the 1980s. Answer: FALSE Diff: 1 Type: TF Page Ref: 334-341 Skill: Recall Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree.

26) When most people expect inflation their expectations come true. Answer: TRUE Diff: 1 Type: TF Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 27) To eliminate inflationary expectations, the Bank of Canada uses quantitative easing to buy mortgages from the chartered banks. Answer: FALSE Diff: 2 Type: TF Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 28) The Governor of the Bank of Canada has never resigned because of disagreements with the Government over the conduct of monetary policy. Answer: FALSE Diff: 2 Type: TF Page Ref: 334-341 Skill: Recall Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 29) After the OPEC oil price shocks in the 1970s, central banks responded by lowering interest rates because they thought this was a negative demand shock. Answer: TRUE Diff: 2 Type: TF Page Ref: 334-341 Skill: Recall Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 30) Accommodating a negative supply shock with monetary policy to accelerate the economy causes rapid inflation. Answer: TRUE Diff: 3 Type: TF Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 31) Accommodating a negative demand shock with monetary policy to accelerate the economy causes rapid inflation. Answer: FALSE Diff: 3 Type: TF Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 586 Copyright © 2021 Pearson Canada Inc.

32) Hands-on economists favour monetary rules. Answer: FALSE Diff: 3 Type: TF Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 33) Accommodating a negative supply shock with monetary policy to accelerate the economy causes stagflation. Answer: TRUE Diff: 3 Type: TF Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 34) Inflation expectations go up slowly and painfully, but come down quickly and easily. Answer: FALSE Diff: 2 Type: TF Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 35) Inflation expectations go up quickly and easily, but come down slowly and painfully. Answer: TRUE Diff: 2 Type: TF Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 36) The "Yes - Markets Self-Adjust" camp favours hands-off rules for monetary policy, like inflation targets. Answer: TRUE Diff: 3 Type: TF Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 37) The "Yes - Markets Self-Adjust" camp favours leaving the driving of monetary policy to the government. Answer: FALSE Diff: 2 Type: TF Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree.

38) The original Phillips Curve tradeoff between inflation and unemployment works when expectations about inflation do not change. Answer: TRUE Diff: 2 Type: TF Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 39) Changing inflation expectations eliminated the original Phillips Curve tradeoff between inflation and unemployment. Answer: TRUE Diff: 3 Type: TF Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. 40) Most hands-on followers of Keynes worry that reducing unemployment by allowing higher inflation would unleash damaging inflation expectations. Answer: TRUE Diff: 3 Type: TF Page Ref: 334-341 Skill: Applied Objective: 11.5 Explain how inflation rate targeting by an independent central bank anchors expectations, helps market economies function, and gets economists to agree. Macroeconomics for Life: Smart Choices for All?, Updated 2e (Cohen) Chapter 12 Spending Others' Money: Fiscal Policy, Deficits, and National Debt 12.1 Spenders of Last Resort: Aggregate Demand Policies for Stabilizing Business Cycles 1) The goals of fiscal policy do not include A) low inflation. B) steady growth. C) stable prices. D) full employment. E) political freedom. Answer: E Diff: 1 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 2) An example of fiscal policy is changing A) the interest rate. B) the money supply. C) the tax rate. D) the exchange rate. E) all of the above. 588 Copyright © 2021 Pearson Canada Inc.

Answer: C Diff: 1 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 3) Which is an injection into the circular flow? A) transfer payments B) income taxes C) import spending D) savings E) harmonized sales tax (HST) Answer: A Diff: 2 Type: MC Page Ref: 350-359 Skill: Recall Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies.

4) Which is an injection into the circular flow? A) exports B) income taxes C) import spending D) savings E) consumer spending Answer: A Diff: 2 Type: MC Page Ref: 350-359 Skill: Recall Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 5) Which is a leakage out of the circular flow? A) exports B) business investment spending C) transfer payments D) harmonized sales tax (HST) E) consumer spending Answer: D Diff: 2 Type: MC Page Ref: 350-359 Skill: Recall Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 6) Which is a leakage out of the circular flow? A) exports B) business investment spending C) transfer payments D) personal savings E) consumer spending Answer: D Diff: 2 Type: MC Page Ref: 350-359 Skill: Recall Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 7) The simple formula for calculating the size of the multiplier effect is A) 1 + (% of leakages from additional income). B) 1 - (% of leakages from additional income). C) 1 / (% of leakages from additional income). D) 1 × (% of leakages from additional income). E) none of the above. Answer: C Diff: 2 Type: MC Page Ref: 350-359 Skill: Recall Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 590 Copyright © 2021 Pearson Canada Inc.

8) If leakages out of the circular flow are 25 percent of additional income, what is the size of the multiplier effect? A) 2 B) 2.5 C) 3 D) 4 E) 5 Answer: D Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 9) If leakages out of the circular flow are 50 percent of additional income, what is the size of the multiplier effect? A) 2 B) 2.5 C) 3 D) 4 E) 5 Answer: A Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 10) If leakages out of the circular flow are 40 percent of additional income, what is the size of the multiplier effect? A) 2 B) 2.5 C) 3 D) 4 E) 5 Answer: B Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies.

11) If leakages out of the circular flow are 33 percent of additional income, what is the size of the multiplier effect? A) 2 B) 2.5 C) 3 D) 4 E) 5 Answer: C Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 12) The size of the multiplier effect of government spending is larger when A) saving is higher. B) export spending is higher. C) income taxes are lower. D) investment spending is lower. E) investment spending is higher. Answer: C Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 13) The size of the multiplier effect of government spending is larger when A) saving is lower. B) export spending is higher. C) income taxes are higher. D) investment spending is lower. E) import spending is higher. Answer: A Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies.

14) The size of the multiplier effect of government spending is smaller when A) import spending is lower. B) import spending is higher. C) saving is lower. D) export spending is higher. E) income taxes are lower. Answer: B Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 15) The size of the multiplier effect of government spending is smaller when A) import spending is lower. B) income taxes are higher. C) saving is lower. D) export spending is higher. E) investment spending is higher. Answer: B Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 16) What decreases the size of the multiplier effect? A) Consumers buy fewer imports. B) Consumers save less and spend more. C) Income tax rates decrease. D) Consumers save more and spend less. E) Businesses invest more. Answer: D Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 17) What decreases the size of the multiplier effect? A) Consumers buy more imports. B) Consumers save less and spend more. C) Income tax rates decrease. D) Businesses export more. E) Businesses invest more. Answer: A Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 593 Copyright © 2021 Pearson Canada Inc.

18) What increases the size of the multiplier effect? A) more leakages from the circular flow B) fewer leakages from the circular flow C) more injections into the circular flow D) fewer injections into the circular flow E) fewer politicians in Ottawa Answer: B Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 19) What decreases the size of the multiplier effect? A) more leakages from the circular flow B) fewer leakages from the circular flow C) more injections into the circular flow D) fewer injections into the circular flow E) more politicians in Ottawa Answer: A Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 20) Which government fiscal policy is a positive demand shock? A) increasing taxes B) decreasing transfer payments C) decreasing government spending D) increasing government spending E) none of the above Answer: D Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies.

21) Which government fiscal policy is a positive demand shock? A) increasing taxes B) decreasing transfer payments C) decreasing government spending D) all of the above E) none of the above Answer: E Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 22) Which government fiscal policy is a positive demand shock? A) decreasing taxes B) increasing transfer payments C) increasing government spending D) all of the above E) none of the above Answer: D Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 23) Which government fiscal policy is a negative demand shock? A) increasing taxes B) increasing transfer payments C) decreasing taxes D) increasing government spending E) none of the above Answer: A Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 24) Which government fiscal policy is a negative demand shock? A) increasing taxes B) decreasing transfer payments C) decreasing government spending D) all of the above E) none of the above Answer: D Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 595 Copyright © 2021 Pearson Canada Inc.

25) Which government fiscal policy is a negative demand shock? A) decreasing taxes B) increasing transfer payments C) increasing government spending D) all of the above E) none of the above Answer: E Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 26) Which government fiscal policy is a positive supply shock? A) increasing taxes B) decreasing transfer payments C) decreasing government spending D) increasing government spending E) none of the above Answer: E Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 27) Which government fiscal policy is a negative supply shock? A) decreasing taxes B) decreasing transfer payments C) decreasing government spending D) increasing government spending E) none of the above Answer: E Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies.

28) The "Yes - Markets Self-Adjust" camp favours ________ to accelerate the economy and ________ to slow down the economy. A) tax cuts; decreased government spending B) increased government spending; decreased government spending C) tax cuts; tax increases D) increased government spending; tax increases E) tax cuts; increased government spending Answer: A Diff: 3 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 29) The "Yes - Markets Self-Adjust" camp agrees with all of the following statements except which one? A) Government spending is determined by political influence rather than need. B) Private individuals should make smart choices about how to spend their money. C) Reduced government spending is preferred to tax cuts for slowing the economy. D) Tax cuts are less effective than government spending for speeding up the economy because savings can cause transmission breakdowns. E) Government should keep its hands off of the economy wherever possible. Answer: D Diff: 3 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 30) The "No - Markets Fail Often" camp favours ________ to accelerate the economy and ________ to slow down the economy. A) increased government spending; tax cuts B) tax cuts; tax increases C) increased government spending; decreased government spending D) tax cuts; decreased government spending E) increased government spending; tax increases Answer: E Diff: 3 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies.

31) The "No - Markets Fail Often" camp agrees with all of the following statements except which one? A) Tax cuts are less effective than government spending for speeding up the economy because savings can cause transmission breakdowns. B) Market failures create a need for hands-on government. C) Democratically elected politicians are the right people to make choices about how to spend taxpayers' money. D) Government spending is determined by political influence rather than need. E) Tax increases are preferred to reduced government spending for slowing down the economy. Answer: D Diff: 3 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 32) During a recessionary gap, government fiscal policy will A) seek re-election. B) decrease spending. C) increase taxes. D) decrease transfer payments. E) increase spending. Answer: E Diff: 1 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 33) When real GDP exceeds potential GDP, fiscal policy will A) increase transfer payments. B) cut taxes. C) increase government spending. D) increase taxes. E) invest in public universities. Answer: D Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies.

34) The size of the multiplier effect is larger when A) leakages are smaller. B) leakages are larger. C) the economy is close to potential GDP. D) interest rates are higher. E) injections are smaller. Answer: A Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 35) The fiscal policy to counter a recessionary gap is a A) positive aggregate supply shock. B) negative aggregate supply shock. C) positive aggregate demand shock. D) negative aggregate demand shock. E) contractionary fiscal policy. Answer: C Diff: 1 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 36) The fiscal policy to counter an inflationary gap is a(n) A) positive aggregate supply shock. B) negative aggregate supply shock. C) positive aggregate demand shock. D) negative aggregate demand shock. E) expansionary fiscal policy. Answer: D Diff: 1 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 37) The estimated size of the multiplier effect for government spending is A) almost zero if real GDP equals potential GDP. B) smaller if real GDP is close to potential GDP. C) larger if real GDP is far below potential GDP. D) zero if real GDP is far above potential GDP E) all of the above. Answer: E Diff: 3 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 599 Copyright © 2021 Pearson Canada Inc.

38) Which event has a multiplier effect and increases aggregate demand? A) increase in saving B) increase in exports C) decrease in investment D) increase in taxes E) decrease in exports Answer: B Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 39) Which statement illustrates the idea of the multiplier? A) The new stadium will generate $100 million in spinoff spending. B) Higher expected profits are leading to higher investment spending by business, and will lead to higher consumer spending. C) The loss of government jobs will hurt the local retail industry. D) Taking the grain elevator out of our small town will destroy 200 jobs. E) All of the above. Answer: E Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 40) Fiscal policy is A) the use of government spending and taxes to achieve macroeconomic outcomes. B) any policy by the Bank of Canada. C) budgeting policy by consumer households. D) any policy by the government or Bank of Canada to control inflation. E) risky due to long lags between changes in interest rates and the impact on real GDP. Answer: A Diff: 2 Type: MC Page Ref: 350-359 Skill: Recall Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies.

41) A fiscal policy to counter a recessionary gap is A) increasing interest payments on the national debt. B) increasing taxes. C) decreasing transfer payments. D) increasing transfer payments. E) decreasing government spending on products. Answer: D Diff: 1 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 42) The size of the multiplier effect for tax and transfer changes ________ the size of the multiplier effect for government spending. A) is smaller than B) is larger than C) is equal to D) could be smaller, larger, or equal to E) cannot be compared to Answer: A Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 43) The effect on real GDP of a $10 million tax cut is less than the effect of a $10 million increase in government spending because A) consumers take some of the extra money from the tax cut and buy exports. B) some people do not pay their taxes. C) changes in government spending do not directly affect consumption. D) tax rates are the same regardless of income levels. E) consumers take some of the extra money from the tax cut and use it to save and buy imports. Answer: E Diff: 2 Type: MC Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 44) Fiscal policy works through aggregate supply. Answer: FALSE Diff: 1 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies.

45) Tax increases decrease the size of the multiplier. Answer: TRUE Diff: 1 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 46) The size of the multiplier effect for tax and transfer changes is not as big as for government spending. Answer: TRUE Diff: 1 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 47) The size of the multiplier effect for government spending is not as big as for tax and transfer changes. Answer: FALSE Diff: 1 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 48) Injections are spending in the circular flow that start with consumers. Answer: FALSE Diff: 1 Type: TF Page Ref: 350-359 Skill: Recall Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 49) Leakages are spending that leaks out of the circular flow through taxes, savings, and imports. Answer: TRUE Diff: 1 Type: TF Page Ref: 350-359 Skill: Recall Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 50) Leakages are spending that leaks out of the circular flow through government spending, business investment spending, and exports. Answer: FALSE Diff: 1 Type: TF Page Ref: 350-359 Skill: Recall Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies.

51) The effects of fiscal policy work through aggregate supply. Answer: FALSE Diff: 1 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 52) The word fiscal comes from a Latin word meaning the public treasury. Answer: TRUE Diff: 1 Type: TF Page Ref: 350-359 Skill: Recall Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 53) Export spending is a leakage. Answer: FALSE Diff: 1 Type: TF Page Ref: 350-359 Skill: Recall Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 54) Import spending is a leakage. Answer: TRUE Diff: 1 Type: TF Page Ref: 350-359 Skill: Recall Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 55) During a recessionary gap, government fiscal policy injects money into the economy. Answer: FALSE Diff: 1 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 56) During an inflationary gap, it is a good strategy to inject spending into the economy. Answer: FALSE Diff: 1 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies.

57) Business investment spending is an injection. Answer: TRUE Diff: 1 Type: TF Page Ref: 350-359 Skill: Recall Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 58) Tax cuts are a fiscal policy to counter a recessionary gap by causing a positive demand shock. Answer: TRUE Diff: 2 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 59) Tax cuts are a fiscal policy to counter an inflationary gap by causing a negative demand shock. Answer: FALSE Diff: 2 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 60) Economists who favour a hands-off approach prefer tax cuts over government spending to accelerate the economy. Answer: TRUE Diff: 2 Type: TF Page Ref: 350-359 Skill: Recall Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 61) Economists who favour a hands-on approach prefer government spending increases over tax cuts to stimulate the economy. Answer: TRUE Diff: 2 Type: TF Page Ref: 350-359 Skill: Recall Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 62) J.M. Keynes would recommend government spending increases during a recessionary gap. Answer: TRUE Diff: 1 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies.

63) "Yes - Markets Self-Adjust" camp economists recommend government spending increases during a recessionary gap. Answer: FALSE Diff: 1 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 64) If leakages out of the circular flow are 50 percent of additional income, the size of the multiplier effect is 2. Answer: TRUE Diff: 1 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 65) If leakages out of the circular flow are 50 percent of additional income, the size of the multiplier effect is 4. Answer: FALSE Diff: 1 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 66) If leakages out of the circular flow are 25 percent of additional income, the size of the multiplier effect is 2. Answer: FALSE Diff: 1 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 67) If leakages out of the circular flow are 25 percent of additional income, the size of the multiplier effect is 4. Answer: TRUE Diff: 1 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 68) If leakages out of the circular flow are 40 percent of additional income, the size of the multiplier effect is 4. Answer: FALSE Diff: 1 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 605 Copyright © 2021 Pearson Canada Inc.

69) If leakages out of the circular flow are 40 percent of additional income, the size of the multiplier effect is 2.5. Answer: TRUE Diff: 1 Type: TF Page Ref: 350-359 Skill: Applied Objective: 12.1 Use the concepts of injections and leakages to explain the multiplied impact of aggregate demand fiscal policies. 12.2 Building Foundations: Aggregate Supply Policies for Promoting Growth 1) When identifying inputs that expanding the circular flow and increases aggregate supply, economists do not include A) government. B) capital. C) land. D) resources. E) entrepreneurship. Answer: A Diff: 1 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 2) Supply-side policies that promote savings for growth can work because consumers who save more A) increase the supply of loanable funds. B) spend less on imported goods and reduce leakages. C) pay less in HST/GST consumption taxes. D) are better prepared for retirement. E) are happier. Answer: A Diff: 2 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects.

3) Supply-siders support lower tax rates because they believe that A) tax revenues will rise. B) incentives to save will increase. C) more consumers will do research and development. D) governments will spend more. E) taxes have positive externalities. Answer: A Diff: 2 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 4) Supply-siders believe people will respond to lower income tax rates by A) working more hours, increasing total tax revenues. B) working more hours, with constant total tax revenues. C) working fewer hours, decreasing total tax revenues. D) working fewer hours, increasing total tax revenues. E) stopping work and stop paying taxes. Answer: A Diff: 2 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 5) The "Yes - Markets Self-Adjust" and "No - Markets Fail Often" camps agree on a government role supporting basic research because A) knowledge creation has positive externalities. B) this encourages consumers to save more. C) this leads to price stability. D) people in school cannot be unemployed. E) economists will benefit from the research. Answer: A Diff: 2 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects.

6) Fiscal policies for economic growth shift A) short-run aggregate supply (SAS) rightward but long-run aggregate supply (LAS) does not change. B) long-run aggregate supply (LAS) rightward but short-run aggregate supply (SAS) does not change. C) both short-run aggregate supply (SAS) and long-run aggregate supply (LAS) rightward. D) aggregate demand (AD) rightward. E) long-run aggregate supply (LAS) rightward but short-run aggregate supply (SAS) leftward. Answer: C Diff: 2 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 7) Fiscal policies for economic growth A) increase potential GDP. B) shift long-run aggregate supply (LAS) rightward. C) result in a falling price level. D) increase the quantity and quality of inputs. E) do all of the above. Answer: E Diff: 2 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 8) If aggregate demand does not change, aggregate supply policies for economic growth A) increase real GDP, increase potential GDP, and raise the price level. B) increase real GDP, increase potential GDP, and lower the price level. C) increase real GDP, do not change potential GDP, and decrease the price level. D) increase real GDP, do not change potential GDP, and do not change the price level. E) fail to produce economic growth. Answer: B Diff: 3 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects.

9) If aggregate demand does not change, aggregate supply policies for economic growth A) create an inflationary gap. B) create a recessionary gap. C) increase potential GDP. D) raise the price level. E) fail to produce economic growth. Answer: C Diff: 2 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 10) Government spending on post-secondary education A) increases the quality of labour inputs. B) increases the quantity of labour inputs. C) decreases the quality of labour inputs. D) decreases the quantity of labour inputs. E) increases diversity in the workplace. Answer: A Diff: 2 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 11) Which fiscal policy does not target aggregate supply? A) tax incentives to stimulate savings B) shifting taxes from income to consumption C) shifting taxes from consumption to income D) support for research and development E) subsidizing education and training Answer: C Diff: 2 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 12) Which fiscal policy does not target aggregate supply? A) tax incentives to stimulate savings B) shifting taxes from income to consumption C) increasing transfer payments D) support for research and development E) subsidizing education and training Answer: C Diff: 2 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 609 Copyright © 2021 Pearson Canada Inc.

13) Fiscal policies encouraging savings and business capital investment A) decrease both aggregate supply and aggregate demand. B) decrease aggregate supply and increase aggregate demand. C) increase aggregate supply and decrease aggregate demand. D) increase both aggregate supply and aggregate demand. E) increase aggregate supply but not change aggregate demand. Answer: D Diff: 3 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 14) Fiscal policies increase potential GDP if they A) increase the quantity of inputs. B) increase the quality of inputs. C) create incentive effects. D) create supply-side effects. E) do any of the above. Answer: E Diff: 2 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 15) Which is not a source of economic growth? A) better educated workers B) increasing stock market prices C) better incentive for workers and businesses D) technological change E) increasing stock of capital equipment Answer: B Diff: 1 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects.

16) Which statement is false? A) Politicians like supply-sider arguments because they can promise to cut taxes without reducing government services or going into debt. B) Politicians who favour a hands-on role for government often use supply-sider arguments to support tax cuts. C) All economists believe tax cuts have some incentives effects increasing aggregate supply. D) Tax cuts affect aggregate demand and, to a lesser extent, aggregate supply. E) There is no evidence to support the claims of supply-siders that tax cuts have large effects on aggregate supply. Answer: B Diff: 3 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 17) Government subsidies for post-secondary education that reduce tuition for students A) increase the quantity of labour inputs. B) increase the quality of labour inputs. C) increase both the quantity and quality of labour inputs. D) decrease the quantity of labour inputs. E) decrease the quality of labour inputs. Answer: B Diff: 3 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 18) The "Yes - Markets Self-Adjust" and "No - Markets Fail Often" camps agree A) that fiscal policy can affect aggregate supply. B) that tax cuts have some supply-side incentive effects. C) that externalities from research and development create a role for government in correcting market failure. D) that education and training have positive externalities. E) on all of the above. Answer: E Diff: 2 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects.

19) Economists often refer to supply-sider arguments as "voodoo economics" because A) Ronald Reagan and Margaret Thatcher practiced black magic. B) lower tax rates do not create incentive effects. C) lower tax rates affect only aggregate demand, not aggregate supply. D) tax cuts increase real GDP. E) in practice, tax cuts have not led to increased tax revenues. Answer: E Diff: 2 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 20) According to the Laffer Curve, A) at tax rates of zero percent and 100 percent, tax revenues are zero. B) higher tax rates increase tax revenues up to a point. C) eventually, higher tax rates decrease tax revenues. D) a cut in the tax rate can increase tax revenues. E) all of the above are true. Answer: E Diff: 2 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 21) According to the Laffer Curve, raising the tax rate A) always increases total tax revenue. B) always decreases total tax revenue. C) does not change total tax revenue. D) increases or decreases total tax revenue, depending on the tax rate. E) taxes are a joke. Answer: D Diff: 2 Type: MC Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 22) The Laffer Curve is the relationship between A) the tax rate and government deficits. B) total tax revenue and potential GDP. C) the tax rate and potential GDP. D) the tax rate and total tax revenues. E) Ronald Reagan and Margaret Thatcher. Answer: D Diff: 2 Type: MC Page Ref: 359-364 Skill: Recall Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 612 Copyright © 2021 Pearson Canada Inc.

23) Supply-siders favour tax cuts because they believe high tax rates create disincentives to work. Answer: TRUE Diff: 1 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 24) Supply-siders believe that government should subsidize basic research because there are negative externalities associated with knowledge. Answer: FALSE Diff: 1 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 25) Supply-siders believe that tax cuts decrease tax revenues because of powerful incentive effects. Answer: FALSE Diff: 1 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 26) Supply-sider arguments appeal to hands-on economists. Answer: FALSE Diff: 1 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 27) Politicians use supply-sider arguments to promise to cut taxes without reducing government services or going into debt. Answer: TRUE Diff: 1 Type: TF Page Ref: 359-364 Skill: Recall Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 28) Fiscal policies promoting savings can increase aggregate supply by providing loanable funds to businesses. Answer: TRUE Diff: 1 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 613 Copyright © 2021 Pearson Canada Inc.

29) Replacing income taxes with consumption taxes discourages savings. Answer: FALSE Diff: 1 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 30) Replacing income taxes with consumption taxes encourages savings. Answer: TRUE Diff: 1 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 31) Education reduces human capital. Answer: FALSE Diff: 1 Type: TF Page Ref: 359-364 Skill: Recall Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 32) Positive externalities are costs that affect others external to a choice or a trade. Answer: FALSE Diff: 1 Type: TF Page Ref: 359-364 Skill: Recall Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 33) Positive externalities are benefits that affect others external to a choice or a trade. Answer: TRUE Diff: 1 Type: TF Page Ref: 359-364 Skill: Recall Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 34) Research and development create positive externalities, promoting economic growth. Answer: TRUE Diff: 1 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects.

35) Positive externalities create market failure and a role for government. Answer: TRUE Diff: 1 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 36) Education and training increase the quality of inputs, increasing potential GDP. Answer: TRUE Diff: 1 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 37) Education and training create positive externalities, promoting economic growth. Answer: TRUE Diff: 1 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 38) Hands-off and hands-on economists agree that externalities from research and development create a role for government in correcting market failure. Answer: TRUE Diff: 2 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 39) Fiscal policies encouraging savings and future economic growth can also decrease aggregate demand in the present. Answer: TRUE Diff: 2 Type: TF Page Ref: 359-364 Skill: Recall Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 40) The "Yes - Markets Self-Adjust" camp believes the long-run benefits of increased aggregate supply outweigh the short-run mismatches between reduced aggregate demand and aggregate supply. Answer: TRUE Diff: 2 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects.

41) The "No - Markets Fail Often" camp believes the long-run benefits of increased aggregate supply outweigh the short-run mismatches between reduced aggregate demand and aggregate supply. Answer: FALSE Diff: 2 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 42) The "No - Markets Fail Often" camp worries that savings reduces consumer spending, business sales, and business investment. Answer: TRUE Diff: 2 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 43) The "Yes - Markets Self-Adjust" camp worries that fiscal policies increasing aggregate supply cause aggregate demand recessions whose costs outweigh the long-run benefits of economic growth. Answer: FALSE Diff: 2 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 44) The "No - Markets Fail Often" camp worries that fiscal policies increasing aggregate supply cause aggregate demand recessions whose costs outweigh the long-run benefits of economic growth. Answer: TRUE Diff: 2 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 45) The "Yes - Markets Self-Adjust" camp strongly supports fiscal policies to encourage savings and capital investment. Answer: TRUE Diff: 2 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects.

46) Ronald Reagan, Margaret Thatcher and Ontario Premier Mike Harris were all supply-siders. Answer: TRUE Diff: 1 Type: TF Page Ref: 359-364 Skill: Recall Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 47) The Laffer Curve claims that a cut in tax rates always increases total tax revenues. Answer: FALSE Diff: 2 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects. 48) The Laffer Curve claims that a cut in very high tax rates can increase total tax revenues if there are powerful incentive effects. Answer: TRUE Diff: 2 Type: TF Page Ref: 359-364 Skill: Applied Objective: 12.2 Identify three aggregate supply policies for growth, and explain the controversy over supply-sider incentive effects.

12.3 Are Deficits Always Bad? Government Budget Surpluses and Deficits 1) Economists are most concerned with ________ government deficits. A) frictional B) structural C) cyclical D) temporary E) unanticipated Answer: B Diff: 1 Type: MC Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 2) During an economic expansion, government transfer payments ________ and tax revenues ________. A) decrease; rise B) decrease; fall C) increase; stay the same D) decrease; stay the same E) increase; fall Answer: A Diff: 1 Type: MC Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 3) During a recession, government transfer payments ________ and tax revenues ________. A) decrease; fall B) increase; stay the same C) stay the same; rise D) stay the same; fall E) increase; fall Answer: E Diff: 2 Type: MC Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles.

4) A government begins the year with a debt $50 billion, collects $10 billion in tax revenues and spends $30 billion. Debt at the end of the year is A) $80 billion. B) $60 billion. C) $70 billion. D) $40 billion. E) $20 billion. Answer: C Diff: 2 Type: MC Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 5) A government begins the year with a debt of $50 billion, collects $10 billion in tax revenues and spends $4 billion. Debt at the end of the year is A) $50 billion. B) $46 billion. C) $64 billion. D) $44 billion. E) $36 billion. Answer: D Diff: 2 Type: MC Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 6) There is a structural deficit when government spending is greater than revenue A) during a deflation. B) during a recessionary gap. C) during an inflationary gap. D) and the national debt is decreasing. E) when the economy is at potential GDP. Answer: E Diff: 2 Type: MC Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles.

7) Government should not try to A) eliminate budget surpluses during a recession. B) eliminate budget deficits during a recession. C) reduce the national debt in an inflationary gap. D) balance the budget at potential GDP. E) balance the budget in an inflationary gap. Answer: B Diff: 1 Type: MC Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 8) Government taxes, transfers and spending work like a thermostat because A) automatic budget deficits occur when the economy expands. B) fiscal policy is cool. C) automatic budget surpluses and deficits counteract changes in real GDP. D) automatic budget surpluses occur when the economy contracts. E) hot air rises. Answer: C Diff: 1 Type: MC Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 9) An economy has $40 billion in debt at the beginning of the year. Tax revenues, net of transfers, are $15 billion while government spending is $5 billion. At the end of the year the debt is A) $50 billion. B) $60 billion. C) $55 billion. D) $30 billion. E) $10 billion. Answer: D Diff: 2 Type: MC Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles.

10) An economy has $20 billion in debt at the beginning of the year. Tax revenues, net of transfers, are $5 billion while government spending is $15 billion. At the end of the year the debt is A) $30 billion. B) $20 billion. C) $10 billion. D) $40 billion. E) $0. Answer: A Diff: 2 Type: MC Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 11) All of the following increase the budget deficit except a(n) A) increase in interest payments on the national debt. B) increase in government spending on products and services. C) increase in government transfer payments D) increase in GST tax revenues. E) decrease in Employment Insurance (EI) premium revenues. Answer: D Diff: 2 Type: MC Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 12) Which is part of federal government spending? A) personal income tax revenues B) Employment Insurance (EI) premium revenues C) interest payments on the national debt D) sales tax revenues E) corporate income tax revenues Answer: C Diff: 1 Type: MC Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles.

13) Due to automatic stabilizers, when real GDP increases, the A) government budget remains in balance. B) government budget deficit decreases or the government budget surplus increases. C) government budget deficit increases or the government budget surplus decreases. D) economy automatically moves to full employment. E) price level remains constant. Answer: B Diff: 3 Type: MC Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 14) The structural deficit is the deficit A) in a recession. B) that occurs at potential GDP. C) in an expansion. D) caused by the business cycle. E) that occurs at the trough of the business cycle. Answer: B Diff: 2 Type: MC Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 15) The cyclical deficit A) is a persistent economic fact. B) occurs when the economy is at full employment. C) arises only because real GDP does not equal potential GDP. D) is an accumulation of the government debt. E) is none of the above. Answer: C Diff: 2 Type: MC Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles.

16) The economy is in a recession and the federal government is running a deficit. An expansion will A) automatically balance the budget. B) automatically increase the deficit. C) automatically decrease the deficit. D) leave the deficit unchanged. E) automatically create a surplus. Answer: C Diff: 3 Type: MC Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 17) There is a cyclical deficit when A) government spending is greater than revenues. B) government spending is less than revenues. C) the deficit arises because real GDP is greater than potential GDP. D) the deficit arises because real GDP is less than potential GDP. E) the deficit arises when real GDP equals potential GDP. Answer: D Diff: 2 Type: MC Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 18) Automatic stabilizers A) require action by Parliament. B) are triggered by a change in real GDP. C) involve only a change in government spending and no change in revenues. D) involve only a change in personal income tax rates. E) work during recessions but not during expansions. Answer: B Diff: 2 Type: MC Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles.

19) What happens automatically if the economy goes into a recession? A) Only transfers increases. B) Only tax revenues rise. C) The deficit increases. D) The deficit decreases. E) Transfers increase, tax revenues rise, and the deficit stays the same. Answer: C Diff: 2 Type: MC Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 20) The largest source of revenues for the federal government is A) transfer payments. B) spending on products and services. C) personal income taxes. D) corporate income taxes. E) GST and HST taxes. Answer: C Diff: 2 Type: MC Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 21) During a recession, tax revenues A) fall and transfers decrease. B) fall and transfers increase. C) rise and transfers decrease. D) rise and transfers increase. E) remain constant and transfers increase. Answer: B Diff: 1 Type: MC Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 22) During an expansion, tax revenues A) fall and transfers decrease. B) fall and transfers increase. C) rise and transfers decrease. D) rise and transfers increase. E) remain constant and transfers increase. Answer: C Diff: 1 Type: MC Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 624 Copyright © 2021 Pearson Canada Inc.

23) Income taxes make up almost half of Canada's federal government revenues. Answer: TRUE Diff: 1 Type: TF Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 24) If income is less than spending, you have a deficit. Answer: TRUE Diff: 1 Type: TF Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 25) If income is less than spending, you have a debt. Answer: FALSE Diff: 1 Type: TF Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 26) The word budget comes from a Latin word meaning a pouch or wallet. Answer: TRUE Diff: 1 Type: TF Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 27) A budget surplus means that spending is greater than revenues. Answer: FALSE Diff: 1 Type: TF Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 28) An economy has $20 billion in debt at the beginning of the year. Tax revenues, net of transfers, are $5 billion while government spending is $15 billion. At the end of the year, the debt is eliminated. Answer: FALSE Diff: 1 Type: TF Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles.

29) Deficits occur when spending is greater than revenues. Answer: TRUE Diff: 1 Type: TF Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 30) An economy has a debt of $50 billion at the beginning of the year. Tax revenues, net of transfers, are $10 billion while government spending is $15 billion. At the end of the year, the debt is $55 billion. Answer: TRUE Diff: 2 Type: TF Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 31) An economy has a debt of $50 billion at the beginning of the year. Tax revenues, net of transfers, are equal to $10 billion while spending is $15 billion. At the end of the year, the debt is $45 billion. Answer: FALSE Diff: 2 Type: TF Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 32) Automatic stabilizers work because cyclical budget deficits and surpluses create injections and leakages that counteract the business cycle. Answer: TRUE Diff: 1 Type: TF Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 33) An economy has a debt of $20 billion at the beginning of the year. Tax revenues, net of transfers, are $8 billion and the budget deficit is $6 billion. At the end of the year, the debt is $22 billion. Answer: FALSE Diff: 3 Type: TF Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles.

34) An economy has a debt of $20 billion at the beginning of the year. Government spending is $10 billion, and the budget surplus is $5 billion. At the end of the year, the debt is $15 billion. Answer: TRUE Diff: 3 Type: TF Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 35) Government should always try to balance the budget during a recession. Answer: FALSE Diff: 1 Type: TF Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 36) Automatic stabilizers counteract business cycles, and steer the economy back towards potential GDP. Answer: TRUE Diff: 1 Type: TF Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 37) Most current automatic stabilizers were introduced during the Great Depression. Answer: FALSE Diff: 2 Type: TF Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 38) Since automatic stabilizers were introduced after the Great Depression, business cycles in Canada have been less frequent, and the contractions have been less severe. Answer: TRUE Diff: 2 Type: TF Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 39) With automatic stabilizers, when the economy goes into an expansion, a budget deficit is automatically created. Answer: FALSE Diff: 1 Type: TF Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles.

40) With automatic stabilizers, attempts to balance the government budget during a recession will decrease aggregate demand and make the recession even worse. Answer: TRUE Diff: 1 Type: TF Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 41) With automatic stabilizers, attempts to balance the government budget during a recession will automatically stabilize the economy at potential GDP. Answer: FALSE Diff: 1 Type: TF Page Ref: 365-370 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 42) With a balanced budget over the business cycle, surpluses during expansions offset deficits during contractions. Answer: TRUE Diff: 2 Type: TF Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 43) A cyclical surplus is a government budget surplus when the economy is at potential GDP. Answer: FALSE Diff: 2 Type: TF Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 44) A cyclical deficit is a government budget deficit when the economy is at potential GDP. Answer: FALSE Diff: 2 Type: TF Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 45) A structural surplus is a government budget surplus when the economy is at potential GDP. Answer: TRUE Diff: 2 Type: TF Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles.

46) A structural deficit is a government budget deficit when the economy is at potential GDP. Answer: TRUE Diff: 2 Type: TF Page Ref: 365-370 Skill: Recall Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 12.4 We Owe How Much?! From Deficits to the National Debt 1) Which statement is true? A) Interest payments on the national debt can become self-perpetuating. B) All debt is bad. C) There is no bad debt, only bad bondholders. D) Canada will go bankrupt because of its debt. E) Canada's debt is currently a major burden for future generations. Answer: A Diff: 2 Type: MC Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 2) Crowding out occurs when debt-financed government spending increases A) inflation. B) exchange rates. C) expectations. D) mindfulness. E) interest rates. Answer: E Diff: 2 Type: MC Page Ref: 371-376 Skill: Recall Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 3) Crowding out occurs when debt-financed government spending decreases private investment spending by A) lowering interest rates. B) raising interest rates. C) lowering expectations. D) improving expectations. E) raising exchange rates. Answer: B Diff: 2 Type: MC Page Ref: 371-376 Skill: Recall Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt.

4) Crowding in occurs when debt-financed government spending A) lowers interest rates. B) raises interest rates. C) lowers expectations. D) improves expectations. E) raises exchange rates. Answer: D Diff: 2 Type: MC Page Ref: 371-376 Skill: Recall Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 5) Gina owes $30 on her VISA card and has no other debt. She charges $60 and makes an $80 payment to VISA. Her debt is now A) $90. B) $60. C) $10. D) $170. E) $0. Answer: C Diff: 2 Type: MC Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 6) Gina owes $30 on her VISA card and has no other debt. She charges $80 and makes a $60 payment to VISA. Her debt is now A) $140. B) $20. C) $10. D) $50. E) $170. Answer: D Diff: 2 Type: MC Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt.

7) Canada will never go bankrupt because A) debt crowds in business investment. B) our credit rating is high. C) the debt is just a transfer. D) where will hockey live? E) our debt can always be refinanced. Answer: E Diff: 1 Type: MC Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 8) Crowding in occurs when A) debt-financed fiscal policy improves expectations, increasing business investment. B) debt-financed fiscal policy raises interest rates, decreasing business investment. C) debt payments become self-perpetuating. D) debt payments become self-financing. E) younger persons object to the inter-generational transfer of interest. Answer: A Diff: 2 Type: MC Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 9) Interest payments can create self-perpetuating debt when A) debt transfers wealth from young to old. B) government must borrow more to make interest payments. C) debt transfers wealth from old to young. D) government borrowing crowds out private investment. E) government borrowing crowds in private investment. Answer: B Diff: 2 Type: MC Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt.

10) In 2009, Canada's debt was $463.7 billion and nominal GDP was around $1,600 billion. The debt to GDP ratio was about A) 45 percent. B) 3.4 percent. C) 345 percent. D) 30 percent. E) 15 percent. Answer: D Diff: 2 Type: MC Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 11) Gina earns $10,000 a year working at the library. Her VISA balance is $2,000. This is the only debt she owes. Gina's debt to income ratio is about A) 5 percent. B) 50 percent. C) 20 percent. D) 500 percent. E) 30 percent. Answer: C Diff: 2 Type: MC Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 12) It is a largely a myth about the national debt that A) government borrowing may crowd out private investment. B) government borrowing may crowd in private investment. C) high interest payments on the debt may create self-perpetuating debt. D) Canada will go bankrupt unless we repay the debt. E) going into debt may be a not-smart choice. Answer: D Diff: 3 Type: MC Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt.

13) Potential problem(s) of the national debt is/are A) government borrowing may crowd out private investment. B) interest payments on the debt may be a burden for future generations if the debt is largely held by non-Canadians. C) high interest payments on the debt may create self-perpetuating debt. D) going into debt to finance consumption. E) all of the above. Answer: E Diff: 3 Type: MC Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 14) A potential problem of the national debt is A) debt is always bad. B) government borrowing may crowd in private investment. C) high interest payments on the debt may create self-perpetuating debt. D) Canada will go bankrupt unless we repay the debt. E) all of the above. Answer: C Diff: 2 Type: MC Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 15) Government debt A) equals revenues minus spending. B) is always increasing. C) equals spending minus revenues. D) is the total net amount of past government borrowing. E) is the result of rising prices. Answer: D Diff: 2 Type: MC Page Ref: 371-376 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles.

16) Suppose the government starts with a debt of $0. Then in year 1, there is a deficit of $100 billion, in year 2 there is a deficit of $60 billion, in year 3 there is a surplus of $40 billion, and in year 4 there is a deficit of $20 billion. The government does not borrow to make interest payments. What is government debt at the end of year 4? A) $20 billion B) $140 billion C) $180 billion D) somewhat greater than $220 billion, depending on the interest rate E) somewhat greater than $140 billion, depending on the interest rate Answer: B Diff: 3 Type: MC Page Ref: 371-376 Skill: Applied Objective: 12.3 Differentiate cyclical from structural deficits and surpluses, and explain the connections between automatic stabilizers and business cycles. 17) Roger has a $30 debt on his VISA card. He pays off $25 but charges $45. His VISA card debt is now $50. Answer: TRUE Diff: 2 Type: TF Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 18) Deficits are a flow, debt is a stock. Answer: TRUE Diff: 1 Type: TF Page Ref: 371-376 Skill: Recall Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 19) Debt is a flow, deficits are a stock. Answer: FALSE Diff: 1 Type: TF Page Ref: 371-376 Skill: Recall Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 20) Debt is the sum of past deficits plus the sum of past surpluses. Answer: TRUE Diff: 1 Type: TF Page Ref: 371-376 Skill: Recall Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt.

21) Government debt can be a smart choice if the positive impact on the economy of spending financed by debt is greater than the interest cost. Answer: TRUE Diff: 2 Type: TF Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 22) Ricardian equivalence is the argument that government spending financed by going into debt will have no impact on the economy. Answer: TRUE Diff: 2 Type: TF Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 23) Ricardian equivalence is the argument that government stimulus spending will fail because taxpayers save, rather than spend, their stimulus dollars to pay for anticipated future taxes. Answer: TRUE Diff: 2 Type: TF Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 24) Robert Barro is a Harvard University economist who believes in Ricardian equivalence. Answer: TRUE Diff: 2 Type: TF Page Ref: 371-376 Skill: Recall Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 25) Believers in Ricardian equivalence tend to be hands-off economists. Answer: TRUE Diff: 2 Type: TF Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 26) Believers in Ricardian equivalence tend to be hands-on economists. Answer: FALSE Diff: 2 Type: TF Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt.

27) Ricardian equivalence is named for the famous Cuban economist Ricky Ricardo. Answer: FALSE Diff: 1 Type: TF Page Ref: 371-376 Skill: Recall Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 28) "Yes - Markets Self-Adjust" economists support debt-financed fiscal spending during a recession. Answer: FALSE Diff: 2 Type: TF Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 29) "No - Markets Fail Often" economists support debt-financed fiscal spending during a recession. Answer: TRUE Diff: 2 Type: TF Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 30) Crowding in occurs when debt-financed fiscal policy improves expectations and increases business investment spending. Answer: TRUE Diff: 2 Type: TF Page Ref: 371-376 Skill: Recall Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 31) Crowding out occurs when debt interest payments become self-perpetuating. Answer: FALSE Diff: 2 Type: TF Page Ref: 371-376 Skill: Recall Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 32) Argentina defaulted on its national debt in 2002 and has since had trouble borrowing money on the international bond market. Answer: TRUE Diff: 2 Type: TF Page Ref: 371-376 Skill: Recall Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt.

33) Governments that do not pay debts are still able to easily borrow on the international bond market. Answer: FALSE Diff: 2 Type: TF Page Ref: 371-376 Skill: Recall Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 34) The government's fiscal year for budgets runs from April 1 to March 31, rather than the calendar year of January 1 to December 31. Answer: TRUE Diff: 2 Type: TF Page Ref: 371-376 Skill: Recall Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 35) Interest payments can create self-perpetuating debt when governments must borrow to make interest payments. Answer: TRUE Diff: 2 Type: TF Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt. 36) Between the mid-1970s and mid-1990s, Canada had the problem of self-perpetuating debt, having to borrow to pay interest on the national debt. Answer: TRUE Diff: 3 Type: TF Page Ref: 371-376 Skill: Applied Objective: 12.4 Explain the difference between deficits and debts, and identify five arguments about the national debt.

12.5 Are Deficits Like Potato Chips? Hands-Off or Hands-On Role for Government? 1) The founding political principles of Canada are ________ and of the U.S. are ________. A) hands-on; hands-off B) hands-on; hands-on C) hands-off; hands-on D) hands-off; hands-off E) red; blue Answer: A Diff: 2 Type: MC Page Ref: 377-380 Skill: Recall Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 2) Which statement is true? A) Canada was created by a revolution against government. B) The U.S. was created by an act of government. C) Canada has hands-off origins. D) Citizens in Canada and the U.S. are attracted to both hands-off and hands-on approaches for government. E) The U.S. has hands-on origins. Answer: D Diff: 2 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 3) Which words reflect Canada's political philosophy? A) created by an act of government B) hands-on origins C) peace, order, and good government D) civil society E) all of the above Answer: E Diff: 2 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy.

4) Which words reflect the United States' political philosophy? A) created by an act of government B) hands-on origins C) individual rights D) peace, order, and good government E) civil society Answer: C Diff: 2 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 5) Which words reflect the United States' political philosophy? A) created through a revolution against government B) hands-off origins C) life, liberty, and the pursuit of happiness D) individual rights E) all of the above Answer: E Diff: 2 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 6) Which words reflect Canada's political philosophy? A) civil society B) hands-off origins C) life, liberty, and the pursuit of happiness D) individual rights E) created through a revolution against government Answer: A Diff: 2 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 7) Which statement is normative? A) Borrowing to spend leads to crowding out. B) Governments should not borrow to finance spending. C) Borrowing to spend leads to crowding in. D) Higher taxes on spending encourage savings. E) Higher interest rates discourage investment. Answer: B Diff: 1 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 639 Copyright © 2021 Pearson Canada Inc.

8) Which statement is positive? A) Monetary policies should follow rules. B) Government should not intervene in the economy. C) Borrowing to spend leads to crowding in. D) Tax cuts are better than spending increases. E) Spending cuts are better than tax increases. Answer: C Diff: 1 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 9) Which statement is positive? A) Tax cuts will increase government revenues. B) Governments should not use tax incentives to encourage saving. C) Governments should increase spending to counteract recessions. D) Governments should pay down the national debt. E) Governments should balance the budget over the business cycle. Answer: A Diff: 1 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 10) A word used to describe government by a hands-off politician is A) participate. B) intervene. C) act. D) responsibility. E) obligation. Answer: B Diff: 2 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 11) A word used to describe government by a hands-on politician is A) mistake. B) intervene. C) responsibility. D) interfere. E) inefficiency. Answer: C Diff: 2 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 640 Copyright © 2021 Pearson Canada Inc.

12) Statements about what ought to be are called A) positive statements. B) normative statements. C) economic statements. D) scientific statements. E) hypotheses. Answer: B Diff: 1 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 13) Statements about what is are called A) positive statements. B) normative statements. C) economic statements. D) scientific statements. E) hypotheses. Answer: A Diff: 1 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 14) Which statement is normative? A) Warts are caused by handling toads. B) Scientists should not make normative statements. C) As DVD prices fall, people buy more of them. D) If income increases, sales of luxury goods decrease. E) None of the above. Answer: B Diff: 2 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 15) A positive statement is A) always true. B) always false. C) about what ought to be. D) capable of being evaluated as true or false by checking the facts. E) an opinion that cannot be proven. Answer: D Diff: 2 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 641 Copyright © 2021 Pearson Canada Inc.

16) A normative statement is A) always true. B) about what is. C) about what should be. D) always false. E) capable of being evaluated as true or false by checking the facts. Answer: C Diff: 2 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 17) Which is a positive statement? A) Canada should cut back on the use of carbon-based fuels. B) Increasing the minimum wage results in more unemployment. C) All Canadians should have equal access to health care. D) The Bank of Canada must cut the interest rate. E) Canada should lower tax rates for wealthier Canadians. Answer: B Diff: 2 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 18) Which is a positive statement? A) Government should control the rents charged by owners of apartment buildings. B) Low rents are better for a city than high rents. C) Housing costs too much. D) Owners of apartment buildings ought to be free to charge whatever rent they want. E) Low rents restrict the supply of housing. Answer: E Diff: 2 Type: MC Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 19) A positive statement can be evaluated as true or false by checking the facts. Answer: TRUE Diff: 1 Type: TF Page Ref: 377-380 Skill: Recall Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy.

20) Normative statements involve value judgements. Answer: TRUE Diff: 1 Type: TF Page Ref: 377-380 Skill: Recall Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 21) "Automatic stabilizers create budget deficits when the economy goes into a recession" is a normative statement. Answer: FALSE Diff: 1 Type: TF Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 22) "Tax cuts will increase government tax revenues" is a positive statement. Answer: TRUE Diff: 1 Type: TF Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 23) In describing government, the words intervene, interfere and mistake indicate the speaker is a hands-off politician. Answer: TRUE Diff: 2 Type: TF Page Ref: 377-380 Skill: Recall Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 24) In describing government, the words intervene, interfere and mistake indicate the speaker is a hands-on politician. Answer: FALSE Diff: 2 Type: TF Page Ref: 377-380 Skill: Recall Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 25) In describing government, the words act, participate and responsibility indicate the speaker is a hands-on politician. Answer: TRUE Diff: 2 Type: TF Page Ref: 377-380 Skill: Recall Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy.

26) In describing government, the words act, participate and responsibility indicate the speaker is a hands-off politician. Answer: FALSE Diff: 2 Type: TF Page Ref: 377-380 Skill: Recall Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 27) A hands-on politician uses the word participate when talking about government. Answer: TRUE Diff: 2 Type: TF Page Ref: 377-380 Skill: Recall Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 28) A hands-off politician uses the word responsibility when talking about government. Answer: FALSE Diff: 2 Type: TF Page Ref: 377-380 Skill: Recall Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 29) Political hands-off arguments against government are often presented as arguments against the national debt. Answer: TRUE Diff: 2 Type: TF Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 30) Policy advice that makes economic sense might be rejected by politicians because it doesn't make political sense. Answer: TRUE Diff: 1 Type: TF Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 31) The United States' political philosophy emphasizes peace, order, and good government. Answer: FALSE Diff: 2 Type: TF Page Ref: 377-380 Skill: Recall Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy.

32) Canada's political philosophy emphasizes peace, order, and good government. Answer: TRUE Diff: 2 Type: TF Page Ref: 377-380 Skill: Recall Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 33) Canada's political philosophy has hands-off origins. Answer: FALSE Diff: 2 Type: TF Page Ref: 377-380 Skill: Recall Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 34) The United States' political philosophy has hands-off origins. Answer: TRUE Diff: 2 Type: TF Page Ref: 377-380 Skill: Recall Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 35) The United States was created by an act of government. Answer: FALSE Diff: 2 Type: TF Page Ref: 377-380 Skill: Recall Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 36) Arguments over fiscal policy are often the main conflict between the "Yes - Markets SelfAdjust" and "No - Markets Fail Often" camps. Answer: TRUE Diff: 1 Type: TF Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. 37) Citizens need to sort out economic arguments from political arguments to make informed choices between hands-off and hands-on views about government. Answer: TRUE Diff: 1 Type: TF Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy.

38) The claim by supply-siders that "tax cuts will increase government tax revenues" is a normative statement. Answer: FALSE Diff: 2 Type: TF Page Ref: 377-380 Skill: Applied Objective: 12.5 Distinguish between normative and positive, and between economic and political, arguments about fiscal policy. Macroeconomics for Life: Smart Choices for All?, Updated 2e (Cohen) Chapter 13 Are Sweatshops All Bad? Globalization and Trade Policy 13.1 Why Don't You Cook Breakfast? Gains from Trade 1) The process by which each person feels that what they give up is worth less than what they get is called A) opportunity cost. B) specialization. C) comparative advantage. D) absolute advantage. E) voluntary trade. Answer: E Diff: 2 Type: MC Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 2) The ability to produce a product or service more cheaply than another producer is called A) comparative advantage. B) specialization. C) opportunity cost. D) absolute advantage. E) mutual benefit. Answer: D Diff: 2 Type: MC Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards.

3) The table below shows the maximum amount of bread and fish that Adam and Bruce can each produce in one hour. According to the numbers in this table,

One Hour Adam Bruce

Loaves of Bread 10 4

Kilograms of Fish 5 1

A) Bruce has a comparative advantage in fish production. B) Adam's opportunity cost of 1 loaf of bread is 2 kilos of fish. C) Bruce's opportunity cost of 1 loaf of bread is 4 kilos of fish. D) Bruce's opportunity cost of 1 kilo of fish is 1/4 loaves of bread. E) Adam has a comparative advantage in fish production. Answer: E Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 4) You have a comparative advantage when your A) opportunity cost is lower than your absolute cost. B) opportunity cost is lower than your competitor's opportunity cost. C) absolute cost is lower than your competitor's absolute cost. D) absolute cost is greater than your competitor's absolute cost. E) opportunity cost is greater than your competitor's opportunity cost. Answer: B Diff: 2 Type: MC Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 5) In a zero sum game A) collaboration can make everyone better off. B) mutually beneficial gains are possible. C) one person's gain is the other person's loss. D) both players will be worse off. E) both players will be better off. Answer: C Diff: 2 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards.

6) Trade improves our standard of living through A) specialization and voluntary exchange. B) taking advantage of losers. C) self-sufficiency and involuntary exchange. D) equalizing opportunity costs. E) minimizing absolute costs. Answer: A Diff: 1 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 7) Opportunity cost is A) the ratio of what you get to what you give up. B) the ratio of what you give up to what you get. C) what you get minus what you give up. D) what you give up minus what you get. E) always less than one. Answer: B Diff: 2 Type: MC Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 8) The terms of trade are A) the quantity you give up for one unit of what you get. B) the quantity you get for one unit of what you give up. C) less than the sum of the traders' opportunity costs. D) greater than the sum of the traders' opportunity costs. E) equal to the sum of the traders' opportunity costs. Answer: A Diff: 2 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 9) The terms of trade are A) the quantity of imports required to pay for one unit of exports. B) the quantity of exports required to pay for one unit of imports. C) less than the sum of the traders' opportunity costs. D) greater than the sum of the traders' opportunity costs. E) equal to the sum of the traders' opportunity costs. Answer: B Diff: 2 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 648 Copyright © 2021 Pearson Canada Inc.

10) Dave gave Candy 10 kilograms of fish and received in exchange 5 litres of wine. The terms of trade for a litre of wine are A) 10 kilograms of fish. B) 0.5 litres of wine. C) 2 kilograms of fish. D) 5 litres of wine. E) 7.5 litres of wine. Answer: C Diff: 2 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 11) Mutually beneficial trade happens when both persons A) increase production of the product where they have a comparative advantage. B) decrease production of the product where they have a lower opportunity cost. C) increase production of the product where they have a higher opportunity cost. D) increase production of the product where they have an absolute advantage. E) increase consumption of the product where they have a higher opportunity cost. Answer: A Diff: 2 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 12) Mutually beneficial trade is also called A) a zero-sum game. B) self-sufficiency. C) international subsidization. D) voluntary trade. E) involuntary trade. Answer: D Diff: 2 Type: MC Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards.

13) Mutual gains from voluntary trade require differences in A) depreciation costs. B) comparative advantage. C) external costs. D) implicit costs. E) absolute advantage. Answer: B Diff: 2 Type: MC Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 14) Mutual gains from voluntary trade require differences in A) internal costs. B) implicit costs. C) opportunity costs. D) import tariffs. E) external costs. Answer: C Diff: 2 Type: MC Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 15) In a zero-sum game A) both players can lose. B) the number of players is zero. C) both players can win. D) one player gains only when another player loses. E) both players get zero gains. Answer: D Diff: 2 Type: MC Page Ref: 7-12 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 16) Specialization eliminates A) scarcity. B) dependency. C) self-sufficiency. D) mutual benefits. E) opportunity cost. Answer: C Diff: 1 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 650 Copyright © 2021 Pearson Canada Inc.

17) It takes Mom 30 minutes to cook dinner. In the same time, she can iron 6 shirts. Dad takes an hour to cook dinner and 30 minutes to iron a single shirt. A) Dad has an absolute advantage in ironing shirts. B) Mom's opportunity cost of cooking dinner is ironing 6 shirts. C) Mom has a comparative advantage in cooking dinner. D) Dad's opportunity cost of cooking dinner is ironing half a shirt. E) Dad's opportunity cost of cooking dinner is 6 shirts. Answer: B Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 18) It takes Mom 30 minutes to cook dinner. In the same time, she can iron 6 shirts. Dad takes an hour to cook dinner and 30 minutes to iron a single shirt. A) Dad has an absolute advantage in cooking. B) Mom should cook dinner and iron; trade is impossible. C) Dad has an absolute advantage in ironing shirts. D) Dad should cook dinner; the opportunity cost is only 2 shirts. E) Dad should cook dinner; the opportunity cost is only 1 shirt. Answer: D Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 19) It takes Mom 30 minutes to cook dinner. In the same time, she can iron 6 shirts. Dad takes an hour to cook dinner and 30 minutes to iron a single shirt. A) Mom should cook dinner; even though the opportunity cost is 12 shirts. B) there are no gains from trade. C) Dad has an absolute advantage in cooking dinner. D) Dad has an absolute advantage in ironing shirts. E) Mom shouldn't cook dinner; her opportunity cost is 6 shirts. Answer: E Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards.

20) In one hour, Chloe can bake 24 cookies or 12 blueberry muffins; Zabeen can bake 6 cookies or 2 blueberry muffins. Which statement is true? A) Zabeen's opportunity cost of a cookie is 2 muffins. B) Zabeen's opportunity cost of a cookie is 6 muffins. C) Chloe's opportunity cost of a muffin is 12 cookies. D) Chloe's opportunity cost of a muffin is 2 cookies. E) Zabeen's opportunity cost of a cookie is 4 muffins. Answer: D Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 21) In one hour, Chloe can bake 24 cookies or 12 blueberry muffins; Zabeen can bake 6 cookies or 2 blueberry muffins. For mutually beneficial trade, Chloe should A) bake muffins because she has a comparative advantage. B) give up. Mutually beneficial trade is impossible in this situation. C) bake cookies because she has an absolute advantage. D) bake cookies because she has a comparative advantage. E) bake muffins because she has an absolute advantage. Answer: A Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 22) If Canada specializes in the production of wine we can produce 10,000 bottles per month. If Canada specializes in the production of wheat we can produce 200,000 bushels per month. The opportunity cost of a bottle of wine in Canada is A) 120,000 bottles of wine. B) 20 bushels of wheat. C) 200 bushels of wheat. D) 2,500 bottles of wine. E) 1/20 of a bushel of wheat. Answer: B Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards.

23) In two hours of work, Clinton can catch 4 fish or he can pick 5 pints of berries. In two hours, Dong can catch 6 fish or she can pick 9 pints of berries. Which statement is true? A) Clinton has a comparative advantage in catching fish. B) Clinton has an absolute advantage in picking berries. C) Clinton has an absolute advantage in catching fish. D) Clinton has a comparative advantage in picking berries. E) Clinton will lose if he trades. Answer: A Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 24) In two hours of work, Clinton can catch 4 fish or he can pick 5 pints of berries. In two hours, Dong can catch 6 fish or she can pick 9 pints of berries. Which statement is true? A) Clinton and Dong will trade and both persons will benefit. B) Clinton and Dong will trade but only Dong will benefit. C) Clinton and Dong will not trade. D) Clinton and Dong will trade but only Clinton will benefit. E) Clinton and Dong will both lose if they trade. Answer: A Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 25) Canada has an absolute advantage in situations where A) we can produce the product on weekends. B) we consume less of this product than do people in other countries. C) we consume more of this product than do people in other countries. D) our opportunity cost of production is very high. E) we can produce at lower cost than producers in other countries. Answer: E Diff: 2 Type: MC Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards.

26) Tova and Ron are the only two people on the planet Melmac. It takes Tova 1 hour to produce a widget and 2 hours to produce a woggle. It takes Ron 3 hours to produce a widget and 3 hours to produce a woggle. Based on the information above, Tova and Ron A) can both gain from trade if Tova specializes in producing widgets and Ron specializes in producing woggles. B) can both gain from trade if Tova specializes in producing woggles and Ron specializes in producing widgets. C) cannot both gain from trade because Tova has an absolute advantage in producing widgets and woggles. D) can trade, but only Tova will gain. E) can trade, but only Ron will gain. Answer: A Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards.

Figure 1.3.2 Monthly Production Possibilities for a Country Producing Only Hockey Sticks and Maple Leaves

Possibility

Hockey Sticks

Maple Leaves

27) In Figure 1.3.2, moving from possibility b to possibility c, the opportunity cost of producing one additional maple leaf is A) 2 hockey sticks. B) 3 hockey sticks. C) 6 hockey sticks. D) 1/6 hockey stick. E) 1/3 hockey stick. Answer: E Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 28) According to Figure 1.3.2 A) the opportunity cost of producing hockey sticks stays the same as more hockey sticks are produced. B) a combination of 3 hockey sticks and 9 maples leaves is possible. C) a combination of 3 hockey sticks and 2 maple leaves is possible. D) the opportunity cost of producing hockey sticks increases as more hockey sticks are produced. E) the opportunity cost of producing hockey sticks decreases as more hockey sticks are produced. Answer: A Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards.

29) In Figure 1.3.2, moving from possibility c to possibility b, the opportunity cost of producing one additional hockey stick is A) 2 maple leaves. B) 3 maple leaves. C) 6 maple leaves. D) 1/6 maple leaves. E) 1/3 maple leaves. Answer: B Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 30) According to Figure 1.3.2 A) the best possibility is 2 hockey sticks and 3 maple leaves. B) a combination of 3 hockey sticks and 9 maples leaves is not possible. C) a combination of 3 hockey sticks and 2 maple leaves is possible. D) the opportunity cost of producing hockey sticks increases as more hockey sticks are produced. E) the opportunity cost of producing hockey sticks decreases as more hockey sticks are produced. Answer: B Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 31) In Portugal, the opportunity cost of a bale of wool is 3 bottles of wine. In England, the opportunity cost of 1 bottle of wine is 3 bales of wool. Based on this information, A) England has an absolute advantage in producing wine. B) England has an absolute advantage in producing wool. C) no trade will occur. D) Portugal has a comparative advantage in producing wool. E) Portugal has a comparative advantage in producing wine. Answer: E Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards.

32) Figure 1.3.3 Monthly Production Possibilities for a Country Producing Only Butter and Guns

Possibility

Butter

Guns

According to the production possibilities in Figure 1.3.3, A) a combination of 1 butter and 6 gun is possible. B) a combination of 8 butter and 4 guns is possible. C) the opportunity cost of producing guns increases as more guns are produced. D) the opportunity cost of producing guns decreases as more guns are produced. E) the opportunity cost of producing guns stays the same as more guns are produced. Answer: E Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 33) In an eight-hour day, Andy can produce either 24 loaves of bread or 8 kilograms of butter. In an eight-hour day, Rolfe can produce either 24 loaves of bread or 24 kilograms of butter. Based on the information above, which statement is true? A) Andy has an absolute advantage in producing butter. B) Rolfe has an absolute advantage in producing bread. C) Andy has an absolute advantage is producing bread. D) Andy has a comparative advantage in producing bread. E) Rolfe has a comparative advantage in producing bread. Answer: D Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards.

34) In an eight-hour day, Andy can produce either 24 loaves of bread or 8 kilograms of butter. In an eight-hour day, Rolfe can produce either 8 loaves of bread or 8 kilograms of butter. Based on the information above, the opportunity cost of producing 1 loaf of bread is A) 1 hour for Andy and 20 minutes (1/3 hour) for Rolfe. B) 1/3 kilogram of butter for Andy and 1 kilogram of butter for Rolfe. C) 3 kilograms of butter for Andy and 1 kilogram of butter for Rolfe. D) 8 kilograms of butter for both Andy and Rolfe. E) not calculable from the given information. Answer: B Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 35) Mexico and Canada produce both oil and apples using labour only. A barrel of oil can be produced with 8 hours of labour in Mexico and 4 hours of labour in Canada. A bushel of apples can be produced with 12 hours of labour in Mexico and 8 hours of labour in Canada. Mexico has A) an absolute advantage in producing oil. B) an absolute advantage in producing apples. C) a comparative advantage in producing oil. D) a comparative advantage in producing apples. E) none of the above. Answer: D Diff: 3 Type: MC Page Ref: 7-12 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 36) Canada and Chile produce both oil and apples using labour only. A barrel of oil can be produced with 4 hours of labour in Canada and 8 hours of labour in Chile. A bushel of apples can be produced with 8 hours of labour in Canada and 12 hours of labour in Chile. Chile has A) an absolute advantage in producing oil. B) an absolute advantage in producing apples. C) a comparative advantage in producing oil. D) a comparative advantage in producing apples. E) none of the above. Answer: D Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards.

37) Tova and Ron are the only two people on the planet Melmac. It takes Tova 3 hours to produce a widget and 3 hours to produce a woggle. It takes Ron 1 hour to produce a widget and 2 hours to produce a woggle. Based on the information above, Tova and Ron A) can both gain from trade if Tova specializes in producing widgets and Ron specializes in producing woggles. B) can both gain from trade if Tova specializes in producing woggles and Ron specializes in producing widgets. C) cannot both gain from trade because Tova has an absolute advantage in producing widgets and woggles. D) can trade, but only Tova will gain. E) can trade, but only Ron will gain. Answer: B Diff: 3 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 38) Figure 1.3.7 Monthly Production Possibilities for a Country Producing Only Butter and Guns

Possibility

Butter

Guns

39) To gain from comparative advantage, countries must trade, and must A) save. B) invest. C) do research and development. D) add add capital equipment. E) specialize. Answer: E Diff: 1 Type: MC Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 40) Figure 1.3.8

The graph in Figure 1.3.8 shows Adam's PPF for food and cloth. The shape of the PPF tells us that Adam has ________ opportunity cost of food and ________ opportunity of cloth. A) increasing; decreasing B) constant; constant C) decreasing; increasing D) increasing; increasing E) decreasing; decreasing Answer: B Diff: 2 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 660 Copyright © 2021 Pearson Canada Inc.

41) On a graph of a production possibilities frontier (PPF), opportunity cost is measured by A) the points inside the PPF. B) the points outside the PPF. C) where the PPF touches the vertical axis. D) the slope of the PPF. E) where the PPF touches the horizontal axis. Answer: D Diff: 1 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 42) On a graph of a production possibilities frontier (PPF), possible combinations of outputs are represented by A) points inside the PPF. B) points outside the PPF. C) points on the PPF. D) the slope of the PPF. E) all of the above. Answer: A Diff: 1 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 43) On a graph of a production possibilities frontier (PPF), impossible combinations of outputs are represented by A) points inside the PPF. B) points outside the PPF. C) points on the PPF. D) the slope of the PPF. E) none of the above. Answer: B Diff: 1 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards.

44) On a graph of a production possibilities frontier (PPF), maximum combinations of outputs are represented by A) points inside the PPF. B) points outside the PPF. C) points on the PPF. D) the slope of the PPF. E) none of the above. Answer: C Diff: 1 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 45) If Ying must decrease production of some other product to increase his production of houses, then Ying A) is producing on his production possibilities frontier. B) is producing outside his production possibilities frontier. C) is producing inside his production possibilities frontier. D) must prefer houses to any other product. E) has too little capital equipment. Answer: A Diff: 2 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 46) If Ying can increase production of houses without decreasing production of any other product, then Ying A) is producing on his production possibilities frontier. B) is producing outside his production possibilities frontier. C) is producing inside his production possibilities frontier. D) must have constant opportunity costs. E) must prefer houses to any other product. Answer: C Diff: 2 Type: MC Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 47) Adam gives Eve 2 apples and receives 3 bananas. The terms of trade are 2/3 apple per banana. Answer: TRUE Diff: 2 Type: TF Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 662 Copyright © 2021 Pearson Canada Inc.

48) Voluntary trade occurs when each person feels that what they get is worth more than what they give up. Answer: TRUE Diff: 1 Type: TF Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 49) Voluntary trade occurs when each person feels that what they give up is worth more than what they get. Answer: FALSE Diff: 1 Type: TF Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 50) The ability to produce a product or service at a lower opportunity cost than another producer is called comparative advantage. Answer: TRUE Diff: 1 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 51) The ability to produce a product or service at a lower absolute cost than another producer is called comparative advantage. Answer: FALSE Diff: 1 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 52) Dave gives Candy 10 kilograms of fish and receives in exchange 5 litres of wine. The terms of trade are 2 kilograms of fish per litre of wine. Answer: TRUE Diff: 2 Type: TF Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 53) Dave gives Candy 10 kilograms of fish and receives in exchange 5 litres of wine. The terms of trade are 1/2 kilograms of fish per litre of wine. Answer: FALSE Diff: 2 Type: TF Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 663 Copyright © 2021 Pearson Canada Inc.

54) Dave gives Candy 2 kilograms of fish and receives in exchange 5 litres of wine. The terms of trade are 2.5 kilograms of fish per litre of wine. Answer: FALSE Diff: 2 Type: TF Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 55) Dave gives Candy 2 kilograms of fish and receives in exchange 5 litres of wine. The terms of trade are 2/5 kilograms of fish per litre of wine. Answer: TRUE Diff: 2 Type: TF Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 56) Opportunity cost is the ratio of what you give up to what you get. Answer: TRUE Diff: 2 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 57) Trade improves our standard of living through specialization and voluntary exchange. Answer: TRUE Diff: 1 Type: TF Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 58) Sam and Dave participate in a zero sum game. Since Sam won $5 we know that Dave must have won $5 too. Answer: FALSE Diff: 1 Type: TF Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 59) Sam and Dave participate in a zero sum game. Since Sam won $5 we know that Dave must have lost $5. Answer: TRUE Diff: 1 Type: TF Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 664 Copyright © 2021 Pearson Canada Inc.

60) You have a comparative advantage when your opportunity cost is lower than your competitor's opportunity cost. Answer: TRUE Diff: 2 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 61) For a trade to have mutual benefits, terms of trade must be between each trader's local opportunity costs. Answer: TRUE Diff: 2 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 62) For a trade to have mutual benefits, terms of trade must be greater than each trader's local opportunity costs. Answer: FALSE Diff: 2 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 63) For a trade to have mutual benefits, terms of trade must be less than each trader's local opportunity costs. Answer: FALSE Diff: 2 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 64) Voluntary trade is a zero-sum game. Answer: FALSE Diff: 1 Type: TF Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 65) Measured as a percentage of GDP, trade is more important to Japan than it is to Canada. Answer: FALSE Diff: 2 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards.

66) Measured as a percentage of GDP, trade is more important to Canada than it is to Japan. Answer: TRUE Diff: 2 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 67) Measured as a percentage of GDP, trade is more important to Canada than it is to the United States. Answer: TRUE Diff: 2 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 68) Measured as a percentage of GDP, trade is more important to the United States than it is to Canada. Answer: FALSE Diff: 2 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 69) 60 percent of Canada's international trade is with the United States. Answer: FALSE Diff: 2 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 70) 80 percent of Canada's international trade is with the United States. Answer: TRUE Diff: 2 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 71) Canada's trade with the United States is more important to us than the United States' trade with Canada is to them. Answer: TRUE Diff: 2 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards.

72) Specialization and trade makes us dependent on others. Answer: TRUE Diff: 2 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 73) Specialization and voluntary trade eliminate the problem of scarcity. Answer: FALSE Diff: 1 Type: TF Page Ref: 388-395 Skill: Applied Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 74) Absolute advantage is the key to mutually beneficial gains from trade. Answer: FALSE Diff: 1 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards. 75) In a zero-sum game, one person's gain equals other person's loss. Answer: TRUE Diff: 1 Type: TF Page Ref: 388-395 Skill: Recall Objective: 13.1 Describe how comparative advantage, specialization, and trade improve living standards.

13.2 What's So Wonderful About Free Trade? Protectionism and Trade 1) Gains from trade arise from differences in A) comparative advantage. B) self-sufficiency. C) absolute advantage. D) involuntary exchange. E) protectionism. Answer: A Diff: 1 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 2) Which government policy is not protectionist? A) quotas B) tariffs C) taxes on imported goods D) subsidies to domestic producers E) subsidies to importers Answer: E Diff: 1 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 3) Political pressure for protectionism arises because a A) large number of producers face small losses. B) large number of consumers face large losses. C) small number of producers face large losses. D) small number of consumers face large losses. E) small number of producers face large gains. Answer: C Diff: 2 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism.

4) Wine producers in the province of Ontario compete with producers from France, Australia, Chile, and other countries. All countries sell their wines to Ontario consumers through government-owned stores. Who would support a quota on wines imported into Ontario? A) consumers of Ontario wine B) Ontario wine producers C) workers at the government-owned stores D) producers in France, Australia and Chile E) Ontario consumers of imported wines Answer: B Diff: 2 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 5) A Canadian import quota on automobiles produced in Korea would be supported by A) Canadians who want to buy domestic cars. B) unions representing Korea's auto workers. C) Canadians who want to buy Korean cars. D) unions representing Canada's auto workers. E) economists. Answer: D Diff: 2 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 6) Schumpeter's theory of creative destruction suggests that A) less productive industries will be driven out of business by freer trade. B) workers in more productive, lower-cost industries will become structurally unemployed. C) robots will force all creative people to leave the country. D) business cycles will be eliminated. E) workers in less productive industries will be frictionally unemployed. Answer: A Diff: 2 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism.

7) Which is not an argument for protectionism? A) avoiding dependency B) saving jobs in import-competing industries C) protecting national security D) maintaining cultural identity E) saving jobs in export-competing industries Answer: E Diff: 1 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 8) Which organization is not connected with globalization and trade? A) NAFTA B) CSIS C) GATT D) IMF E) WTO Answer: B Diff: 2 Type: MC Page Ref: 395-401 Skill: Recall Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 9) Canada issues a small number of student visas, which restricts the number of international students studying in Canada. This limit is a(n) A) tax on imports. B) import quota. C) export quota. D) tariff. E) subsidy to import-competing universities. Answer: C Diff: 3 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism.

10) Jobs lost because of freer trade are part of A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) seasonal unemployment. E) discouraged worker unemployment. Answer: A Diff: 2 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 11) Who loses when trade connects Canada to new international markets? A) Canadian consumers B) Canadian exporters C) Canadian workers in exporting industries D) Canadian businesses in import-competing industries E) R.O.W. consumers Answer: D Diff: 2 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 12) Who loses when trade connects Canada to new international markets? A) R.O.W. workers in industries competing with new Canadian exports B) R.O.W. industries competing with new Canadian exports C) Canadian workers in import-competing industries D) Canadian businesses in import-competing industries E) all of the above Answer: E Diff: 2 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 13) Who wins when trade connects Canada to new international markets? A) Canadian consumers B) Canadian exporters C) Canadian workers in exporting industries D) R.O.W. consumers E) all of the above Answer: E Diff: 2 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 671 Copyright © 2021 Pearson Canada Inc.

14) Who wins when trade connects Canada to new international markets? A) Canadian consumers B) Canadian exporters C) R.O.W. workers in exporting industries D) R.O.W. consumers E) all of the above Answer: E Diff: 2 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 15) When trade connects Canada to new international markets, A) Canadian consumers win and Canadian businesses in import-competing industries win. B) Canadian workers in export industries win and Canadian workers in import-competing industries lose. C) Canadian workers in export industries lose and Canadian workers in import-competing industries win. D) Canadian consumers win and Canadian exporters lose. E) everyone wins. Answer: B Diff: 2 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 16) When trade connects Canada to new international markets, A) Canadian consumers win and Canadian businesses in import-competing industries win. B) Canadian consumers win and Canadian workers in import-competing industries lose. C) Canadian workers in export industries lose and Canadian workers in import-competing industries win. D) Canadian consumers win and Canadian exporters lose. E) everyone wins. Answer: B Diff: 2 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism.

17) When the Canadian Pacific Railway connected markets across Canada in the late 1800s, A) Quebec farmers won. B) Manitoba textile businesses won. C) prairie farmers lost. D) workers in Manitoba textile businesses lost. E) Canadian consumers lost. Answer: D Diff: 3 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 18) A tax applied to a product or service imported into a country is a(n) A) import quota. B) subsidy to domestic producers. C) subsidy to R.O.W. producers. D) tariff. E) GATT. Answer: D Diff: 1 Type: MC Page Ref: 395-401 Skill: Recall Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 19) A limit on the quantity of a product or service that can be imported into a country is a(n) A) import quota. B) subsidy to domestic producers. C) subsidy to R.O.W. producers. D) tariff. E) GATT. Answer: A Diff: 1 Type: MC Page Ref: 395-401 Skill: Recall Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism.

20) A government payment to producers of products or services threatened by international competition is a(n) A) import quota. B) subsidy to domestic producers. C) subsidy to R.O.W. producers. D) tariff. E) GATT. Answer: B Diff: 1 Type: MC Page Ref: 395-401 Skill: Recall Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 21) Tariffs A) raise revenue for the government. B) raise the price of imports for Canadian consumers. C) win votes for politicians from import-competing businesses and workers. D) are a tax that hurts R.O.W. industries and workers. E) are all of the above. Answer: E Diff: 2 Type: MC Page Ref: 395-401 Skill: Recall Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 22) Subsidies to domestic producers A) hurt consumers. B) benefit the subsidized businesses. C) benefit workers in the subsidized businesses. D) are common in agricultural and dairy products. E) are all of the above. Answer: E Diff: 2 Type: MC Page Ref: 395-401 Skill: Recall Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism.

23) Tariffs and import quotas differ. One A) is a form of protectionism, the other is not. B) is a tax, the other is a quantity limit. C) is imposed by government, the other is imposed by the market. D) is legal, the other is not. E) increases imports, the other decreases imports. Answer: B Diff: 2 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 24) Economists might agree with which argument for protectionism? A) necessary to compete with cheap foreign labour B) saving Canadian jobs C) protecting cultural identity D) reducing the risk of trade retaliation E) none of the above. Answer: C Diff: 2 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 25) Economists might agree with which argument(s) for protectionism? A) necessary to compete with cheap foreign labour B) saving Canadian jobs C) protecting national security D) reducing the risk of trade retaliation E) all of the above Answer: C Diff: 2 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism.

26) The gains from freer trade benefit a ________ number of people and the losses affect a ________ number of people. A) small; large B) large; small C) small; small D) large; large E) large; even larger Answer: B Diff: 2 Type: MC Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 27) GATT stands for the General Arrangement on Taxes and Tariffs. Answer: FALSE Diff: 1 Type: TF Page Ref: 395-401 Skill: Recall Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 28) GATT stands for the General Agreement on Tariffs and Trade. Answer: TRUE Diff: 1 Type: TF Page Ref: 395-401 Skill: Recall Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 29) Subsidies for imported products are an example of a government protectionist policy. Answer: FALSE Diff: 1 Type: TF Page Ref: 395-401 Skill: Recall Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 30) Tariffs on imported products are an example of a government protectionist policy. Answer: TRUE Diff: 1 Type: TF Page Ref: 395-401 Skill: Recall Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 31) The Canadian winemaking industry would support a tariff on imported French wines. Answer: TRUE Diff: 1 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 676 Copyright © 2021 Pearson Canada Inc.

32) The Canadian Auto Workers union would support an import quota on Korean automobiles. Answer: TRUE Diff: 1 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 33) Political pressure for protectionism arises because freer trade results in a small number of businesses facing large losses. Answer: TRUE Diff: 2 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 34) Political pressure for protectionism arises because freer trade results in a large number of businesses facing small losses. Answer: FALSE Diff: 2 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 35) Restrictions on the number of international students allowed to study in Canada is an import quota. Answer: FALSE Diff: 3 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 36) Restrictions on the number of international students allowed to study in Canada is an export quota. Answer: TRUE Diff: 3 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 37) National security can be threatened by specialization and free trade. Answer: TRUE Diff: 2 Type: TF Page Ref: 395-401 Skill: Recall Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 677 Copyright © 2021 Pearson Canada Inc.

38) The completion of the Canadian Pacific Railway in 1885 and the North American Free Trade Agreement (NAFTA) in 1994 both led to the destruction of less productive, higher-cost products and businesses. Answer: TRUE Diff: 2 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 39) The completion of the Canadian Pacific Railway in 1885 and the North American Free Trade Agreement (NAFTA) in 1994 both led to a process of creative destruction. Answer: TRUE Diff: 2 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 40) The completion of the Canadian Pacific Railway in 1885 and the North American Free Trade Agreement (NAFTA) in 1994 both benefitted consumers and businesses in Canada on the whole. Answer: TRUE Diff: 1 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 41) Jobs lost through trade and new international competition are part of structural unemployment. Answer: TRUE Diff: 1 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 42) Jobs lost through trade and new international competition are part of frictional unemployment. Answer: FALSE Diff: 1 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 43) Jobs lost through trade and new international competition are part of cyclical unemployment. Answer: FALSE Diff: 1 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 678 Copyright © 2021 Pearson Canada Inc.

44) Jobs lost through trade and new international competition are part of the natural rate of unemployment. Answer: TRUE Diff: 3 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 45) The unequal distribution of gains and losses from international trade produces political pressure to protect the losers. Answer: TRUE Diff: 1 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 46) The unequal distribution of gains and losses from international trade produces political pressure to reward the winners. Answer: FALSE Diff: 1 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 47) The number of consumers who lose from freer trade is small, but the loss for each consumer is large. Answer: FALSE Diff: 1 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 48) The number of consumers who gain from freer trade is large, but the gain for each consumer is small. Answer: TRUE Diff: 1 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 49) Political pressure from export industries in many countries is a barrier to international trade negotiations. Answer: FALSE Diff: 1 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 679 Copyright © 2021 Pearson Canada Inc.

50) Political pressure from import-competing industries in many countries is a barrier to international trade negotiations. Answer: TRUE Diff: 1 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 51) Protecting Canadian jobs is a valid, limited argument for protectionism. Answer: FALSE Diff: 1 Type: TF Page Ref: 395-401 Skill: Applied Objective: 13.2 Explain how competition creates winners, losers, and opponents to trade, and analyze three forms of protectionism. 13.3 Globalization and Its Discontents: Is Free Trade the Problem? 1) The organization that describes its mission as "inclusive and sustainable globalization" is the A) World Bank. B) UNICEF. C) IMF. D) GATT. E) NAFTA. Answer: A Diff: 2 Type: MC Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 2) Economic globalization is the integration of ________ across national borders. A) sweatshop factories B) government administration C) labour markets D) economic activities E) free market policies Answer: D Diff: 2 Type: MC Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade.

3) Economic globalization is the integration of A) banks, businesses, and labour. B) economic activities through markets across borders. C) markets in developing countries. D) economic activities in developed countries. E) transportation and communication networks. Answer: B Diff: 2 Type: MC Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 4) Economic globalization is A) good. B) bad. C) speeding up due to falling communication costs. D) speeding up due to new government barriers to trade. E) slowing down due to rising transportation costs. Answer: C Diff: 1 Type: MC Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 5) Economists evaluate sweatshop issues by asking if the A) owners of sweatshop factories should jailed. B) sweatshop workers are being exploited. C) consumers who buy sweatshop products are immoral. D) workers in sweatshop countries would be better off if they moved to Canada. E) workers would be better off with, or without, sweatshop jobs. Answer: E Diff: 2 Type: MC Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 6) The International Monetary Fund (IMF) is directly responsible for all of the following except A) securing financial stability. B) fostering global monetary cooperation. C) the international monetary transmission mechanism. D) promoting high employment and sustainable growth. E) reducing poverty. Answer: C Diff: 2 Type: MC Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 681 Copyright © 2021 Pearson Canada Inc.

7) The International Monetary Fund (IMF) is responsible for A) securing financial stability. B) fostering global monetary cooperation. C) reducing poverty. D) facilitating international trade. E) all of the above. Answer: E Diff: 2 Type: MC Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 8) Sweatshop wages are low because A) workers face alternatives that are worse. B) sweatshop workers are not very productive. C) sweatshop factories have old equipment. D) transportation costs are high for shipping from developing countries. E) the t-shirts sold by Nike are cheap. Answer: A Diff: 2 Type: MC Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 9) Anti-globalization groups view international trade as harmful to developing countries and target two main organizations, including A) the United Nations. B) the World Bank. C) Amnesty International. D) GATT. E) NAFTA. Answer: B Diff: 2 Type: MC Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade.

10) Anti-globalization protestors have criticized A) the International Monetary Fund. B) the World Bank. C) the World Trade Organization. D) the International Development Agency. E) all of the above organizations. Answer: E Diff: 2 Type: MC Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 11) The "free market" conditions on loans and assistance from the World Bank and IMF to developing countries did not include A) eliminating protectionist tariffs and quotas. B) enforcing property rights. C) removing regulations from labour markets. D) eliminating agriculture. E) crackdowns on bootleg DVDs. Answer: D Diff: 2 Type: MC Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 12) The economist who changed the globalization debate was A) Naomi Klein. B) Joseph Stiglitz. C) Jagdish Bhagwati. D) Martin Wolf. E) J.M. Keynes. Answer: B Diff: 1 Type: MC Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade.

13) The pace of globalism is accelerating for all of the following reasons except A) reduced government subsidies. B) falling transportation costs. C) easier international communication. D) falling tariffs. E) rising self-sufficiency. Answer: E Diff: 2 Type: MC Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 14) Globalization can create benefits for all countries because of A) stable exchange rates. B) coordinated fiscal policy. C) comparative advantage, specialization, and trade. D) price stability. E) Joseph Stiglitz. Answer: C Diff: 1 Type: MC Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 15) Which country has had textile sweatshops? A) Taiwan B) England C) United States D) Japan E) all of the above Answer: E Diff: 2 Type: MC Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 16) Losers from globalization include A) sweatshop workers. B) transportation businesses. C) consumers in developing countries. D) workers in import-competing industries. E) none of the above. Answer: D Diff: 2 Type: MC Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 684 Copyright © 2021 Pearson Canada Inc.

17) Losers from globalization include A) workers in export industries. B) transportation businesses. C) consumers in developing countries. D) import-competing industries. E) none of the above. Answer: D Diff: 2 Type: MC Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 18) During the 1990s, IMF loans to developing countries required the enforcement of property rights. Answer: TRUE Diff: 2 Type: TF Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 19) Government corruption is less common in hands-off economies. Answer: TRUE Diff: 1 Type: TF Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 20) Globalization becomes easier as transportation and communication costs fall. Answer: TRUE Diff: 1 Type: TF Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 21) Hands-on and hands-off economists disagree about gains from specialization and voluntary exchange. Answer: FALSE Diff: 1 Type: TF Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade.

22) During the 1990s, the IMF required governments to crack down on bootleg DVDs within their borders before making a development loan. Answer: TRUE Diff: 2 Type: TF Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 23) During the 1990s, the IMF required governments to crack down on cruelty against animals within their borders before making a development loan. Answer: FALSE Diff: 2 Type: TF Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 24) Sweatshop wages are low because workers in the sweatshops have low opportunity costs. Answer: TRUE Diff: 1 Type: TF Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 25) As labour markets are integrated globally, all workers in comparable jobs are paid the same wages. Answer: FALSE Diff: 1 Type: TF Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 26) Hands-on policies will not work well if governments are corrupt. Answer: TRUE Diff: 1 Type: TF Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 27) Hands-on policies will work well even if governments are corrupt. Answer: FALSE Diff: 1 Type: TF Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade.

28) Joseph Stiglitz is the leading hands-off economist in the globalization debate. Answer: FALSE Diff: 2 Type: TF Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 29) Joseph Stiglitz is the leading hands-on economist in the globalization debate. Answer: TRUE Diff: 2 Type: TF Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 30) Joseph Stiglitz, the former chief economist at the World Bank, criticized the World Bank's hands-on policies during the 1990s. Answer: FALSE Diff: 2 Type: TF Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 31) Joseph Stiglitz, the former chief economist at the World Bank, criticized the World Bank's hands-off policies during the 1990s. Answer: TRUE Diff: 2 Type: TF Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 32) Globalization itself is neither good nor bad. Answer: TRUE Diff: 2 Type: TF Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 33) In evaluating sweatshop jobs, the key question is whether the workers' lives are better or worse than the lives of factory workers in developed countries. Answer: FALSE Diff: 2 Type: TF Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade.

34) In evaluating sweatshop jobs, the key question is whether the workers' lives are better or worse than a situation without globalization, trade, and the factory jobs that follow. Answer: TRUE Diff: 1 Type: TF Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 35) Wages and working conditions in sweatshops that look terrible to us may be better than the sweatshop workers' alternative employments. Answer: TRUE Diff: 1 Type: TF Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 36) In countries that have had sweatshops — England, the U.S., Japan, Korea — standards of living and working conditions have improved over time. Answer: TRUE Diff: 1 Type: TF Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 37) In countries that have had sweatshops — England, the U.S., Japan, Korea — standards of living and working conditions have gotten worse over time. Answer: FALSE Diff: 1 Type: TF Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 38) In countries that have had sweatshops, like England, the U.S., Japan, and Korea, improved standards of living and working conditions came only from governments playing a hands-off role. Answer: FALSE Diff: 2 Type: TF Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade.

39) In countries that have had sweatshops — England, the U.S., Japan, Korea — improved standards of living and working conditions came only from governments playing a hands-on role. Answer: FALSE Diff: 2 Type: TF Page Ref: 402-406 Skill: Applied Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 40) Anti-globalization critics view sweatshops as exploitation for corporate profits. Answer: TRUE Diff: 1 Type: TF Page Ref: 402-406 Skill: Recall Objective: 13.3 Explain the pace of globalization and how to evaluate if sweatshop workers are better off with international trade. 13.4 Hands-Off or Hands-On Again? Governments and Global Markets 1) The social safety net policies favoured by Joseph Stiglitz and hands-on economists would not include A) subsidized travel insurance plans. B) unemployment insurance. C) job retraining. D) health care. E) social assistance programs. Answer: A Diff: 1 Type: MC Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 2) Hands-off economists argue that social safety nets are not a good globalization policy because A) market failure will happen. B) developing countries will not export. C) developed countries will not import. D) workers in developing countries will move to developed countries. E) special interest groups will gain control of government. Answer: E Diff: 1 Type: MC Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate.

3) The "Yes - Markets Self-Adjust" hands-off camp believes all of the following except A) creative destruction eventually makes everyone better off. B) losers in importing-competing industries should not be helped. C) government will not operate in the public interest. D) government should leave labour markets alone. E) market failure is worse than government failure. Answer: E Diff: 3 Type: MC Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 4) The "No - Markets Fail Often" hands-on camp believes A) creative destruction eventually makes everyone better off. B) losers in importing-competing industries should not be helped. C) government will not operate in the public interest. D) government should leave labour markets alone. E) market failure is worse than government failure. Answer: E Diff: 3 Type: MC Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 5) Developed countries want A) lower import tariffs for their import-competing businesses. B) less protectionism by developing countries. C) lower world prices for their exports. D) higher prices on products that they import. E) more loans to developing countries. Answer: B Diff: 3 Type: MC Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 6) Developing countries want A) higher prices on products that they import. B) lower import tariffs for their import-competing businesses. C) lower world prices for their exports. D) less protectionism by developed countries. E) the elimination of development loans. Answer: D Diff: 3 Type: MC Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 690 Copyright © 2021 Pearson Canada Inc.

7) The forces that encourage creative destruction ultimately A) cause unstable prices. B) reduce employment. C) increase living standards. D) eliminate protectionism. E) ensure social justice. Answer: C Diff: 1 Type: MC Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 8) Protectionism A) rewards the winners from trade. B) invites retaliation from trading partners. C) discourages self-sufficiency. D) is mutually beneficial. E) encourages specialization. Answer: B Diff: 1 Type: MC Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 9) Tariffs A) result in lower prices for consumers. B) restrict domestic exports. C) generate revenues for government. D) result in lower prices for businesses. E) result in lower prices for government. Answer: C Diff: 2 Type: MC Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate.

10) When Canada imports products or services from the rest of the world, A) our trading partners become poorer. B) prices rise in import-competing industries. C) wages rise in import-competing industries. D) prices fall for Canadian consumers. E) wages fall in the rest of the world. Answer: D Diff: 3 Type: MC Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 11) Hands-off and hands-on economists agree about A) how import-competing industries should be supported. B) the need for freer trade. C) the need for government intervention in labour markets. D) the need for a social safety net. E) the role of government in developing countries. Answer: B Diff: 3 Type: MC Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 12) Hands-off and hands-on economists agree about A) how import-competing industries should be supported. B) the role of government in developing countries. C) the need for government intervention in labour markets. D) the need for a social safety net. E) none of the above. Answer: E Diff: 3 Type: MC Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 13) The Canadian government program(s) that help those who lose from expanded trade is A) Employment Insurance. B) job retraining. C) social assistance payments. D) universal health care benefits. E) all of the above. Answer: E Diff: 2 Type: MC Page Ref: 406-412 Skill: Recall Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 692 Copyright © 2021 Pearson Canada Inc.

14) According to The Economist magazine, the rich countries' A) trade rules in farming and textiles discriminate against poor countries. B) subsidies waste energy and harm the environment. C) protection of intellectual property discriminates against poor countries. D) corporations influence government policy. E) policies do all of the above. Answer: E Diff: 3 Type: MC Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 15) Both the hands-off and hands-on positions agree that A) government failure is worse than market failure. B) specialization and trade can cause poverty and misery in import-competing industries. C) there is a limited role for government. D) market failure is worse than government failure. E) there should be a social safety net for those left behind by trade and markets. Answer: B Diff: 2 Type: MC Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 16) The biggest risk that comes directly from a hands-on globalization policy is that A) markets will fail. B) losers in import-competing businesses get no assistance in adjusting. C) government gives in to political pressure for protectionism. D) jobs disappear in import-competing industries. E) creative destruction causes poverty and misery before raising overall living standards. Answer: C Diff: 3 Type: MC Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 17) When Canada begins importing products from the rest of the world, wages in our importcompeting industries will fall. Answer: TRUE Diff: 1 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate.

18) When Canada begins importing products from the rest of the world, wages in our importcompeting industries will rise. Answer: FALSE Diff: 1 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 19) When Canada exporting more products, wages in these export industries will fall. Answer: FALSE Diff: 1 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 20) When Canada exporting more products, wages in these export industries will rise. Answer: TRUE Diff: 1 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 21) Protectionism invites retaliation. Answer: TRUE Diff: 1 Type: TF Page Ref: 406-412 Skill: Recall Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 22) Developing countries would like to see an end to IMF loans. Answer: FALSE Diff: 1 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 23) Hands-on economists believe that more restrictions should be placed on IMF loans to developing countries. Answer: FALSE Diff: 1 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate.

24) Creative destruction ultimately raises living standards. Answer: TRUE Diff: 2 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 25) Hands-off economists believe that market failure is worse than government failure. Answer: FALSE Diff: 1 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 26) Hands-off economists believe that government failure is worse than market failure. Answer: TRUE Diff: 1 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 27) Hands-on economists believe that government failure is worse than market failure. Answer: FALSE Diff: 1 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 28) Hands-on economists believe that market failure is worse than government failure. Answer: TRUE Diff: 1 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 29) The risk of the "Yes - Markets Self-Adjust" camp's hands-off position on globalization is that losers in import-competing industries get no assistance in adjusting to trade. Answer: TRUE Diff: 1 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate.

30) The risk of the "Yes - Markets Self-Adjust" camp's hands-off position on globalization is that government succumbs to political pressure for protectionism. Answer: FALSE Diff: 1 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 31) The risk of the "No - Markets Fail Often" camp's hands-on position on globalization is that losers in import-competing industries get no assistance in adjusting to trade. Answer: FALSE Diff: 1 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 32) The risk of the "No - Markets Fail Often" camp's hands-on position on globalization is that government succumbs to political pressure for protectionism. Answer: TRUE Diff: 1 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 33) The "No - Markets Fail Often" camp's hands-on position on globalization states that government should help losers from expanded trade in import-competing industries. Answer: TRUE Diff: 1 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 34) The "Yes - Markets Self-Adjust" camp's hands-off position on globalization states that government should help losers from expanded trade in import-competing industries. Answer: FALSE Diff: 1 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 35) Protectionism creates government failure because tariffs and subsidies create large gains for a small group of people who lobby government. Answer: TRUE Diff: 3 Type: TF Page Ref: 406-412 Skill: Applied Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 696 Copyright © 2021 Pearson Canada Inc.

36) In trade negotiations at the World Trade Organization, developed countries want reduced tariffs, quotas and subsidies on products that they import. Answer: FALSE Diff: 2 Type: TF Page Ref: 406-412 Skill: Recall Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 37) In trade negotiations at the World Trade Organization, developing countries want continued protection of their domestic industries from Western import competition. Answer: TRUE Diff: 2 Type: TF Page Ref: 406-412 Skill: Recall Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 38) Power struggles over tariffs and subsidies between rich and poor nations affect the terms of trade. Answer: TRUE Diff: 2 Type: TF Page Ref: 406-412 Skill: Recall Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 39) Power struggles over tariffs and subsidies between rich and poor nations do not affect the terms of trade, which are determined in markets. Answer: FALSE Diff: 2 Type: TF Page Ref: 406-412 Skill: Recall Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 40) The Economist magazine argues that any harm from globalization comes from government protectionist policies, not from market forces. Answer: TRUE Diff: 2 Type: TF Page Ref: 406-412 Skill: Recall Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate.

41) The Economist magazine and hands-off economists argue for a limited role for government in maintaining a social safety net. Answer: FALSE Diff: 2 Type: TF Page Ref: 406-412 Skill: Recall Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate. 42) Your vote matters! Answer: TRUE Diff: 1 Type: TF Page Ref: 406-412 Skill: Recall Objective: 13.4 Evaluate the hands-off and hands-on arguments about the role for government in the globalization debate.